Wave Law - Half Reverse Game (Authoritative Theory of Stock Price Fluctuation)

Author: Wu Jie / Country: Mainland China
Publisher:
Publish Date: 2006-07-01
Features: From Extremes to Extremes
Since 2001, the environment of China's stock market has generally been a process of value regression. Those once-standing, fairy-tale-like bubble stocks have collapsed one by one. Meanwhile, a series of institutional or retail investors who distrusted reality have also fallen by the wayside. Until 2005, most retail investors still held such junk stocks, hoping history would repeat itself, but the mainstream of value investing seemed unstoppable. In securities-related news investigations, many investors had completely lost faith in the continuously devaluing equities. In fact, many stocks had delisted or were nearing delisting. According to exchange data from the first half of 2005, the Shanghai and Shenzhen stock markets had nearly 1,500 listed companies, with nearly 100 stocks classified as ST (financially troubled), most priced below 3 yuan, and a batch trading near 1 yuan, becoming part of the "heavenly stocks" group. A typical example is the 10-year trend chart of ST Top, which rose in five waves in the five years before 2000, peaking at a front-adjusted price of 24.95 yuan, but in the following five years, the stock price experienced five major declines, even near 1 yuan, still failing to demonstrate value.
A continuous downward shift in the center of gravity. We excerpted relevant data from the April 28, 2004, issue of the Shanghai Securities News:
Average Stock Price:
Shanghai and Shenzhen A-shares in 2000: 12.32 yuan to 12.78 yuan;
2001: 8.67 yuan to 9.21 yuan;
2002: 6.73 yuan to 7.18 yuan;
2003: 6.96 yuan to 6.56 yuan;
2004: 5.73 yuan to 5.86 yuan;
By late April 2005: 4.78 yuan to 4.74 yuan.
Average P/E Ratio:
Shanghai and Shenzhen A-shares in 2000: 50.89 times to 52.99 times;
2001: 40.13 times to 44.31 times;
2002: 32.17 times to 35.66 times;
2003: 28.32 times to 28.53 times;
2004: Around 24 times to 25 times;
By late April 2005: Around 22 times to 17 times.
Overall, about 600 stocks hit new lows in history, excluding new issues. Such a large number of price regressions prove that this major market adjustment was not just a correction of history but a complete overhaul. As we all know, the index did not hit a new low because of the continuous influx of new issues. In reality, from the perspective of the market's total value decline, it has almost returned to its starting point.
This passage describes the losses of ordinary investors since the market reversal, excluding more than 30 marginal stocks that have delisted and are now traded in the third-tier market. Now, as we reflect and summarize investment experience, we have a clear answer to the decline in the index and stock prices: the so-called "market is transitioning from an era of speculation to an era of investment." This conclusion seems to be used to praise the extraordinary significance of value investing. However, after two waves of value investing fervor in early 2003 and early 2004, another batch of institutional and retail investors ended up with "fundamentally excellent" stocks at high prices. By 2005, the prices of most of these stocks had already become unrecognizable.
Steel stocks had already undergone significant declines even before the economy entered a recession, while auto stocks became undervalued during temporary industry downturns, with prices even lower than in years with worse earnings data. Many began to doubt the so-called value concept. But if you criticize the effectiveness of value investing, others will counter: the price declines of most non-value stocks have been even greater and faster, which is an undeniable fact. Moreover, some stocks that were highly valued in terms of value have indeed maintained high prices, with some even rising continuously, such as transportation and port shipping stocks, which were lucky at the time.
So, where exactly is the problem? And for these blue-chip stocks, which are fundamentally similar, do their price differences really need to be so large? It seems we are in an awkward position, where neither a simple affirmation nor negation can stand on its own.
Here is another example: During the 2004 rally of China Unicom's A-shares, a group of analysts and researchers from research institutes discussed the current market conditions. Many heard rumors about international capital's strategic holdings of China Unicom's Hong Kong-listed shares, while in the public market, whispers about the company's mainland earnings data, business development plans, and merger and acquisition plans were rampant, painting an unprecedentedly optimistic picture of its future. In reality, China Unicom's A-share price subsequently plummeted, and its business did not show the expected vigor. In similar exchanges, one should ask: How exactly do we know that international capital is holding China Unicom? More precisely, how did this information become known? Because in this market, one must remember: everything you see and hear may be what others want you to see and hear.
This incident also tells investors that fundamental analysis pricing can sometimes be just as fragile. Clearly, the market and ordinary investors are facing a new test, and as we move from speculation to investment, new risks have emerged. In practice, we emphasize the importance of company value and constantly see successful examples of using value to trade stocks. On the other hand, value traps created by fundamentals are everywhere. How can this contradiction be resolved? The initial suggestion is as follows: First, the use of fundamentals requires a correct understanding—not just echoing others or arbitrarily pricing. Therefore, the step is to fully master a set of fundamental analysis methods for companies. Second, when applying value pricing, investors must understand that fundamentals are just one factor in stock price movements. Even if we use them to their fullest, they cannot encompass all information, and prices will fluctuate under the influence of other factors, such as:
- Heavy-handed control by market players
- Systemic risks in the broader market
Therefore, investors should not treat learning about fundamentals as a simple profit model. Only when the factor of value is appropriately applied in a comprehensive stock analysis may there be successful examples.
Stock trading has always been complex and uncertain. You cannot simply rely on one method or dismiss another. Always remember that analyzing a stock with multiple factors is sound advice for long-term investing. P2-4