Equity Investment

Today, we will mainly discuss with you from the perspective of the equity investment framework.

After reading this article, you will not be able to know which stock to invest in for the second half of 2021.

However, you can understand what the analysis framework of professional investors is, how to view data information, and how to select stocks. In short, this is another article full of practical information!Stock investment essentially falls into two major categories: technical analysis and fundamental analysis.

Technical AnalysisTechnical analysis is essentially the process of examining charts to identify patterns.

The primary focus is on analyzing the historical performance of stocks, such as price, trading volume, volatility, etc., to predict future price trends.

For instance, you may have heard of terms like "double tops," "volume expansion," "immortal pointing the way," "volume rising with price rising," and so on.

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However, technical analysis carries significant risks, and it is not recommended to rely on it excessively.

Nowadays, there are many quantitative hedge funds and trading firms with professional model data analysis and machine learning experts to find patterns.

When the market experiences a slight deviation, they are the first to detect it and adopt strategies. Therefore, individual investors cannot compete.We understand that prices are determined by supply and demand in the short term, and by value in the long term. This kind of quantitative analysis of supply and demand is generally more suitable for short-term investments.

Sometimes people might think that technical analysis seems to be effective, but in fact, a lot of it is due to psychological factors in the market.

For example, a stock may fall when its price reaches 50 yuan, and then it will rise again to 50 yuan and fall again.

At this time, everyone will feel that this 50 yuan might be a hurdle it cannot pass. Then, every time it is about to reach 50 yuan, everyone will feel that it cannot get through.Then they all sell, and the price falls with a whoosh, whoosh, whoosh, and it might really not be able to get over the hump in the short term.

However, once it crosses the threshold of 50 yuan, those who previously thought it couldn't make it start buying, and the price soars with a zip, zip, zip.

Many people might have sold at a loss just before the surge, losing money.

So, over-reliance on technical analysis entails a greater risk.Fundamental Analysis

Fundamental analysis can primarily be divided into three levels:

Macro level, industry level, and stock selection level.Macro Level

Why should we consider the macro level when buying stocks?

Many people think they don't want to look at the macro level; they just want to buy stocks with low price-to-earnings (P/E) ratios. They may think it's as simple as just picking the stocks with the lowest P/E ratios, right?

This is akin to liking big eyes, but does that mean all big eyes are the most attractive?

Of course not! Any detail that is detached from the whole is just being unreasonable.Of course, we should look at the macro perspective.

The U.S. stock market has been on an upward trend, largely due to an excess of money in the economy, which leads to an overall increase in stock prices.

Whether it's the People's Bank of China or the Federal Reserve, the ultimate goal of their various policies, such as quantitative easing and adjusting reserve requirements, is to control the amount of money in the economy.

After the 2008 financial crisis, a large amount of money flowed into the United States, and the U.S. stock market has been in a bull market for 13 years for the following main reasons:1. Quantitative Easing/Zero Interest Rates

2. Tax Relief

3. Economic Weakness in Other Regions

During this phase, anyone who buys will make a profit, which does not necessarily mean that the technology is highly advanced.

For another example, in our country, starting from 2017, we began to deleverage, and the amount of funds suddenly decreased. As a result, the entire stock market was bearish in 2018, and various private enterprises began to experience financial turmoil.

So, you say macroeconomics can be ignored? Of course, it must be considered!Macroeconomics encompasses a multitude of indices that reflect the overall state of the economy, such as our Gross Domestic Product (GDP) and Consumer Price Index (CPI).

Macroeconomics also offers a variety of options, for instance, you can invest in mutual funds or Exchange Traded Funds (ETFs), which allow you to purchase a basket of assets at once, thereby diversifying risk.

Industry Level

The industry represents a track that we need to select for investment.

Generally, if the overall environment of an industry is favorable, the stocks within it will tend to perform well as a whole.The differences between industries can be quite significant, such as during the pandemic, when the price of masks surged and supply became tight.

For individual investors, choosing the right industry is more important than choosing the right company.

This is because there are many companies, and individual energy is limited, making it difficult to understand each company. However, with industries, you can get a general idea and choose the leading stocks within a good industry, which will basically be correct.

