The stock market is falling, how should we go bottom-fishing?

A few days ago, I said in an article that “people who are bullish on China can consider bottom-fishing”. As a result, many friends said that I was bullshit. Big A is far from the end, and you let us copy now or copy in the middle of the mountain?

Indeed, buying A shares now does not necessarily lead to the next big drop, we always think very well, at the bottom of the stock market, and then sit and watch the stock market rise to make a fortune.

But, shares really bottom of the moment will not call you, how do you know that is the bottom? How can you be so sure of that opportunity? The bottom is out, not out!

I couldn’t agree more with that, so here’s the question

How do you buy bottom? Whose bottom?

Hundreds of years ago, Shakespeare’s The Merchant of Venice said:

“My investment is not limited to one ship, one port;

All my assets are not due to the luck of this year;

So, my business is not going to suffer.”

In the world of investment, if the “value investor” represented by Warren Buffett is the Shaolin school, then there is another Wading school, the “portfolio investor”, whose master is David Swenson, who has been in charge of Yale University Endowment Fund since 1985. In more than 30 years, the fund will be less than 1 billion dollars. Roll over to $42.3 billion today.

According to Swenson:

“About 90 per cent of investment returns come from the portfolio and only about 10 per cent from timing and security selection.”

To put it simply, James Tobin, a Yale professor who won the Nobel Prize in economics in 1981, said:

“Don’t put all your eggs in one basket!”

This egg-laying portfolio philosophy led Bridgewater’s president, Ray Dalio, to come up with his “All Weather” approach to asset allocation in 1996.

What do you mean 24/7?

That is to say, if this asset allocation portfolio is adopted, then, no matter the capital market is sunny, cloudy, windy, rainy, or even hail, sandstorm, this asset portfolio strategy can achieve relatively good returns.

How do you do that?

First of all, under the credit-money system, the prices of most assets, they go up gradually. If you draw a line that shows the trend of an asset class going up, then the slope of that line is the long-term annualized rate of return of that asset.

In general, assets with higher slopes are more volatile; Assets with a low slope are less volatile. Moreover, most of the time, the prices of these asset classes do not move in the same direction For example, when stocks rise, gold may fall; and when stocks fall, gold is likely to rise.


In this case, finding assets with different performance and combining them together can complement and hedge the volatility direction of assets and reduce the risk of large fluctuations without affecting the long-term yield of these assets.

This is the all-weather strategy.

Furthermore, as asset prices rise or fall, the potential returns and risks of each asset class change. When the return/risk ratio of an asset is reduced, it can actively choose to adjust positions, and the proportion of the asset will be reduced. On the other hand, if the return/risk ratio of a certain asset class rises, then you can actively increase the proportion of that asset class. By doing so, you can effectively increase the return and reduce the risk.

Therefore, the all-weather fund is not a passive index that you can buy and sleep on, nor is it a lazy investment strategy. It is an active management strategy, and the aforementioned adjustment of return/risk is known as “risk parity theory” in contemporary portfolio theory.

Global capital markets over the past two decades have largely validated the effectiveness of this strategy.

From 1999 to 2019, the United States went through a recession, real estate bubble, financial crisis and other challenges, but Bridgewater’s all-weather strategy withstood the test, losing money in one year, 2000, and turning a profit in all the other years, which can be described as “solid happiness.”

Some people may ask will the foreign strategy not adapt to the local conditions in China.

There is a company specializing in asset allocation in China, called Financial Rubik’s Cube, which brings the all-weather strategy to China to practice.

How exactly do they do it?

First, they back tested history to find the “slope” of different asset classes. Then, find the proportion of losses in the worst-case scenario and, based on that, make a corresponding portfolio of underlying assets.

Then, when the market has gone up or down a lot, it can actively add or subtract from these assets based on their current risk-return ratio, ensuring that even in extreme circumstances, the pullback can be controlled without breaking the bottom line.

Even after the stock market crash in 2015, the trade war in 2018 and the epidemic in 2020, the overall asset volatility level of the fund portfolio made by this method is still within the range that investors can safely bear (see the figure below).

You might wonder what kind of portfolio the firm sifted through to take such a hit.

Although the assets mainly consist of A-shares, US stocks, Hong Kong stocks, gold and bonds, their combinations are customized. Each person has different risk tolerance and gets different asset combinations. Let’s take the one with the highest risk (slope) for you to see:

Some friends may want to scold me, you said the risk is the highest, I cannot carry, see what is the use?

Don’t worry, on this allocation, in 6 years of solid trading practice, experienced the trade war in 2018 and the US stock market circuit breaker in 2020, its maximum retreat did not exceed -14.88%, much smaller than the Shanghai Composite index -30.77%, I believe most people can hold.

So, if you are in the process of investing, especially worried about the crash, especially worried about the bottom of the mountain, especially worried about the net worth of big fluctuations, the all-weather strategy, or can give you a “steady as a dog” feeling.

If there is a disadvantage, then the disadvantage is that you need to have a certain understanding of the market and the various assets, when the position can be adjusted to the right place. If you don’t know how to analyze, and don’t want to spend time and effort, then directly let the financial Rubik’s Cube help you.

By the way, to add a little gossip knowledge, Zhang Lei, the head of Hill house, one of China’s top venture capital firms, is a student of Swenson, while Swenson is a student of Tobin.


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