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History may be extremely unbalanced in the short term, but will tend towards balance in the long term; the world may seem balanced locally, but it is often unbalanced as a whole.

In balance, we must be wary of risks; in imbalance, we must look for opportunities.

Just as the Yellow Emperor's Classic of Internal Medicine advocates, managing the balance well can be used to cure small diseases and govern a country; on the contrary, an unbalanced society, like an unbalanced body, will sooner or later trigger a crisis.

Risks in balance, opportunities in imbalance

Balance or imbalance depends on what you pursue - if you yearn for harmony and happiness, then maintaining balance is crucial; but if you focus on differentiation, then imbalance will bring opportunities and make people stand out.

In the business world, pain points represent an extreme imbalance between supply and demand. Where there are pain points, there are opportunities for entrepreneurship. And the more painful the problem, the greater the reward when it is solved.

In the past few years, confused young friends have often asked me where their future investment and entrepreneurial paths will be. I often ask two key questions in return:

First, what areas are they passionate about and good at?

Second, what bottlenecks and pain points do they have that need to be addressed?

The intersection of these may be the best entrepreneurial opportunity in the future - because being good at something can make it easier for people to succeed, and being passionate about something can increase happiness. A life that is both successful and happy is a fulfilling one; and solving bottlenecks and pain points will generate huge commercial and social value.

Just as Pinduoduo provides products with the ultimate cost-effectiveness and becomes the cost leader in the retail industry, embracing the huge demand for consumption downgrade, its market value has surpassed that of Alibaba, the e-commerce overlord of the year, and Huang Zheng has also recently become China's richest man.

Similarly, the success of Meituan and Tencent is also due to solving social bottlenecks and pain points.

Theoretically, if the supply and demand of the economy can be kept balanced, there will be no economic cycle. However, in practice, whether it is the capital cycle, inventory cycle or the long cycle of real estate, due to the blindness, misjudgment, greed or panic of the participants, it will eventually lead to excessive expansion or contraction (such as the balance sheet recession experienced by Japan), causing economic bubbles or recessions, and repeating the cycle over and over again.

As Gu Hongming, a well-known economist at Nomura Securities, pointed out, cycles have both negative and positive sides. The negative cycle contracts, so the government must increase fiscal stimulus and monetary supply, while the positive cycle expands, and in order to prevent overheating, it may be necessary to put the brakes on fiscal or monetary policy.

The yin cycle adopts the policies of the yang cycle. For example, when the economy is in recession, the government still does not increase fiscal stimulus, which is a mismatch of prescriptions. Not only will it fail to cure the disease, but it will have the opposite effect, aggravating the condition and exacerbating the cyclical shocks.

It is worth noting that the Chinese economy has a strong cyclical nature. According to our estimates, more than 60% of the constituent stocks of the Hang Seng Index belong to cyclical industries. One real estate will affect more than 50 industries. As the saying goes, when one prospers, all prosper; when one disgraces, all disgraced. When the real estate industry is booming, related industries such as finance, steel, cement, building materials, home decoration, home appliances, logistics and even automobiles will all prosper. But when the real estate industry enters a period of contraction, the entire industrial chain will be affected, causing severe economic pain.

An unbalanced industrial structure coupled with unbalanced capital investment cannot possibly produce a positive result and lead to balanced economic development. Today's situation is the inevitable result of the superposition of these two imbalances.

Just like the imbalance of yin and yang in medicine, many crises in life and career often start with imbalance.

Whether investing, starting a business, or pursuing happiness, whether in capital chain, business model, mind or even emotion, we should be alert to the state of imbalance, because imbalance is often a harbinger of crisis, and when a crisis occurs, rescue efforts can usually only treat the symptoms and not the root cause, and it is often too late.

For example, in the world of emotions, men and women have asymmetric emotional responses. As described in the movie "Men Are From Mars, Women Are From Venus", girls are more sensitive to emotions and tend to have better intuition. If you deal with their emotions first, problems will often be solved. Boys have a longer reaction time, are more rational, and tend to have a better sense of direction. If you solve their problems first, their emotions will naturally improve.

For the same thing, girls have rich and delicate emotions, and are prone to being emotional and overreacting, while boys are often careless and slow in their emotions. This imbalance will be the root cause of conflicts between men and women, and is also one of the key factors in whether emotions can be harmonious and happy.

In the choice of business model, balance not only cannot bring about the ultimate, but often represents compromise and moderation. For example, Michelin and McDonald's are two extremes of the business model - the former emphasizes characteristics, but it is difficult to achieve economies of scale; while the latter pursues scale, but can only produce standardized products.

