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the shanghai composite index fell below 2,800 points. a-shares have continued to fall and consolidate for more than three years since february 2021, and investors are pessimistic.

the current performance of a-shares is very similar to that of the us stock market in 1974, when the average price of us stocks fell by 70% compared to the peak in 1968. the headlines of major mainstream media in the united states described the panic at the time with words such as "terrible avalanche" and "from pessimism to despair". however, buffett opened his positions and bought stocks with all his strength. he was not affected by pessimism at all, and even told an old friend, "there were a few days when i even wanted to tap dance after getting up."

the joys and sorrows of human beings in investment are so different because most people only focus on stock prices and do not ask about value. they can be described as trend investors. the last round of blue-chip stock market in a-shares started in early 2016. it took four or five years for the market to attract widespread attention from investors. in 2021, "10 billion funds" and "daylight funds" can be seen everywhere, but the excessive prosperity at this time has already laid the hidden dangers of future adjustments.

pessimism is once again dominating the a-share market. if we only look at the stock price trend over the past three years, investors will see a sharp adjustment and feel the pressure of panic fleeing. however, the average valuation of shenwan's blue chip stocks is 17 times, the return on investment is nearly 6%, and the dividend yield is 3.17%. if the price of the stocks you hold is lower than the intrinsic value, then when will it be wise to sell them now?

looking back at those classic moments

many investors will blame the outside world for the losses in the past three years. but as buffett once said, it is not the stock market, or even the company, that determines the fate of investors, but ourselves.

looking back at classic moments in investment history can help us be alert to our own irrational impulses. if we treat investment decisions with a historical, long-term, value and rational attitude, we will not be credulous when the market is rising wildly, and we will be more courageous in the darkest moments of fear.

investors did not care about the value but were only lured by the wildly rising prices, which gave rise to the "tulip bubble" in investment history.

"in 1636, tulip speculators bought at low prices and sold at high prices, earning huge profits by earning the difference, and many people's wealth rose rapidly..." charles mackay wrote in "the great madness: extraordinary popular fantasy and mass madness": faced with this extremely tempting golden bait, no matter nobles or commoners, or farmers, craftsmen, sailors, male servants, maids, even chimney sweeps and old seamstresses, they all bought tulips. all classes from bottom to top cashed in their wealth and invested it in the tulip market. foreigners soon fell into this crazy vortex, and money poured into the netherlands from all directions.

the tulip bubble came to an end in 1637, and the value rule once again played a dominant role. a large number of merchants almost became beggars, and many nobles lost their property and fell into an irretrievable situation.

investors did not care about the value, but were only frightened by the repeatedly falling stock price, which also created a classic battle in the history of investment. from february to october 1973, berkshire hathaway, controlled by buffett, became the largest external shareholder of the washington post, holding about 9% of the shares. buffett believed that the washington post was worth at least $400 million, but the company's market value was only $100 million at the time. even at such a low price, buffett was still stuck with 20% after buying the washington post, and it took two years to get out of the trap.

buffett later made hundreds of times the profit on the washington post. he believes that what you buy is just a share of the company's equity, a right to share in its future profits in the publishing and television industries. if you know how much the washington post or any company is worth, you will not be confused by other factors.

during the "four-year bear market" of a-shares from 2001 to 2005, some analysts were famous for predicting that the shanghai composite index would fall below 1,000 points. however, if investors sold their stocks during this period, they would feel relieved in the short term, but would miss the biggest bull market in the history of a-shares in the future. investors who invested in blue chip stocks at that time have made huge profits in the past two decades. for example, the net profit attributable to shareholders of companies such as kweichow moutai, gree electric appliances, and tbea in 2023 alone is several times their market value in mid-2005.

similarly, at the beginning of 2016, the shanghai composite index had fallen from a high of 5178 points to 2638 points. thousands of stocks hit the limit down frequently, and the market was in a panic. however, this was the beginning of a five-year blue-chip stock market rally, with many blue-chip stocks seeing a surge in share prices due to valuation repair and continued growth in performance.

should we be pessimistic at this time?

if we only look at the price adjustments over the past three years, investors will feel a deep chill. the shanghai composite index has fallen from a peak of 3,700 points to the current 2,800 points, a 24% drop, and many benchmark stocks have fallen by more than 40%.

if investors choose to enter the market at 3,700 points, there is no reason to exit at 2,800 points. the law of value will work sooner or later, and at least there should be no fear at this time. if shenwan blue chip is regarded as a combination, the current market value of this combination is 6.26 trillion yuan, the net profit attributable to the parent company of this combination in 2023 is 373.6 billion yuan, and the dividends in the past 12 months are 198.5 billion yuan.

a simple calculation shows that the corresponding price-earnings ratio of the shenwan blue chip portfolio is 16.7 times, the return on investment is nearly 6%, and the dividend yield is 3.16%. in terms of growth, the net profit attributable to the parent company of this portfolio in 2018 was 119.3 billion yuan. in the past five years, the net profit of this portfolio has increased by 113%.

the net profit earned by many stocks in 2023 has more than doubled that of five years ago, but the valuation is nearly half cheaper than five years ago. for example, mindray medical's net profit attributable to the parent company was 3.719 billion yuan in 2018, and the net profit attributable to the parent company in 2023 was 11.582 billion yuan, an increase of 211%. the valuation of mindray medical at the end of 2018 was 38 times, and the current valuation is 23 times.

kweichow moutai's valuation is nearly 10% cheaper than at the end of 2018 when sentiment was extremely pessimistic. kweichow moutai's net profit attributable to its parent company in 2018 was 35.2 billion yuan, and its net profit attributable to its parent company in 2023 was 74.7 billion yuan, a 112% increase in net profit in five years. kweichow moutai's valuation at the end of 2018 was 23 times, and its current valuation is 21 times.

buffett has a famous saying that if you cannot watch your stock drop 50% without changing your expression or heart, you are not suitable for entering the stock market. however, it is difficult for ordinary investors to overcome the psychological difficulties because they tend to pay too much attention to price and not value.

most investors only focus on stock prices. they spend too much time and energy tracking, evaluating and predicting changes in stock prices, but rarely spend time studying companies and their businesses. even when it is necessary to evaluate the value of a stock, these investors only rely on single-factor valuation models, such as price-to-earnings ratio, book value and dividend yield. however, these simple indicators are not enough to explain the value of a company. most people tend to focus on stock price factors, while buffett analyzes business factors.