Special | Shi Lei
" The Future of Investors " is an alternative classic work. Professor Jeremy J. Siegel, a master of value investment, did not become an evangelist, waved the banner of value investment and guided the country. Instead, from the perspective of the basic source of investor returns, we have pragmatically criticized the mainstream views that investors almost blurted out by investors through nearly half a century of research on the S&P 500 index since 1957, and based on detailed calculations and comparisons, we have clearly criticized the mainstream views that investors almost blurted out. It also clearly pointed out that dividends are the smooth road of value investment and an important way for investors to survive for a long time.
At present, global stock markets are fluctuating violently, and A-share market is once again deeply trapped in the 3000-point defense battle. The market is losing money, and investors' sentiment falls to the bottom, falling into the fear of "different this time". At this time, reading the professor's book "The Future of Investors", you can feel the glory of reason and it is extremely precious.
high valuation 70 years ago American
and now A shares are both "the emperor's new clothes"
Chasing new technologies, new concepts and new tracks is a distinctive feature of the stock market. People firmly believe that the ever-changing technology will drive new companies to continuously create value for mankind, and of course, their own wealth will continue to rise with the company. Professor Siegel decisively proposed that contrary to our intuition, growth rate is a double-edged sword, or even a trap. It stimulates the economic machine to move forward while also constantly disappointing investors. This conclusion undoubtedly shocked investors. Only by growing the economic cake can we benefit more people by benefiting more people. Should we fall into the game of stock? Investors are always misled by emotions and abandon logic. Professor
believes that the logic is that growth is being chased enthusiastically, causing investors to pay too high prices for new technologies. At the same time, a large amount of funds entered popular industries, resulting in excessive competition, and eventually "the tree cannot grow into the sky." Winners are very few entrepreneurs, venture capitalists, investment banking, . Small and medium-sized investors will swallow the bitter fruit of losses. The book
lists examples of IBM and New Jersey Standard Oil. Although IBM has significantly exceeded New Jersey Standard Oil in every growth indicator such as earnings per share, dividends, profit , industry growth, etc. However, from 1950 to 2003, the annualized yield of New Jersey Standard Oil, an old man in the traditional industry, was 0.59% higher than that of IBM, a benchmark new economy company (see the attached table), and the total yield was 31% higher.
The reason is that people are very optimistic about IBM's prospects, resulting in a high buying price ( high price-to-earnings ratio ). New Jersey Standard Oil investors expect the company's growth rate to be much milder, and stock price has been kept at a lower price. Investors can reinvest their dividends to accumulate more stock . And these extra stocks have won the New Jersey Standard Oil investors.
Professor Siegel's views are in line with the suggestions of investment master Graham in "Securities Analysis". Graham proposed the famous valuation formula:
Corporate value = current normal return* (8.5+2G)*4.4%/RF
G is the expected growth rate molecular value in the next 7 to 10 years, and RF is the risk-free return. Among them, Graham is very cautious about the expected growth rate. He wrote: "The value of the expected growth rate must be relatively conservative."
In the later published book " Smart Investor ", Graham proposed the "margin of safety" theory, which further strengthened his cautiousness in the growth rate. "Safety Margin" is the core of Graham and his disciples' long-term victory (early called " cigarette butt stock " investment). That is, it must be bought at a sufficiently low price to ensure that the intrinsic value of the stock can provide sufficient security for the invested funds guarantee . Buffett has warned investors more than once that the margin of safety is the cornerstone of smart investment or successful investment.John Neff, one of the three musketeers of
, invests almost only in low-price ratio stocks with low-price ratio . He believes that stocks with high visibility and high growth have received too much attention, pushing their valuations to unreasonable levels, while slow-growing stocks and low-profile stocks have low valuations and have become excellent investment targets. He jokingly called himself a "scavenger" in the stock market. James P.O’Shaughnessy also praised undervalued buying in " Wall Street Stock Market Investment Classic ", the general idea is that the market is constantly rewarding investors who buy low price-to-earnings, low price-to-book, and low price-to-sales ratio stocks.
A-share market is experiencing ups and downs more frequently. Compared with US stock , A-shares are characterized by extremely high volatility and a shorter stock price cycle. From the time when everyone picks up firewood to the trampling, it will happen in a blink of an eye. Excessive valuation will always be "the emperor's new clothes".
A more stable "combination" than S&P 500 index
High valuation will also drag down the performance of index funds.
Professor Siegel used the initial 500 companies of the S&P 500 as a sample to build a portfolio and calculated the long-term returns from March 1, 1957 to December 31, 2003. The conclusion was unexpected, no matter how defined, the returns of the portfolio composed of the original S&P 500 component are 21% to 26% higher than the returns obtained by updating the portfolio according to changes in the index components at any time. The professor believes that in order to maintain its own representation, the index must absorb some new companies, regardless of whether it is overvalued or hotly speculated.
Let’s look at the situation of A-shares. At the close of December 10, 2021, , known as the "King of Ning", was included in the , Shanghai and Shenzhen 300 Index, for the first time. CICC estimates that the initial weight reaches 3.91%, second only to Moutai, ranking second in all A-shares. The weighted average price-to-earnings ratio of the Shanghai and Shenzhen 300 is 13.58 times and the price-to-book ratio is 1.63 times, while CATL is 149 times and 20.4 times respectively. Judging from the results, as of the end of October 2022, CATL fell by about 42% compared to when it was just included in the Shanghai and Shenzhen 300 Index, which means that passive index funds took over CATL at a high level.
Professor Siegel said that in order to keep pace with the times, those popular indexes have introduced overvalued companies, which has damaged the income of fund . An over-high valuation of an index has no investment value, or even a value destroyer.
