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In the previous lectures, we talked about how narrative is a new factor in asset pricing, and used capital markets such as A-shares, US stocks, gold and Bitcoin as examples to talk about how narrative affects asset pricing.
In this lecture, I will answer questions that many students are concerned about. Since narrative has become an important factor in asset pricing, can I participate in narrative or even trade narrative? If I want to trade narrative, what should I pay attention to?
The core of value investing
I believe many students have heard a saying from Buffett, If you are reluctant to hold a stock for 10 years, then don’t even consider holding it for 10 minutes.
It sounds a bit like chicken soup, but Buffett actually said so and did so.
In 2024, Buffett’s Berkshire Hathaway increased its holdings of Occidental Petroleum by 11.56 million shares. Occidental Petroleum is currently one of the world’s largest shale oil producers. At the shareholders’ meeting, Buffett talked about the logic of this investment. It was very simple. He felt that the company “is doing the right thing and is valuable to shareholders and the country.” So he doesn’t pay attention to how the oil price changes in a month or even ten years. When he chooses to buy the company’s stock, he doesn’t think about selling it. It’s just a requirement to buy at a reasonable price (that is, the “safety margin” mentioned in value investing).
So the logic of value investing is that if there is no long-term value, I shouldn’t buy it. If there is long-term value, why should I sell it?
Following this logic, we can get two inferences about value investing:
1. The essence of value investing is to “share the new value created” through equity;
2. The core of value investing lies in holding, not trading.
This sentence may be questioned by many people today, and Buffett has not bought Nvidia so far. But in the two years from 2023 to now, Nvidia has created more than 800% of returns for shareholders, with an annualized return of more than 200%. Similarly, Tesla has created 230% of returns for shareholders in the two years from 2023 to now, with an annualized return of 84%.
So, this is indeed a soul-searching question-
Should I buy Nvidia? If I buy Nvidia, will I just hold it and not trade it?
Let’s do a thought experiment with data.
In January 2024, Nvidia’s stock price was $50. By November 2024, the stock price reached a high of more than $150, an astonishing increase of more than 200%.
But in less than a year, Nvidia’s stock price fluctuated four times. If an investor adheres to the idea of ”buy when it falls sharply and firmly increase holdings, sell when it rises sharply and take profits”, and sells when the stock price rises to around $130 and buys when it falls to around $100, within a year, he only needs to operate twice, then his return rate exceeds 600%, which is three times the return rate of continuous holding.
Therefore, many investors in the AI track, such as the famous investment research institution Capital Economics and Citigroup, directly advise clients that in the AI track, they should “choose to change positions at the right time” instead of holding for a long time or staying away.
Why?
The logic is what we discussed earlier. Under current technological conditions, investors’ expectations are easily changed for highly uncertain investments like AI. Super communicators like Huang Renxun can make Nvidia’s stock price fluctuate greatly within a few minutes, with market value fluctuating by more than 100 billion US dollars.
To put it more academically, the strength and speed of narratives changing investors’ expectations have been amplified, and the capital market has entered a non-steady-state “geological structure zone”. Under such a “geological structure”, if the “long-term holding strategy” is still adopted, investors’ risk exposure will be greater.
In fact, in 2023, Munger said that he and Buffett were “products of a specific era”. They benefited from low interest rates, low equity values, and ample opportunities – which is completely different from the current environment. I have also talked about this topic in the previous “Xiang Shuai’s Peking University Finance Class”. Think about it carefully, what does Buffett love? Coca-Cola, American Express, Kraft Heinz – essentially, they are all leaders in American brands occupying the global market. In other words, the victory of Buffett and Munger is the victory of American capitalism and the dividends of globalization. Any legend is a legend of the times. Therefore, we may also need to think more about Buffett’s value investment philosophy in the framework of the times and make iterative improvements.
Should we trade narratives?
For example, as mentioned earlier, the essence of value investment is to “share the new value created” through equity, and its core lies in holding rather than trading. The first point has not changed, but the second point may be more open to different opinions-
Especially now that many people realize that narratives have an increasing impact on asset prices, “trading narratives” has also become a trend in the market. For example, after October 2024, the most popular strategy in the US market is “trading Trump narratives”:
Before Trump took office, US Treasury bonds fell sharply. Why? Because everyone expected that Trump would increase tariffs and restrict immigration after taking office, which are all practices that push up inflation, so the market fell first to show respect and trade a wave of “Trump inflation”;
A month after Trump was elected, Trump’s company stock price doubled, even though the company’s fundamentals had not changed at all.
So in essence, trading narratives have a lot in common with the previous “swing trading” and “timing trading”, so trading narrative strategies also face similar problems: when should we enter the market and when should we leave the market?
There are a large number of professional institutions in the market that specialize in studying these issues:
For example, the “momentum strategy” that has been popular for 30 years has been proven to be effective. Traders have found that rising and falling have inertia, so the safe way is to buy stocks that continue to rise for a period of time and sell stocks that continue to fall for a period of time.
There are also CTA strategies (commodity trading advisor strategies) that have performed well in 2020, 2021, and this year, which actually use commodity markets and financial futures to make money from fluctuations.
The essence of these strategies is to do swing trading.
Overall, there are two ways to capture swings-
The first type is to judge based on price and yield indicators.
For example, a common analysis indicator is called moving average, which means that after the price of an asset breaks through the moving average of the previous 20 days, it is likely to continue to rise. Other indicators include MACD (moving average convergence divergence), Bollinger Bands, stochastic oscillators, support and resistance lines, momentum indicators, deviation rates, etc. (I will find time to talk to you about these technical indicators in detail in the future). The core of these indicators is that if the price breaks through a certain stable state, it may continue to go up or down for a period of time.
But these indicators also have a premise, which is to assume that there is more information in the price. If there is more “noise” in the price, this “trend” is likely to become a “pit” and directly “bury” the entrants.
The second category is based on information other than price, such as market sentiment, fundamentals, and policy expectations.
When a strong consensus begins to form, it is probably when the band starts. This type of method actually overlaps a lot with the logic of “trading narratives”, because most of the consensus information is spread through “narratives”. This investment strategy is actually closer to a comprehensive art, which tests basic skills, judgment, discipline, and even that kind of “feel”. This is also the most interesting part of investment. Compared with the quantitative strategy mentioned above, this method seems to have no threshold, and anyone can do it, but in fact the threshold is very high, and it is impossible to accurately use “indicators” to evaluate this threshold. Therefore, there are the most people on this track, and the probability of losing money is also high.
So here is a blackboard, any strategy that sounds “once and for all, you will learn a sure win and no loss” is not 100%, but 99% is a “pitfall”.
We can only say that when trading narratives, some principles can be used for reference:
For example, chips and AI, these technologies are not mature enough, and the market space has yet to be verified. The valuation of enterprises depends more on narratives, and these tracks may be more favorable for “trading narratives”; and those mature industries whose performance is easy to verify in the short term, such as public utilities, electricity, banks and other tracks, have a high probability of errors in “trading narratives”.
When trading narratives, the concepts of “value investment” and “long-termism” are still needed. As mentioned in the previous lecture 3, try to avoid participating in short-term narratives. When participating in long-term narrative transactions, you should track super spreaders for a long time and understand their narrative logic and ideas earlier and more deeply than the market – in this sense, there is not much difference between trading narratives and value investing.
Finally, I would like to say that not participating in trading narratives is also a strategy.
Remember, I said that investment is a loser’s game – the one who survives in the end is not the one who hits the winning ball, but the one who makes fewer mistakes.
