Buffett's insights into A-shares: Bought Gree Electric 11 years ago, how much profit has he made holding the stock until now? The full journey from poverty to wealth

(Source: A-share Highlights)

Berkshire Hathaway’s founder Buffett once said, “Be surrounded by great companies.”

Since we don’t have the ability to run a company ourselves, we need to find high-quality companies, find a group of outstanding talent, and then entrust our assets to them at a suitable price.

So the first and most important thing about value investing is selecting high-quality companies. Then how do we identify such high-quality companies among hundreds or thousands of companies?

In response, Peter Lynch provided the answer. He said: If you do a little research on stocks with care, ordinary investors can also become experts in stock investing, and their performance in stock selection can be as excellent as that of Wall Street experts.

When you work, shop, visit exhibitions, and eat, pay more attention—or focus more on newly emerging industries with development prospects—and you can find stocks that can make a lot of money.

This whole approach—using common sense to select stocks—is easy enough that even elementary school students can learn it, but adults think it has no “technical content,” it’s too non- “complicated.” As a result, while they refuse something simple, they also refuse wealth.

1. Use common sense to select stocks

Most high-quality companies are something we can almost always come into contact with in everyday life. For example, Moutai liquor is indispensable at banquets; China Ping An, an insurance company that nearly everyone pays premiums to every month; the CMB bank card in your wallet; Vanke in the real estate industry; and Suning Appliance in electronics retail, and so on.

Selecting stocks with common sense is just that simple. It doesn’t require any advanced or complex economics knowledge.

Facts show that there is a tendency in human nature to simplify things into more manageable forms. The more profound truth lies in simplicity; the world itself is simple—we just make it complicated after becoming adults.

2. The three questions you must think through about the company

(1) Will this company still be around after 10 years or 20 years?

(2) Can this company’s level of profitability continue to grow over the next few years?

(3) Does the company have good mechanisms and a management system?

3. After buying a high-quality company, you need a long-term perspective and patience

Buying a high-quality company doesn’t mean it will rise right after you buy it. On the contrary, when market conditions are bad, it may fall more sharply than other stocks; when market conditions are good, it may rise more slowly than other stocks.

Because great companies often have no compelling stories and no hype themes—like plain boiled water, they are flat and unexciting. So in the short term, there is little hope for the stock price to rise. But the difference between high-quality companies and junk companies is that when a high-quality company’s stock price falls, it will rise back years later; when a bad company’s stock price falls, it may never rise again.

So investing requires a broad vision and patience. Once you find a high-quality company, whoever can look farther, whoever has more patience to wait than others, will make more money. And not obsessing over day after day, tomorrow vs. the day after tomorrow, and short-term stock price fluctuations.

Next, let’s get back to the topic. First, use a computer to calculate. Suppose the opening price on July 17, 2009—11 years ago—refers to the opening price of Gree Electric; and the closing price on July 18, 2019—up to that point—refers to Gree Electric’s closing price.

Year 1: On July 17, 2009, with 500,000 in capital at Gree Electric’s opening price of 22.65 yuan per share, the number of shares that can be purchased is: 500,000 / 22.65 yuan = 22,075 shares. Initially, using 500,000 yuan in July 2009, you could buy approximately 22,075 shares of Gree Electric. The company already implemented dividends in June 2009, so you cannot enjoy Gree Electric’s dividend gains.

Year 2: Gree Electric implemented a distribution of 5 yuan in cash and 5 shares as a bonus for every 10 shares. From this, we can calculate the dividends you would receive in 2010 for holding Gree Electric shares: 22,075 shares * (10 / 5 yuan) = 11,037.53 yuan. After the share bonus conversion, the total number of shares becomes: 22,075 shares + 22,075 shares * (10 / 5 shares) = 33,742.5 shares.

Year 3: Gree Electric again implemented a distribution of 3 yuan cash for every 10 shares. The cash dividend is: 33,742.5 shares * (10 / 3) = 10,122.75 yuan. In 2011, you can enjoy Gree Electric’s cash dividend of 10,122.75 yuan.

Year 4: Gree Electric implemented a distribution of 5 yuan cash for every 10 shares. The cash dividend is: 33,742.5 shares * (10 / 5) = 16,871.25 yuan. In 2012, you can enjoy Gree Electric’s cash dividend of 16,871.25 yuan.

Year 5: Gree Electric implemented a distribution of 10 yuan cash for every 10 shares. The cash dividend is: 33,742.5 shares * (10 / 10) = 33,742.5 yuan. In 2013, you can enjoy Gree Electric’s cash dividend of 33,742.5 yuan.

