This article is from: Thought Steel Seal
Is Bernstein's view correct?
At the beginning of October, amidst a flurry of bullish sell-side reports on Pop Mart, independent analysis firm Bernstein issued an exclusive 'sell' recommendation with a six-month target price of 225 yuan. The stock fell to that level within a month, prompting widespread acclaim for its 'remarkable accuracy'.
However, it wasn’t long before critics pointed out Bernstein’s history of bearish calls on Tesla. Upon reviewing, one of the most notable 'sell' recommendations was issued in December 2023, a year when Tesla's share price surged dramatically, doubling in value. Bernstein published a report advising investors to sell, arguing that Tesla faced potential sales declines, concerning profit prospects, and competitive pressures from Chinese rivals. To boost sales, Tesla might have to resort to discounting, which would hurt its profit margins. Their target price was set at $150 for the next year, while the stock was trading above $240 at the time.
In hindsight, the reasons for the bearish call appear valid, but the stock price prediction was incorrect. Tesla later soared to a peak of $480 and remains above $400 today. The subsequent rise in Tesla’s valuation had little to do with sales volume and more to do with its advancements in autonomous driving, AI, and robotics.
However, if viewed from a mid-term cyclical perspective, this forecast was not entirely off the mark. Tesla’s stock did fall to $150 by mid-2024, hitting a low of just over $130, making it the worst-performing tech giant and validating its designation as the 'best short target for 2024.'
But if we extend our view more than a decade back, this Bernstein analyst appears rather inconsistent. Since initiating coverage of Tesla in 2016, the firm has consistently rated the stock as a 'sell,' starting when Tesla traded at just $16. Given Tesla’s highly volatile stock price, the analyst occasionally 'accurately' predicted peaks, drawing attention from Elon Musk, who sarcastically referred to the analyst as the 'best contrarian indicator' in a tweet.
Of course, this does not necessarily indicate that Bernstein lacks competence or harbors a bias toward bearish views; rather, it reflects a characteristic of the firm. As one of the few independent research firms on Wall Street without investment banking or IPO-related businesses, Bernstein is unafraid of offending large corporations. Its analysts often present 'non-consensus views' when market sentiment leans bullish, frequently being among the first to raise concerns such as 'peak growth,' 'intensified competition,' or 'overvaluation' regarding high-profile stocks and popular sectors.
Another factor is stylistic: Bernstein’s analysts tend to adopt a more traditional approach, emphasizing discounted cash flow models and placing significant weight on valuation and earnings sustainability. They scrutinize the replicability of business models rigorously, which explains their bearish stance on companies like Pop Mart and Tesla. This style also aligns with their positive outlook on Apple and memory chip manufacturers this year, while maintaining a relatively conservative view on Super Micro (SMCI).
I have long wanted to address an important topic—the alignment between average investment cycle duration and investment logic—often the primary culprit behind 'being right but acting wrong.' Bernstein’s two bearish reports provide a perfect case study. This article will explore this critical yet underappreciated issue among many investors.
This topic is truly significant. If I fail to thoroughly cover it in one piece, I plan to write several follow-ups.
02 Why is it always like talking past each other?
If you are a stock market commentator, the following basic principles must be very familiar to you:
For a long-term forecast, the main theme must be bullish. The stock market is always on an upward trajectory in the long run; even the longest bear markets last only three or four years, and the next bull market will most likely exceed current expectations.
This is the 'base probability' of stock market fluctuations: the longer the time horizon, the higher the base probability of going long. Of course, if you don’t have any fresh insights, such long-term bullish market analysis becomes valueless 'boilerplate.'
Conversely, if you are bearish, you must add a time limit of 'no more than one year,' especially for high-quality but overvalued individual stocks. These stocks may consolidate for about a year to digest their valuation before continuing to rise, or they might not adjust at all, directly using high growth to justify their valuation. Moreover, if the overall market is strong, they could maintain a high valuation for a prolonged period.
It is common to see predictions that are simultaneously bullish in the long term and bearish in the medium term. While many people can understand this, they find it hard to reconcile two conflicting conclusions, especially when discussing individual stocks. Debates between those with a one-month trading cycle and those with a one-year trading cycle over future stock price movements are like 'talking past each other,' a waste of time.
