A common question is: Can undervalued index funds rise back?
Yes or no?
The answer is yes.
Because it involves the mean regression theory.
If we throw a normal sieve and it is 1 min for many times in a row, can we say that this sieve is 1 min every time?
Obviously not.
Everyone who has studied elementary school mathematics knows that this is a question of probability.
The probability of 1, 2, 3, 4, 5 and 6 is one in six respectively.
If you throw it six times, three times is 1 minute. Then in these six times, the frequency of 1 point is half, which is indeed more than one-sixth of what it should be.
But if we continue to roll the dice 1000 times, we will find that the frequency of each point is infinitely close to one sixth.
Theoretically, the regression from half to one sixth is the mean regression.
The same is true of funds.
There is mean regression effect in the valuation of index funds.
For example, the Standard & Poor's 500 Index of American stocks.
The historical P/E ratio of the past 40 years mostly fluctuated between 10-30 times, with an average of about 15 times.
A shares refer to all. In the past, the P/E ratio of 10 mostly fluctuated between 12-30 times, with an average of about 17 times.
20 15 is the last bull market of A shares, and the highest P/E ratio of CSI refers to about 30 times. 20 18 is the last bear market of A shares, and the lowest P/E ratio of CSI is about 12 times.
If it rises more, it will fall, and if it falls more, it will rise, but it will always return to the average of 17 times. It's just that the length of time is uncertain
Just like throwing a sieve, you can't expect to throw one-sixth accurately every time.
But it is very obvious that the probability of buying safety benefits is very high when it is below the average level, and buying it when it is above the average level is to die.
We invest in low valuation index funds to buy at a low valuation, and when the future valuation returns to the average, we can earn some valuation gains.
But if the valuation does not return in the short term, will it be unprofitable?
Not exactly.
Net value of index fund = P/E ratio * profit+dividend.
The price-earnings ratio will fluctuate back and forth within an interval. However, profits can rise for a long time.
As I said yesterday, enterprises operate to make money. No one does business at a loss. What's more, the market is the survival of the fittest and the index is the survival of the fittest.
A loss-making shop can keep you open for ten or eight years. If it weren't for charity, it would definitely go bankrupt.
Therefore, listed companies will try their best to get more and more profits.
Therefore, in the long run, the P/E ratio fluctuates within a range, profits rise for a long time, and the multiplication of the two also rises for a long time.
Take the CSI index as an example. The lowest point in 2008 1557, the lowest point in 2013,2357 and the lowest point in 2018,3316. In 2022, this year, the lowest point was at the end of April, 4302 points.
Imagine that if it does not fall again and this lowest point is written into history, then it can be inferred that in 10 and 20 years, the lowest point of the CSI index may be six or seven thousand points, or even ten thousand points.
I saw a comment yesterday, asking how many decades can people live?
The implication is that ten years is too long.
However, as far as investment is concerned, I think ten years is not a long time.
First of all, buying stock assets such as the fund itself is to consider age.
If you are 80 years old, of course, it is not suitable to buy funds at all, because it is unlikely to wait 10 years.
I am 30 years old now, and I don't think I will live to be 40, so I am willing to get rich slowly.
If you can't wait 10 years, can you reflect on whether you are too impetuous? Do you want to get rich too much? Do you want to wait for money to fall directly from the sky?
If not, why not love what you have now, live a good life, and then wait to get rich slowly?
If you can't get it in ten years, don't take it for a day.