Year 6: Gree Electric implemented a distribution of 15 yuan cash for every 10 shares. The cash dividend is: 33,742.5 shares * (10 / 15) = 50,613.75 yuan. In 2014, you can enjoy Gree Electric’s cash dividend of 50,613.75 yuan.

Year 7: Gree Electric implemented a distribution of 30 yuan in cash for every 10 shares and bonus 10 shares. The dividend is: 33,742.5 shares * (10 / 30 yuan) = 101,227.5 yuan. After the share bonus conversion, the total number of shares is: 33,742.5 shares + 33,742.5 shares * (10 / 10 shares) = 67,485 shares.

Year 8: Gree Electric implemented a distribution of 15 yuan cash for every 10 shares. The cash dividend is: 67,485 shares * (10 / 15) = 101,227.5 yuan. In 2016, you can enjoy Gree Electric’s cash dividend of 101,227.5 yuan.

Year 9: Gree Electric implemented a distribution of 18 yuan cash for every 10 shares. The cash dividend is: 67,485 shares * (10 / 18) = 121,473 yuan. In 2017, you can enjoy Gree Electric’s cash dividend of 121,473 yuan.

Year 10: Gree Electric implemented a distribution of 6 yuan cash for every 10 shares. The cash dividend is: 67,485 shares * (10 / 6) = 40,491 yuan. In 2018, you can enjoy Gree Electric’s cash dividend of 40,491 yuan.

As of yesterday, July 18, 2019, Gree Electric’s closing price was 54.40 yuan. And from 10 years ago, starting from the total share count of 22,075 shares after two rounds of high-sending bonus shares, the current total number of shares you hold is 67,485 shares. Thus, we can calculate the gains brought by Gree Electric’s stock price over the 10 years as: 67,485 shares * 54.40 yuan = 3,671,184 yuan. As of now, the total market value you hold is 3,671,184 yuan.

Recalculate the cumulative dividends from holding Gree Electric over 10 years as: 11,037.53 yuan + 10,122.75 yuan + 16,871.25 yuan + 33,742.5 yuan + 50,613.75 yuan + 101,227.5 yuan + 101,227.5 yuan + 121,473 yuan + 40,491 yuan = 486,806.78 yuan.

So total market value + dividend gains = total amount: 3,671,184 yuan + 486,806.78 yuan = 4,157,990.78 yuan;

10 years ago, using 500,000 yuan to buy Gree Electric, and calculating based on Gree Electric’s closing price as of July 18, 2019, the total profit from holding Gree Electric for 10 years is: 4,157,990.78 yuan - 5,00,000 yuan = 3,657,990.78 yuan. Therefore, if you invested 500,000 yuan in full in Gree Electric 10 years ago, your profit as of now would be approximately 3.65799 million yuan.

Friends all care more about what kind of individual stock can become a second “Gree Electric,” a long-term great bull that can be a real standout. Great companies worth long-term investment only need to achieve these 3 things!

First, a good industry. Is the industry’s outlook big enough? Only when a company operates in an industry with a big enough outlook can it keep growing and expand its market share. When the industry outlook keeps expanding, the “cake” can get bigger, and then you can claim the portion belonging to the listed company. If the industry is very niche, even if the market share reaches over 90%, it is still hard to grow further—then those listed companies’ performance cannot keep increasing.

Second, a great company. Does the company have competitiveness? Every industry follows the laws of the jungle—survival of the fittest and the elimination of the unfit is the norm. When we invest in listed companies, we are essentially seeking the best among them. Only companies with core competitiveness can pull ahead of others in the industry. This is what value investing often calls a “moat”—for example, technology patents, exclusive formulas, or advanced organizational structures and innovation mechanisms, etc. These create competitive barriers in the industry, consolidate the leader’s position, improve market share, form a winner-takes-all situation, and continuously create incremental value, delivering returns to investors.

Third, a good price. Whether investing in a company at a reasonable price will lead to returns depends not only on whether the company can grow and whether it has competitiveness, but also on the price we buy at—that is, the investment cost. For example, suppose a company’s current market cap is 50 billion yuan, but its net profit is only 20 million yuan. The market cap-to-profit ratio, i.e., the P/E ratio, is 2,500 times. If this performance level stays unchanged, it would take 2,500 years to break even.

Assuming the company grows rapidly over the next five years and net profit increases by 9 times to 200 million, the P/E ratio would still be as high as 250 times, which is still an extremely high valuation level. Then it’s very likely that if you buy now and the performance increases greatly in five years, the market cap may still be under 50 billion yuan, making it unable to deliver returns—possibly even resulting in losses. The reason is that the purchase cost is simply too high: it has already front-loaded and “prepaid” future performance. Even if the listed company’s performance continues to grow for five years, it still cannot catch up with the valuation bubble.

By going through these three steps—good industry, good company, good price—you can select listed companies that are truly worth investing in. None of the three can be missing!