Different trading cycles focus on vastly different logics. Short-term trading emphasizes themes, stock price trends, and popularity, while medium-term trading focuses on momentum, catalysts, and style. Long-term trading, on the other hand, looks at valuation, certainty, and industry trends.
You argue that high-frequency data already shows signs of fatigue and that future earnings growth will slow down, suggesting selling. He counters that the current valuation is reasonable and the competitive landscape stable; although growth is slowing now, it will still maintain relatively high growth in the future, making it a good time to buy the dip.
The viewpoints may seem contradictory, but their visions of the 'future' are simply not the same. These two investment methods, based on completely different trading cycles, provide liquidity to each other when they clash. Without the latter’s buying the dip, the former would have no choice but to sell at even lower prices, significantly reducing profit margins. Without the former's selling, the latter would never get a chance to buy at a reasonable price.
Everyone has their own habitual trading cycle, and there is no right or wrong in this regard. However, the key is that your investment logic must align with your trading cycle. Long-term investors should make decisions based on long-term logic, while medium-term investors should rely on medium-term logic—this is crucial for success or failure in investing.
The following examines the logic and correspondence between operational cycles and investment strategies by using medium-term and long-term operations, which are relatively easy to confuse, as examples.
03 The Logic and Contradictions of Long-Term Operations
First, let's look at long-term operations, where there is a basic rule: the fundamental return from long-term operations comes from the probability of success, while excess returns come from the odds.
How should this rule be understood?
As previously mentioned, the stock market has an inherent natural upward trend; the longer the time frame, the higher the base probability of success for going long.
If we were to go back to 1995 and say that the next 30 years would be a major bull market, it would not be incorrect. The market rose sevenfold, with an annualized return of 7.2%, and even higher when including dividends of 1-2% per year. Looking at the monthly K-line, haven't these 30 years been a long-term bull market with gradually rising lows and highs?
But in 'such a massive bull market,' how many people actually made money? Most investors' individual operation cycles might last only a few months at best. If you pick any point on the 30-year K-line chart and calculate the return over the following months, averaged over the long term, you will find that this decades-long bull market has little relevance to your personal gains.
Consider another perspective: in a market that trends upward with fluctuations, the longer the duration of each individual operation, the higher your probability of success and expected return.
Of course, in terms of practical investment, high-probability long-term opportunities are abundant. Deposits offer a 100% success rate, government bonds provide around a 90% success rate, and buying Moutai today means a very high likelihood of profit in five years, given its consistently predictable annual profit growth. However, determining whether it can outperform the broader market with excess returns remains challenging.
Thus, the issue with these investments lies in insufficient odds. The real difficulty with long-term operations is identifying opportunities that offer continuous growth without overextending into the future—long-term odds where the upside potential far exceeds the downside risk.
Long-term investment may appear straightforward—simply holding high-quality assets for an extended period—but the challenges behind it are significant.
At the core of these challenges is the contradiction posed by the 'impossible trinity' of valuation, certainty, and prosperity. Everyone knows about quality assets, but their valuations are rarely low, meaning long-term returns will inevitably be mediocre. To achieve better returns, you need to enter when its prosperity is relatively low, ideally during periods of significant market disagreement, capitalizing on the selling pressure from medium-term investors exiting. This is almost the only opportunity with a high payoff ratio.
However, another challenge arises: deteriorating blue chips exist at all times, and market divergence does not always favor the bulls. Therefore, you also need to diversify your holdings among such 'undervalued' stocks.
But diversification creates new problems. As the number of positions increases, the likelihood of misjudgment rises, which drags down your overall rate of return.
Furthermore, the greatest challenge in long-term investing is time. Long-term payoff requires contrarian investing, but with investment cycles often spanning several years, repeated misjudgments can lower success rates, making it difficult to achieve high returns over a lifetime. Thus, long-term investing constantly weighs the trade-offs between 'perseverance for payoff' and 'surrender for success rates.'
This encapsulates the understanding that 'the fundamental returns of long-term investing come from success rates, while excess returns stem from payoff ratios.'
