Let’s do a test first. Suppose there is a large jar with several red and green beans in it. The tester could not see the condition in the jar, but could only reach out and take out one bean at a time. If you have taken out several mung beans in a row from the jar, then you can predict the color of the beans taken out next time.
If the expectation is green, then you are likely to be a trend investor; if it is red, then you may be a mean reversionary investor. Which situation is closer to rationality?
Let me tell you the answer-if I were to design this experiment, I would put an opened mousetrap in the jar beforehand.
This is a joke. I will tell you the answer at the end of the article. Let’s talk about bank stocks first. Regardless of whether it is in the A-share or Hong Kong stock market, the prices of Chinese listed banks’ shares are shockingly cheap relative to their earnings. Of course, from a rational point of view, there is a reason for this “cheap”.
In summary, there are probably the following reasons. But are they real?
This is one of the most important concerns of many quasi-professional investors for listed Chinese banks.
Their statement seems to make sense. Because banks are different from the retail industry, which is easier to understand. In those business models where one-handed payment and delivery, you can clearly see how much a company has made or lost, and people can easily figure out the current purchase. Whether its stock is worth it.
But banks are different. The quarterly profits they show may be completely wiped out because of a bad debt later. This is because the bank’s profit is only two or three percent of the loan volume. If a loan is lost, 30 to 50 normal loans of the same scale are needed to make up.
One reason for the low valuations of listed banking companies in China is probably that doubts about loan business models fit the tone of some cynic conspiracy theorists.
Indeed, after 2011, China’s commercial banking system has been digesting the negative effects of the investment frenzy that began at the end of 2008.
It is difficult for people to evaluate the long-term pros and cons ratio of the investment campaign driven by large-scale fiscal expenditures by the decision-makers in 2008 (from a historical perspective, the benefits outweigh the disadvantages). However, sports capital investment and the inefficient investment derived from its multiplier effect have indeed caused many problems in China’s financial system.
China’s policy-makers’ solutions will not be like the United States, which will clear the problem in a short period of time and then let irrational financial institutions fail. Their idea is to divide a big trouble into many small troubles and assign them to the entire commercial banking system according to their weights. Each commercial bank then divides the little troubles into small troubles and assigns them to each year according to the time axis. The regulatory authorities also give a certain degree of leeway to the preparation of commercial bank statements during this period.
Therefore, from the perspective of financial reports, listed commercial banks have been profitable for 10 years, and there will be slow growth-this financial smoothness has a lot to do with the above-mentioned processing methods.
Between 2011 and 2020, the commercial banking system has digested trillions of bad debts in this way. At the end of 2019, the regulatory authorities began to urge commercial banks to speed up the write-off and clearance rates. This shows that a cycle of poor digestion in China’s commercial banking system is basically over. In other words, starting from 2019, the statements of listed banks in China can basically reflect the current operating conditions.
Prudent investors should buy the stocks of companies that are undervalued and well-run.
Relevant departments’ expectation of the level of non-performing loans for China’s entire banking system in 2021 is 2%, which is probably based on conservative estimates of 3 trillion yuan of non-performing loans and 170 trillion yuan of bank loan balances in 2021. Judging from the recent third-quarter bank financial reports, those excellent commercial banks have not changed their trend due to the impact of the new crown epidemic, and their non-performing loan levels and provisions will be much better than the industry average.
Bank stock prices just don’t rise
Not investing in bank stocks seems to be a custom for ordinary Chinese investors. The most important reason for this custom is that bank stocks never rise. This impression is probably also a misunderstanding caused by labeling.
Give an example of my own. I bought shares of China Merchants Bank from 2012 to 2014, and the purchase price was about 10 to 11 yuan in the three years. Through the distribution of dividends over the years, the average cost can be reduced to about 5.2 yuan. In this way, the company’s dividend reinvestment annualized rate of return is about 37%. Even if I use the dividends for food, drink, and fun, based on the stock purchase price, the rate of return of China Merchants Bank over the years is around 24%.
I believe that the annual yield of 24% can definitely defeat 99% of stock investors, including investment institutions. Therefore, even in their worst cycle, bank stocks have made good returns when market valuations have basically not changed significantly from 2012 to now.
In fact, this is the “Holy Grail” that so-called value investors hope to get-the company does not rely very much on market valuations, but relies more on endogenous growth to make those who invest in it get high returns.
The reason why ordinary investors believe that the price of bank stocks will basically not rise is probably because the stocks of listed banking companies have relatively small fluctuations in the short-term, and there are very few cases where the daily limit and lower limit occur, and they also ignore the impact of dividend reinvestment on income. effect.
Gain 1.5 trillion yuan
The financial system gives 1.5 trillion yuan to the real economy. This is a statement put forward by the decision-makers in mid-2020.
To be honest, this statement is rather vague. What does “Rangli” mean? Many media with little knowledge of investment interpret this kind of concession as commercial banks cutting off 1.5 trillion yuan in profits and distributing them to physical companies. But the annual profit of the entire banking system is only about 2 trillion yuan. So does it mean that banks are going to implement interest-free loans?
This statement did deter investors from buying bank stocks. To be honest, I haven’t seen a clear definition of the so-called concession. However, in October 2020, the relevant departments issued a report on the operation of China’s commercial banks. The report mentioned that the 1.5 trillion yuan of “profits” has been completed by 1.1 trillion yuan. According to the financial statements of commercial banks in the third quarter of 2020, there was no shrinking of profit before provision while the scale of loans rose.
Banking business is disrupted by the Internet
Many people have believed that since 2010, the Internet will subvert the mode of operation of commercial banks, or even commercial banks will also subvert.
However, the real change in recent years is that Internet finance, which was originally built on the momentum, has been “subverted.”
Based on this fact, Internet enthusiasts may still believe that the reason why commercial banks have not been subverted is because of the government’s preference for them, and Internet finance is the part that receives unfair treatment.
In fact, this is not the case. Do you remember the 250 vice president of a company’s research institute in the past few months when he was ordered to resign when he said that “those who get the silk get the world”? Some people say that the deputy dean is right, but he shouldn’t express it like that in front of the public. I think there is a problem with the perception of the deputy dean. Because even in the era when Internet applications are very deep, not all industries can “get the silk to win the world.” The banking industry falls into this category.
Banks are engaged in the kind of business where the 28th-eighth split is very obvious, and 80% of their profits come from 20% of their customers (the actual business ratio is much more exaggerated than the 28th-eighth). Many big banks are willing to marginalize “X Diaosi” from their business halls, but they cannot do so due to the pressure of social responsibility.
Are there any more? I can’t think of any other bad features of listed mainland banking companies that allow the market to trade these stocks at a valuation of about 4 times the bankruptcy level.
Let’s return to the jar of beans. If an investor thinks that the future trading price of stocks will rise and fall like touching beans in a jar (for example, red is rising, green is falling), then he does not need to read what I wrote above. For them, every company is the same.
But in the real market, the marginal price of stocks is determined by the opinions of this group of bean traders. Moreover, the trader’s prediction of the color will affect the probability of which beans will be touched next time.
In fact, regardless of whether it is a red bean or a mung bean next time, the person who touches the bean is a kind of person. After all, because a certain kind of bean appears too many times, the situation will be reversed next time. This is the behavioral reason why the market will eventually return to the mean in the long run. It is precisely for this reason that prudent investors should buy the stocks of companies that are undervalued and well-run. They are the beneficiaries of the law of mean reversion.