Moving Average Trading Rules (Diagram)

Rule One: The trend line is ambiguous; wait in cash for opportunities

Waiting for the half-year moving average system chart to show

Rule Two: When the trend line turns downward, never buy

Half-year moving average system: the half-year line turns downward

Rule Three: When the trend line turns upward, buy decisively on dips

Half-year moving average system: the half-year line turns upward

Rule Four: When the “life line” breaks through, boldly do swing trades

Half-year moving average system: the life line turns upward

Rule Five: If it falls through the life line, don’t run—you’ll lose money

“Raise the flag and start the uprising”

It refers to the price action: after a wave of decline, the stock then long stays flat and consolidates in the bottom area, and the moving average system is in a “stuck together” state or has extremely small spacing with a bullish-and-bearish arrangement. Suddenly, on some day, the stock price lifts off from three lines (13-day, 34-day, 55-day). This is an important sign that the institutional investors (the “Zhuang”) are starting to ramp up. The huge bullish candle that lifts off from those three lines is called “Raise the flag and start the uprising.”

Pattern characteristics: After a wave of decline, the stock price stays flat and consolidates in the bottom area for a long time, and the moving average system shows a “stuck together” state or extremely small spacing with a bullish-and-bearish arrangement. Suddenly, on some day, the stock price crosses above three moving averages (13-day, 34-day, 55-day) and lifts off, accompanied by releasing heavy volume. This is “Raise the flag and start the uprising.” This pattern is a classic attack formation used by institutional investors. Here, bravely chasing in means you bought at the starting point of this rally; you can gain substantial returns in the short term.

Underlying mechanism: After repeated consolidation, the disorderly moving average system finally comes together for a common target.

When the moving averages “stick together” and move together, it indicates that market participants’ holding costs are basically aligned. That means those who should sell have already sold, and those who haven’t sold for the moment have temporarily lost the momentum to short. The institutional investors adopt a “mushroom strategy,” extremely patient with limit-price accumulation, making some people in the market—because they can’t see hope—admit losses and exit, while funds outside the market feel there is no benefit and don’t want to enter. Then the stock price’s narrow-range fluctuations hint that the institutional investors are choosing the direction of the breakout. Once they think the timing is right, they “raise the flag and start the uprising,” quickly pulling the stock price away from the cost zone. During the process of surging on increasing volume, they complete the final “looting.”

Practical trading tips for “Raise the flag and start the uprising”

In practice, “Raise the flag and start the uprising” is the preferred setup. It mainly appears in three types: attack type (rapid rise, rapid pullback, then a slow bull climb along the 13-day line), accumulation type, and defensive type (it does not hit limit-up, and there is no upper shadow line indicating attack is blocked; on the next day it opens low and moves low to close the session with a bearish candle). The key points are: heavy-position entry for the attack type; half-position follow-up for the accumulation type; and small-order participation for the defensive type (add when a bullish candle overcomes a bearish one; break above the previous high, then go in with a heavy position).

Like “one bullish candle piercing three lines,” “Raise the flag and start the uprising” also has a preference for “clustering.” If, within a certain period or on a certain day, different stocks suddenly “raise the flag and start the uprising” at the same time, it indicates that the broader market has started to bounce upward. At that time, you need to abandon a short-side mindset and bravely join the long-side camp. Only by catching strong stocks can you gain quickly. Stocks that have the technical pattern of “Raise the flag and start the uprising” and also “one bullish candle piercing three lines” are exactly such stocks.

Trading opportunities:

(1) After the “Raise the flag and start the uprising” pattern appears, you can enter with a small position on the same day.

(2) On the next day after “Raise the flag and start the uprising,” if the stock price shows up with a low-volume small bearish candle, you may add a certain amount of shares—but the stock price must not break below the midpoint (50%) of the “Raise the flag and start the uprising” bullish candle. If the second day is still strongly pushing higher, or on the third day it eats the bearish candle from the second day and breaks above the previous high, then you can go in with a heavy position.

Case analysis

Case One:

This stock (GreenTing Investment) is a strong, heavy-position attack formation. On December 13, 2019, it showed a long bullish candle. After that, it opened high and kept rising along the way, and the stock price performance was very strong. If you could have entered before the strong rally, you would have gained substantial profits. So for such strong stocks, once you are sure, you should enter immediately—so you can capture the timing!

Case Two:

From the chart, you can see that GuoYang Xin’s early-stage stock price lifted off from the 55-day moving average, then pushed upward with rising volume, and formed the “Raise the flag and start the uprising” pattern. The next day, the stock price still rose with strength, pushing higher. The third day, the institutional investors’ original intent did not change—the attack kept coming, as strong as ever. In the following days, the stock price fluctuated widely; the institutional investors began to shake out profitable positions. Because there was no clear sell-off pattern, you could still hold the shares boldly.