If you achieve perfection in any one end, you may develop strong core competitiveness and market value. But if you pursue balance blindly, wanting the characteristics of Michelin and the scale of McDonald's, you may not get the scale and sacrifice the characteristics; because the two models require different resources, organizations, systems, and even corporate cultures, and it is a pipe dream to organically integrate them into the same enterprise.

Many companies and investment funds have faced this paradox on their road to growth. In the pursuit of scale growth, they have lost their characteristics and finally fallen into the trap of fighting each other. It is worth noting that scale is a comparative advantage, while characteristics are competitive advantages. If more valuable competitive advantages are given up in pursuit of comparative advantages, the result will inevitably be more loss than gain.

Imbalance makes people uncomfortable, but it also creates opportunities. At the two ends of the emotional spectrum are panic and greed. These extreme emotions often lead to over-reaction and mispricing of risky assets, becoming the best opportunity for value investing and a "blessing in disguise."

Legendary investor John Templeton is a well-known "contrarian investor". When the German army occupied Paris in 1939, the market was filled with panic and most investors sold their stocks, causing the Dow Jones Index to plummet. However, Templeton took advantage of the situation and "aggressively" borrowed money to buy 104 stocks, with each share priced at one US dollar or less.

This seemingly crazy move puzzled many people, but after 5 years of huge fluctuations, Templeton's investment made nearly 5 times the profit!

Interestingly, we have also seen similar panic in the current market - according to our estimates, the Hang Seng Index is currently at a historical low, with its valuation in the historical lowest 5% range, lagging behind the historical average by nearly 30%; and for every percentage point of increase, investors in the US stock market have to pay 2 to 3 times more than in the Chinese stock market.

It is no exaggeration to say that in my more than 20 years of working on Wall Street, I have never seen so many investors so pessimistic about China's future; and the capital market is precisely a discounting machine. Most of the future risks have probably been fully discounted into asset prices, causing Chinese assets to enter a peculiar value trough.

From historical experience, extreme emotions often bring extreme discounts, and extreme discounts bring extreme returns.

The more unbalanced the love, the more valuable it is

Because emotions cannot be quantified, there is often an asymmetry between input and output, and this is the case with the efforts made for love.

In Shakespeare's original work, when Romeo and Juliet met, Romeo was about 16 years old and Juliet was only 13 years old. Because of their youth, their love was like lightning, and they spared no cost and no consequences. In the end, they both died for love.

In "Dream of the Red Chamber", Lin Daiyu was only 17 years old when she died. She was both talented and beautiful, and in the prime of her life. However, because her childhood sweetheart, Jia Baoyu, whom she had a crush on for many years, married someone else, she ended up dying.

The love in literary classics does not care about giving or calculating in return. It is precisely because of the imbalance that it makes people feel so moved and fascinated.

Love in real life is often fussy and pays attention to the symmetry of input and output, but the success rate is so low and the divorce rate is so high. On the eve of the Chinese Valentine's Day, the "Civil Affairs Statistics for the Second Quarter of 2024" released on the official website of the Ministry of Civil Affairs on August 2 showed that in the first and second quarters of this year, 3.43 million couples registered for marriage and 1.274 million couples registered for divorce. The number of marriage registrations in the first half of this year decreased by 498,000 couples year-on-year, a year-on-year decrease of 13%...

There is nothing wrong with boys valuing girls' beauty, but men may not realize that beauty is only a comparative advantage, while good character is a competitive advantage; ladies yearn for a happy life and value men's wealth, but wealth is also a comparative advantage, while the ability to create wealth is a competitive advantage; having many lovers is only a comparative advantage, while being loving is a competitive advantage.

Comparative advantages are often short-lived, while competitive advantages are long-lasting. For value investors, you can pay a premium for competitive advantages, but you have to discount comparative advantages. Unfortunately, in the world of emotions and investment, most people do the opposite. They are willing to pay a high price for comparative advantages, but discard precious competitive advantages. This is worth our deep consideration.

Love is often unbalanced, which is why it is precious. For example, our parents give us love for free, and we share it with our children for free. In the world of investment, the pursuit of returns is often put first, which may be understandable; but in the world of love, the more love requires returns, the lower the quality, and the less love requires returns, the purer and higher the quality. In this unbalanced world, the ability to love is a core competitiveness and a priceless treasure.

Author Ji Weidong｜Image Visual China

About the author: Founder and managing partner of “All-Star Investment Fund”.

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