Shi Lei: Why Following Trends Is No Longer Profitable (AI Translation)

【周刊提前读】石磊专栏：跟随趋势为何不赚钱了？

The article discusses why trend-following investment strategies have become unprofitable in the contemporary market, especially since 2022, and elaborates on the complexity of identifying true trends amid economic noise [para. 1]. Traditionally, following market trends was a reliable investment strategy, but this approach has faltered recently. In 2024, both stock and commodity markets have shown a tendency to return to their original prices after a rise, causing losses for late investors [para. 1][para. 2]. The root cause is the high-noise economic environment, making it challenging to distinguish genuine trends from superficial fluctuations [para. 3].

To mitigate noise, multi-perspective filtering methods, often called the "blind men and an elephant" approach, are suggested. This entails systematically integrating various perspectives rather than combining disjointed pieces of information. A deliberate and structured approach prevents erroneous conclusions that could arise from isolated viewpoints [para. 4]. Since the start of the year, discrepancies between macro and micro economic data have made it difficult to draw consistent conclusions about trends. This uncertainty persists, even after on-site investigations [para. 5][para. 6].

To accurately navigate this volatile scenario, one must return to fundamental principles, systematically integrate multiple perspectives, and understand the underlying structure of the system. This approach helps identify the main drivers of economic evolution and prepare strategies for various possible scenarios [para. 7]. The current Chinese economy exemplifies this complexity. Despite consistent growth in physical consumption, structural differentiation has emerged. Notably, China's global trade share has remained resilient, with the supply chain adding more intermediate links, influenced by ongoing Sino-U.S. trade frictions [para. 8][para. 9].

Several contradictions exist within the economic systems of China and the U.S., showcasing a complementary dichotomy. China's primary economic issues revolve around energy, raw materials, and manufacturing, focusing on deleveraging and savings. In contrast, the U.S. grapples with technological and financial issues amid a decline in national net savings [para. 10]. Since 2021, China has prioritized energy system security, transforming coal from a cyclical industry into a stable, long-duration sector integral to energy security [para. 11][para. 12].

Reevaluating stock pricing fundamentals reveals that coal stocks, traditionally viewed as cyclical, are now seen as stable, high-certainty investments. Despite steady coal prices, coal stocks have surged 40% due to improved valuation metrics, including an increased free cash flow and reduced risk premium [para. 12][para. 13]. Meanwhile, some consumer stocks are trending downward due to systemic changes, transforming them into new cyclical stocks [para. 14].

The export manufacturing sector has seen significant gains, attributed to not just external demand but also strategic disruptions in traditional markets by leading manufacturers. Even within pressured sectors like raw materials manufacturing, leading companies maintain profitability and healthy cash flows, despite industry-wide overcapacity. This scenario could pave the way for investment opportunities driven by industry consolidation and stricter energy consumption policies [para. 15][para. 16].

Ultimately, the article concludes that "value" in the economic context is dynamic, determined by continuous interactions within the system. Therefore, asset management requires a systematic understanding of these relationships. Echoing the advice inscribed at Hangzhou Ling Shun Temple, successful investment necessitates a mindset of not clinging to static assets but recognizing the fluid nature of value [para. 17][para. 18]. The insights provided in this article are credited to Shi Lei, Chairman of Xiyinzi Technology, and are excerpted from Caixin Weekly's upcoming July 1 issue [para. 19][para. 20].