Case Three:

From the chart, you can see that Junda Shares had been repeatedly consolidating in the bottom area until October 24, 2019. The disordered moving average system basically became closer and stuck together, making funds outside the market feel there was no profit opportunity, so they were unwilling to enter. But on October 24, 2019, the stock price crossed above 3 moving averages (13-day, 34-day, 55-day) and lifted off with huge volume. Then on the next day, the stock price appeared as a small bearish candle, but it did not break below the midpoint of the previous long bullish candle, which does not prevent the stock price from continuing to rise afterward.

Case Four:

This stock had long been consolidating and ranging in the bottom area in the early stage, with the moving average system showing a stuck-together state or extremely small spacing with a long/short arrangement. Suddenly on some day, the stock price crossed above the three moving averages (13-day, 34-day, 55-day) and lifted off with huge volume, so it was “Raise the flag and start the uprising.” And the three consecutive days of reduced-volume small bearish candles after the long bullish candle did not break below the midpoint of that bullish candle. Therefore, this pullback is another opportunity for friends who had not entered before the big bullish candle.

Key points to note

(1) “Raise the flag and start the uprising” usually appears after long periods of horizontal consolidation, when the technical pattern looks very similar to the three-line propulsion. It is extremely rare and usually belongs to short-term but powerful “mighty bulls.” Once the stock starts moving, the ramp-up speed tends to be fast and fierce.

(2) After “Raise the flag and start the uprising” appears, the stock price generally has a small correction. Most of the time it appears in the form of horizontal consolidation, and the strong characteristics are very obvious. Once you discover that the stock price is again increasing volume and pushing higher, immediately move in and “cover the hat” to rush in.

(3) When “Raise the flag and start the uprising” happens on three lines, it usually becomes a strong institutional bull stock. Therefore, when holding, you should have a little more patience. If there is no clear exit signal, hold all the way. If the consolidation time is not sufficient or the moving averages do not stick together long enough—because sudden factors cause the stock to “raise the flag and start the uprising” in a hurry—the rise is usually not that big.

(4) The formation mechanism and pattern characteristics of “Raise the flag and start the uprising” are basically similar to those of the three-line propulsion. The difference lies in the timing of entry. After the three-line propulsion pattern appears, it requires buying on dips along the upper or lower edge of the three lines, so you can pick up relatively cheap shares. But it’s harder to gauge the institutional investors’ attack timing. Therefore, if you enter based on the three-line propulsion technical pattern, you must have enough patience. “Raise the flag and start the uprising” indicates that the ramp-up has already begun, with big changes in price action and a clear situation, making it easier to spot and follow—so it saves time, but the cost is relatively higher.

The art of investing has countless methods. Only by finding the investing approach that fits you and sticking to it long-term can you survive in the stock market.

However, many investors enter the market with motives that are only to grab a quick profit in the short term. They never set a long-term investment goal, and they don’t even know what their real foundation is. Following the crowd and gambling with a short-term mindset is an important cause of losses.

Finding a profitable model is what all investors care most about. To win steadily in the market, you first need to understand the market’s profitability model. Only by operating according to that model can you profit in the market; otherwise, you can only contribute to the market. Many people lose money simply because they haven’t found a fixed, self-fitting profitability model. They keep making mistakes, paying the market “tuition” in an unclear way. Some people even spend their whole lives without figuring out why they lose.

To become a master investor in the stock market, you must research more and learn more. If in this market there is a mentor who can help you remain undefeated for a long time, then that mentor is this market itself. We must respect it, become familiar with it, perceive it, and finally be able to coexist with it harmoniously—so that your investment life can connect with the rhythm of your market.

Success equals small losses plus big and small profits—accumulate them repeatedly. Achieving “no big losses” is simple: treat survival as the first principle. When there is danger that prevents this principle, abandon everything else. Because no matter how many 100% excellent performances you had in the past, as soon as you lose one 100%, you’ll have nothing left.

In the way of trading: defend the ground where you cannot lose; attack to win against your enemy. If you lose 1 million by 50%, it becomes 500,000. If 500,000 grows to 1 million, it still requires 100% profit to get back. Every time you succeed, you only take a small step forward. But every time you fail, it pushes you back a large step. From the first floor of an imperial skyscraper to the top floor takes one hour. But jumping off from the top floor takes only 30 seconds, and you can return to the ground floor.

In trading, there are always things you never expected that can cause you to lose. The simplest way to decide whether you need a stop-loss is to ask yourself one question: Suppose you have not built a position yet—would you still be willing to buy at this price? If the answer is no, sell immediately, without hesitation.

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