Investment strategy

Q3 of 07 is begining of a new stage of China's bullish stock market. A large percentage of personal investors began to lose money and 90% of mutual funds did not outperform the index in Q3. I selected some stocks in July, util Sep, I earned over 80% profit, beat the index growth at same period, which is 22%.

Maybe I was lucky, but I think there are two things for sure, firstly, safety is top priority, lose money is inevitable in the market, but always earn more than lose. Second, China's stock market is far from mature and so dynamic, so it is very important to review the influencing factors, market trend periodically and formulate the most effective strategy for each stage.

Overall objective: at least beat inflation over time and try to outperform average market performance. (means at least over 10% return annually). I follow the below strategies currently.

1. Never invest in a zero-sum market, such as gambling, it is a mathematical certainty that you will go broke. Most markets are positive-sum game including the stock market. Investment is to rent capital to market who can make more effective use of it, this adds more value to excess capital and can help beating the inflation over time. 2. Reading about a 'hot stock' in Wall Street analyst's buy recommedation won't bring above average return on the stock. Because everyone else has access to the same information. This is the essence of the efficiency markets theory. The effecient market theory says that asset prices already reflect all available information. According to Morningstar, only 30% of actively managed funds have performed better than the S&P 500 over the past five years, and only 15% of such funds have done so over the past two decades. The simple index fund, our morden equivalent of a monkey throwing a towel at the stock page, did better. And behavioral economics, did not beat the traditional effecient market theory. 3. By point 2, I did not mean reviewing company fundamentals useless. In fact, not every one in market is so effective or the big fishes in market is doing something else to maximize the utilization of capital, I am competiting with them, and moreover, only understand the true value of the company, I won't buy any stock not worth its value. Buy low, sell high is the principle everybody knows, thus I need to find out what's undervalued (it's better that WSJ analysts didn't promote it recently) and the efficiency markets theory will do the rest, the value will be capitalized sooner or later, as long as valuation model is correct and industry/company fundamentals remain strong, the only risk is time cost of capital might be very high. 4. After picking stocks, at least reviewing its quarterly report. I once made a mistake, I picked two stocks and at the begining made good profit, then the price went to the downward trend and finally I lost all the profit and had to sold them out. The lesson is to track the fundamentally on timely basis so don't miss critical information so as to make more informed investment desicion. All information I can get is public, but as said ealier, it is possible to outperform institutional investors and ordinary investors. Comparably, insitituonal investors move slower than me, I react more responsively to market change. Compare to personal investors, because the mass population is in market now, I certainly make more rational decisions than many people. 5. Take risks, earn reward. It's not a shame the stock I pick actually fall, because it's the thing I can't predict matter. As stock prices settle at a fair price given everything that we know or can reasonably predict, prices will rise or fall in the future only in response to unanticipated events-things that we cannot know in the present.Nothing is impossible in the market, remember the magic words: Enron, Enron, Enron. I don't keep money in stock all the time, grasp limited opportunities in each year is enough to reach my objective. 6. Save, invest, repeat. The gain from market is the rent I can command from financial market. Thus, if I have diversified portfolio (significantly lower the risk of serious losses without lowering the expected return) and invest for the long turn (I am certainly sure stocks is much higher in 25 yrs time than it is today, day trading incurs all the costs of trading without any of the benefits that come from holding equities for the long run), I will make profit. Furthermore, It is not realistic to expect the market always being a crazy bull, consistently beat the index is already a mirable. Remember Buffet, his annual average return is about 20%, after lasting for several decades, he is the richest guy in the world. There is no need to be impatient, what matters is to find out the best investment strategy working for myself and stick to it. I expect the rest of 07 will be a fluatuating market, returns will not jusify risks. But I am optimistic about 08, there should be a significant opportunity before Olympics ends. Just watch it closely and looking for best timing to enter again.