In the past year, the experience of the Chinese stocks listed in the list of index is a vivid and painful example. The rise in the Chinese stock index includes the increase in performance to drive stock prices, and also includes speculative funds from many investors who follow the trend.
Professor Siegel does not completely deny the index investment in . He said, I still believe that indexing is an important part of stock investment, but investors should comprehensively analyze index companies, industrial performance, IPOs and dividends, and adopt corresponding strategies to improve their investment portfolios to obtain better returns.
Follow dividends
Breaking out of the complex relationship between price and value
Professor Siegel confidently said that history has clear answers, and dividends have always been the most important source of shareholder income. From 1871 to 2003, after removing inflation factors, 97% of stock returns came from dividends used for dividend reinvestment, and only 3% came from capital returns (understood as the bid-ask spread).
Li Ka-shing reviewed his entrepreneurial journey when he retired. He said that when Changjiang Industrial went public, he bought it and continued to use to pay dividends to again, with a return of more than 5,000 times in 36 years.
In his "Practical Manual for Value Investment", Tang Shufang assumes an absurd example of a Sichuan wine company suffering from a super bear market for 27 consecutive years. In September 1994, the wine company bought 200,000 yuan at the peak price when it went public, and then it suffered a 5% drop every six months. Suppose the only operation of an investor is to buy the stock of the wine company after receiving the dividend. Then 27 years later, when Pandora's box opened, the investor's principal of 200,000 yuan had become about 315 million yuan, and he already held about 28.65% of the company's equity , becoming the second largest shareholder.The power of dividend reinvestment is amazing. It does not require the appearance of buyers at all. It depends entirely on the cash flow generated by the real profit of the company. Stock price fluctuations are just "dispensable shadows".
In the 2022 shareholder letter, Buffett said, "Please pay special attention that our holdings are based on our expectations of their long-term business performance, not because we regard as a tool to take advantage of short-term market changes. This is crucial. Charlie and I are not stock selection , we are business selectors." Gotham Capital founder Joel Greenblatt said: "Stocks represent ownership of the company you are evaluating and trying to buy at a discount." The "corporate ownership" view comes from Graham's Securities Analysis. He believes that stocks are not a note to pass the flowers, but rather a certificate of ownership of the company's assets and businesses. The value of this certificate is determined by the intrinsic value of the company itself. This was like a lightning bolt at that time, breaking through the fog of investment chaos. At this point, the once mainstream insider, manipulation and price difference have gradually become clowns.
From the perspective of corporate ownership, the focus is always on whether the business can make money and pay dividends, rather than selling the company at a price difference. Fundamentally speaking, if there is no taker in the market, whether the assets themselves can achieve continuous appreciation. This is the essence of investment.
Professor Siegel continued to write that dividends are a way to be sure that the company's profits are real, because profits can be whitewashed, and it is relatively difficult to fake dividends. Especially if dividends reinvest in a stock accumulated in a bear market, it will create miracles when bull market is used. Dividends can also supplement household cash flow and help survive a difficult bear market.
When you pursue stock price spreads, due to the complex relationship between stock price and value, investors will be in an unfavorable risk, and they may fall into a game centered on greed and fear. You will become a gambler who believes in luck and hopes that fools will appear. At this time, stocks become bargaining chips for gambling, and bargaining chips cannot be evaluated because they do not have underlying value such as dividends, so they are likely to become a carrier of bubbles and scams.
The future of investors
Professor Siegel extracts the research results into three "indicators", namely D-I-V, and uses them to build an investment portfolio. D (Dividends) is dividends. Buy stocks that have sustainable cash flows and return them to investors in the form of dividends.
V (Valuation) is the valuation. Accumulate stocks of companies that have reasonable prices relative to their expected growth. Avoid initial public offerings, popular stocks and other companies and industries that are generally considered “must” to invest. The author agrees very much with the two points of
D-V, they are the essence of investment.
As for I (international) is international. "The Future of Investors" was written in 2005. China accelerated its integration into the world and globalization was booming. The boundaries of the entire world suddenly became smaller and became a global village. People have reason to believe that the great division of labor in the world will benefit people of all countries, and mankind will continue to benefit from globalization.
But in 2022, the epidemic continues, the conflict between Russia and Ukraine, the United States leads the decoupling with China, Europe, Japan and South Korea are declining, and the iron curtain of anti-globalization is slowly falling. Whether Professor Siegel's international bright prospects can be realized needs to be questioned.
was written at the end
In the three years since the beginning of 2020, the epidemic has given people a deep feeling of uncertainty, the economy will be shut down and traffic will be cut off. Enterprises are machines that operate as expected. Uncertainty makes it difficult for investors to see the future of the company, and it is even more difficult to understand the macro cycle of the industry cycle. Therefore, investors must lower expectations, adhere to bottom-line logic, and believe in equity thinking. It is appropriate to choose a leading industry leader with high dividends, low valuation, low debt ratio, high return on equity, and reject leverage , diversified investment, and spare money investment. At this moment of panic, we believe that the country's development is still on the upward channel. We need some courage to choose the above-mentioned high-quality stocks, survive the cold winter, and add some luck to obtain appropriate returns.
The author believes that Professor Siegel's "The Future of Investors" is a sincere work of Shouzheng Investment in a bear market. He tells us that based on the dividends (cash flow) continuously created by enterprises, investing in high-quality companies with reasonable prices is the right way to invest in value.
(The author is a public lawyer in Shanghai. This article has been published in "Red Weekly" on November 12. The views in the article only represent the author's personal opinion and do not represent the position of "Red Weekly". The mention of individual stocks is only for example analysis and no recommendations are made.)
