Everyone is chasing "light"! Popular stocks rally together. Should you join in? Understand these three points before deciding

The most dazzling sector in China’s A-shares right now is “Light.” Concepts such as optical modules, optical fibers, optical devices, and optical chips are all “hot stocks in a hot industry,” and institutional allocations to the communication sector are as high as 13.1%, with a clear phenomenon of funds clustering together.

For ordinary investors, whether to stand in the “light” depends on three things: first, whether the company and industry are understood clearly; second, whether the valuation is reasonable; third, whether they are truly loyal to themselves.

“Clinging” or “not clinging” is not the core of investing. If you can’t see clearly or understand well, merely being swept up in market optimism, then clustering around “light” stocks entails huge risks; if you see clearly, understand well, and stay true to your principles, then others’ “clinging” or “not clinging” doesn’t matter—I’ll go my own way, even if it means facing thousands of people.

Can you see clearly?

Ten years ago, Buffett invested $35 billion in Apple, and today its total value has risen to $185 billion, undoubtedly one of the most successful investment cases in the world.

Seeing clearly is a prerequisite for Buffett’s investment in Apple. In 2017, Buffett publicly mentioned Apple, which was also his first time expressing his view on Apple: “Apple is more like a consumer goods company than a tech company. We can analyze Apple’s business model using the moat theory—IBM and Apple serve different customers, and these are two different decision-making projects.”

Companies related to the “light” industry are not consumer goods companies; they are more like IBM, not Apple. Whether it’s optical chips or optical modules, they are intermediate products that need to be embedded into downstream companies’ products, which are then offered to consumers through products or services.

Ordinary investors find it difficult to directly track the related products of “light” companies like consumer goods. So, their information about the “light” industry mainly comes from institutions and other third parties. By the time this information reaches ordinary investors, the time lag has already occurred. Not to mention, if you’re an outsider, you can’t even verify the authenticity of the information. People are likely to struggle with a game they don’t understand.

Munger once said, “Unless I can refute my own views more convincingly than others, I have no right to speak on this issue.” The same applies to investing: unless you truly understand this industry and company, you are at a disadvantage, which will inevitably lead to rushing to buy during price increases and hurriedly cutting losses during declines.

The foundation of building an investment fortress is understanding. During the ten years that Duan Yongping and Buffett held Apple, the stock price was halved multiple times. Someone who doesn’t understand Apple will find it hard to hold on during a price drop. The standard for understanding this company is the willingness to buy more shares during declines, rather than fleeing.

Can you calculate clearly?

“Understanding” is a qualitative indicator, while the valuation at which you buy is a quantitative one. Ten years ago, when Buffett started buying Apple, its dynamic valuation was only 10 times earnings. When Buffett added to his position, Apple’s valuation was no more than 15 times earnings.

Even for a leading company with abundant cash reserves, strong operating cash flow, continuous dividends and buybacks, pricing power, and a significant share of global consumer mindshare, Buffett did not buy blindly. He only struck when the valuation was extremely cheap and within his comfort zone.

Value investors are naturally wary of “hot industry leading companies” because their prices are too high and lack the safety margin they pursue. The so-called safety margin sounds like a financial term, but it is actually a mindset of self-protection. Under this mindset, even if very bad things happen, investors won’t suffer too much loss.

The valuation of “light” companies in A-shares is far higher than the overall market valuation and also higher than similar companies in mature markets. Investors might use profit growth over the next three to five years for valuation, believing the company isn’t expensive. But the difficulty of investing is that within three to five years, the company faces many uncertainties. If these uncertainties are not given enough room, then when bad luck strikes, valuations and stock prices can plummet sharply.

Buffett bought Apple at a 10x valuation, meaning even if Apple doesn’t grow in the future, he can recover his costs within ten years. Apple has already gained a psychological share of investors, and the competitive landscape is unlikely to change much within ten years. Value investing expert Zhang Yao in A-shares “20 years 2000 times,” has made nearly tenfold gains from his investment in Shanxi Coal over the past decade, based on the principle of investing when current valuations seem cheap and even cheaper in the future.

Zhang Yao provided a clearer investment standard: invest in companies that can recover costs in 5 to 6 years through dividends. His standard includes low valuation, high dividends, high cash flow, sustainable profits (not necessarily high growth), and high visibility of the company.

Buying well leads to selling well; safety margin is a form of error tolerance. Long-term, investments will make mistakes, and bad luck will happen. Investors should prepare for this and avoid setting overly aggressive valuations, leaving room for errors.

Is the decision independent?

When hot sectors continue to rise sharply, it’s easy for spectators to lose rationality. It’s hard to oppose market sentiment, especially when everyone around seems to be making big money. But if decisions are based on market sentiment, it’s like playing a “hot potato” game—investors are betting they won’t be the “last one” holding the stock. However, market sentiment is a fuel that will eventually run out. When it absorbs all the bullish momentum, the shift from bullish to bearish can happen unexpectedly.

Recently, Buffett described the market as a “church with a casino attached”: people can switch freely between the church (value investing) and the casino (short-term speculation). Currently, more people are in the “church” (value investing) than in the “casino” (speculation), but the allure of the casino has become extremely strong.

If investors make decisions independently based on industry, company, and valuation analysis, then “clinging” or not “clinging” doesn’t matter—there’s no reason not to invest just because others are clustering, nor to abstain because others are not. But if decisions are driven by market sentiment, then the fate of your investments is in others’ hands.

(Article source: Securities Times)