So, is medium-term operation any easier?
It’s even harder.
04 Misconceptions in Medium-Term Operations
Within the span of several months for medium-term investment, numerous influencing factors are at play. It is affected by fundamentals, capital inflows and outflows, as well as shifts in market sentiment and risk appetite. Therefore, one cannot rely solely on chart analysis or exclusively on fundamental analysis.
Mid-term operation opportunities may offer a certain range for odds, as well as high-probability opportunities, thus involving a trade-off between probability and odds. It is highly sensitive to the choice of investment logic.
For example, the easiest mid-term investment to fail is: I see that XX has dropped significantly, the fundamentals are fine, it's cheap, so I buy.
The essence of buying at a low price is to make a valuation recovery play, which means earning from odds. However, valuation recovery is extremely insensitive to time—it could happen within a week or be delayed for over a year.
Therefore, low valuations are typically suited for long-term operations with profit targets often exceeding 100%. But this is only the target, the upper limit. During the process, there will always be tests of downside risks. Low-valuation, weak sectors tend to have many 'ghost stories', with share prices more prone to falling than rising. After hearing one or two such narratives, investors might panic and sell at a loss. A few months later, the stock price may quietly rise again. Even if you picked the right stock, you might still incur losses due to a mismatch in cycles—using long-term investment reasoning for mid-term operations.
So what constitutes the rationale for mid-term operations?
Taking low valuation as an example, aside from this, a condition for probability must also be added—that is, you believe a positive catalyst event will occur in the next month or two, whether it’s earnings reports, new production capacity coming online, shifts in industry supply-demand dynamics, or milestone validations of key new products. In short, these are events that lead the market to believe there is upward momentum.
‘Low valuation + catalyst events with clear timelines’ form the conditions for a typical mid-term trade. This timeline usually needs to materialize within three months and must be falsifiable. If the event does not occur or occurs but the market does not react, positions should be decisively liquidated.
The most crucial aspect of mid-term operations is ‘falsifiability.’
Momentum investing is the most common form of mid-term investment. Investors typically track one or two core operating metrics—for instance, seat turnover rates and store expansion speeds for restaurants, order data for manufacturing firms, or pricing data for resource-based companies. These investments all have explicit ‘falsification conditions,’ and once key high-frequency data weakens, positions should be immediately sold.
From this perspective, mid-term investments do not necessarily involve predetermined durations but are instead defined by their ‘falsification conditions,’ which typically span several months since exceptionally strong high-frequency data cannot persist indefinitely.
Therefore, any event-driven investment with a clear timeline and a duration of over one month can be categorized as medium-term investment, such as new product launches, entry into new major customer systems, quarterly earnings reports, etc.
Medium-term investment essentially involves selecting investment theses that can be falsified within a few months or at any time to shorten the validation period of the investment logic, avoiding the regret of long-term investments where a single mistake could lead to years of wasted time.
To meet this condition of being 'short-term falsifiable,' medium-term investors have somewhat relaxed the requirement for low valuation, as long as the asset is not excessively overpriced, and reduced the emphasis on fundamental certainty, provided there are no issues within a year.
Otherwise, when an investor accustomed to medium-term operations buys based on long-term logic and stock selection criteria, the outcome often turns out like this:
Purchasing due to low valuation often leads to selling at an even lower valuation or selling immediately after a small price increase.
Buying because of long-term industry trends often results in self-doubt shortly thereafter.
Purchasing based on the certainty of a company's fundamentals often ends with selling during every downturn under the pretext of 'finding better opportunities.'
The investment world also has its share of 'politically correct' concepts, such as long-termism. Investors often cannot overcome behavioral biases caused by human weaknesses, and holding can amplify these biases. 'Long-term stocks with medium-term investment,' and the result often ends up being 'buying correctly but selling emotionally.'
Most investors were already mature individuals with established worldviews before becoming investors. Their cognition can improve, but habits cannot be changed. Therefore, there is no universally good method in investing; the key lies in 'know thyself': What kind of person are you? What is your minimum expected rate of return? What can you accept, and what can't you tolerate? How much volatility in your account can you handle? How sustainable is your future cash flow?
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Editor/KOKO