Minority AM Liam Zhou: We are not Value Investing

Liam Zhou   2019-10-15 本文章399阅读

Minority Asset Management has been holding the blue-chip stocks with full position since the second half of 2016 and we have very low turnover rate for last three years. Many people misunderstand our investment style as value investing and long-term investing. But I want to emphasize that we are not value investing.


Stock price fluctuates all the time, which reflects the information absorbed by the most market players, and their expectation for the future. If you have similar expectation with the majorities, you would likely to have similar investment behavior, and therefore there shouldn’t be much difference in returns.


This is the reason why most investors cannot achieve excess returns or alpha from the market. So, where does the alpha come from?


We believe that alpha return comes from bias of the majority.


When the majority shows cognitive bias and make misjudgment, there will be a mispricing in the market. This is the area one can take advantage and obtain alpha.


Here comes the next question: how do you spot the bias of the majority?


The answer can be found in the book Thinking Fast and Slow, written by the Nobel Laureate in Economics Daniel Kahneman. He pointed out that there are two kinds of thinking patterns, one is fast thinking, the other is slow thinking.


Most people are accustomed to applying the fast thinking pattern, which is emotional and intuitive. It has the advantage of high efficiency when dealing with complicated things. The fast thinking pattern only takes couple minutes to make a decision, however, it’s also prone to errors.


The slow thinking pattern, on the other hand, is seamless and logical, and requires repeated verification. The slow thinking pattern consumes brain power and not quite efficient, but the result is much more reliable.


Our human brain has limited power, and that is why most people tend to think fast with emotion and intuition and often make mistakes.


When it comes to making investment decision, we need to think slow, applying seamless, logical analysis and using quantitative method to support investment decision. If we can employ the more accurate slow thinking pattern to discover the bias of the fast thinking majority, then we can identify the source of alpha.


For example, prices of China blue-chips have been rising in recent years. We often hear from the media that blue-chips have been held by mutual funds with high concentration, and this racing track is too crowded. As a result, the suggestion for investors is to take great caution towards blue-chips.


We’ve heard this kind of comments two years ago, yet the blue-chips kept rising for two years. Similar view comes up almost every month and many people believe it to be true. This is a typical example of fast thinking, as most opinions on media only follow what the others have said, without verification, and cannot withstand any scrutiny.


So how did we apply slow thinking to verify this case?


Minority calculated positions for every stock held by over 2000 actively managed mutual funds, to analyze the level of concertation for blue-chips. Doing the calculation is time consuming, and require great amount of brain power. But we found out that many blue-chips have not been over-weighted, even for popular stocks like Ping-an insurance and Kweichou Maotai, are still under-weighted. Data clearly tells which judgement is right.


This is an example of using the slow thinking to identify bias of the majority. In recent years, we have conducted research on supply and demand, scarcity of stocks, allocation, valuation and market sentiment based on behavioral finance methodology.


We held blue-chips for long time, not only because solid fundamentals and low valuation, but more importantly, most investors still have bias on blue-chips for the five aspects above. Not only for strategic direction, we also apply the same methodology in selecting sectors and individual stocks.


Why is investing in stocks so difficult? Because there are many factors influencing stock prices. What we need to take into consideration is much more than just fundamentals and valuation. Even for fundamentals and valuation, people have different way to assess them, therefore we need to find where the majority bias exist, rather than simply judge if the valuation is too high or too low.


That’s why I stated that we are not value investing in the beginning.


As long as people still use fast thinking, most people would still have cognition bias and misjudgment.


We believe that in the decades to come, the thinking pattern will remain the same and this is our source of alpha in long term.


This year we continued to implement the strategy of investing blue-chips, and actively participate in IPO placement, and we have achieved YTD returns that exceed our expectation. 


We believe this strategy will continue to work well in the fourth quarter and next year.