So, how do you look at an industry?Here, I will mainly divide the content into four parts for everyone:

1. Industry Cycle

Is it a sunrise industry or a sunset industry?

2. Industry Pattern

Is it a pro-cyclical industry or a counter-cyclical industry? Is it a financial industry with barriers to entry, such as the tobacco industry with licenses, or is it an industry with low barriers and intense competition?

3. Government Policies

If there is government support, there will definitely be more room for growth.For instance, a policy in the energy industry's supply-side reform in 2015 led to a very positive trend in the steel and coal sectors. The upstream industries reduced their production capacity, which resulted in a decrease in quantity and an increase in prices.

4. Sector Rotation

This point is somewhat mystical, to put it simply, it's about market preference. It's about what we all like to buy in this period of time. For example, technology stocks, growth stocks, and so on.

For individual investors, if they don't want to delve into research on a particular company, looking at research reports and investing in the industry is about enough.Here is a simple method, which is to buy ETFs (Exchange Traded Funds).

ETFs are also a type of fund, and they offer you industry-specific ETFs.

Stock Selection

For some investors, buying an index might not be exciting enough, and they might want to experience the thrill brought by various company news.

In this case, company analysis involves stock selection. The most important aspect is to look at the company's future profitability and cash flow.

(Note: The original text seems to be cut off and incomplete. The translation provided is based on the available content.)The price of this stock is, in fact, equivalent to the market's expectation of the present value of its future dividends, the discounted cash flow of the dividends it can bring to shareholders.

Analyzing a company generally requires both qualitative and quantitative analysis.

Qualitative Analysis

It involves looking at the company's model, growth, moat, etc., one of the most important points being its growth drivers.The future development of the entire company, is there a point that can generate more cash flow for it?

Also, what we usually hear, for example, Apple says it's starting to make cars, which is also considered a growth point.

Sometimes, we also need to see what role a company plays in its industry chain, and how its profit space is.

Generally, a linear enterprise has a smile curve theory:

The R&D design and marketing here, its profit space is relatively larger, because the entry threshold is relatively high.However, during the intermediate stage of production and manufacturing, the barriers to entry are lower, and the profit margins are relatively smaller.

For example, Apple Inc., it outsources the production with relatively low profit margins to various places, which is a very smart approach, allowing its profit margins to be so high.

Technology and brand are also the moat for Apple Inc.

Nowadays, with the widespread use of the Internet, for many platforms, users are their moat, and capital is also a very strong moat, such as price wars, followed by mergers or acquisitions.Qualitative analysis primarily hinges on your insight into the industry.

For instance, if you are optimistic about Huawei and believe that Huawei smartphones could potentially become the best-selling phones globally in the future due to its chips and 5G technology, etc.,

this represents a growth point you have identified through your industry insight.

However, it is essential to mention that a good company does not necessarily equate to a good stock.

A good company, once everyone agrees it is good and starts buying, may have already seen its stock price rise significantly, potentially not representing an especially good investment opportunity.So do not easily believe in other people's recommendations and blindly follow the trend of investment.

Quantitative Analysis

We don't just listen to the company's stories and product descriptions; we also need to analyze their data.

For example, we should look at the balance sheet, income statement, and cash flow statement to analyze their financial data and look at some indicators, comparing them.

Generally, the profit margin for traditional industries is between 20%-30%, and the profit margin for asset-light industries is slightly higher.Different industries have different operational metrics.

For instance, cash flow is a crucial indicator in the retail industry;

In the real estate industry, accounts receivable and payable are significant indicators;

In hospital operations, the number of beds is an important metric.

Therefore, there is a significant difference between different companies, and we cannot focus on just one metric for analysis.At the same time, we cannot overlook the management of this company. For example, if a mistake is made, it can directly lead to a significant drop in the stock price.

So far, you have learned about the framework of the entire stock investment system.

Of course, this is just a framework. Every single point within it is worth studying for a long time.

Please note that the original text seems to have a few typographical errors or missing words, and the translation has been adjusted for clarity and coherence in English.