A retail investor holding ICBC stock tells you: stock selection is like choosing a company. Here is a list of the market's blue-chip stocks in the recent phase—investing once in a lifetime is enough.

(A Source: A-Share Highlights)

A story to help you understand the essence of the stock market:

There is a market with two people selling sesame cakes—only two people. We’ll call them Sesame Cake A and Sesame Cake B. Their sesame cake prices are not regulated by the Price Bureau. Each sesame cake sells for one yuan, and they can break even (including their labor value). And they have the same number of sesame cakes.

These days, business is really bad. Not a single person buys a sesame cake. A says, “So boring.” B says, “Me too, so boring.” At this moment, you who are watching the story also say: So boring.

At this point, we’ll call this market inactive! To keep everyone from getting bored, A and B decide to play a game. And so, the real story begins.

A spends one yuan to buy one sesame cake from B. B also spends one yuan to buy one sesame cake from A. Cash is paid on the spot.

A then spends two yuan to buy one sesame cake from B. B also spends two yuan to buy one sesame cake from A. Cash is paid on the spot.

A then spends three yuan to buy one sesame cake from B. B also spends three yuan to buy one sesame cake from A. Cash is paid on the spot.

……

So, in the eyes of everyone in the entire market (including you watching the story), the price of sesame cakes skyrockets. Before long, it rises to 60 yuan per sesame cake. But as long as A and B each hold the same number of sesame cakes, then no one makes money and no one loses money. Still, they have revalued their future assets and their “value” has increased! A and B now have “wealth” that is many times higher than before. Their net worth has risen a lot, and their “market value” has increased a lot.

At this time, a passerby C comes along. An hour ago, when C passed by, they knew sesame cakes cost one yuan each. But now C sees they’re 60 yuan each. C is shocked.

An hour later, C finds that sesame cakes are already 100 yuan each. C is even more shocked.

Another hour passes, and C discovers sesame cakes are now 120 yuan each. Without hesitation, C buys one, because C is an investor who also speculates. C is sure the sesame cake price will keep rising, and there is still room for further upside. And someone has even given a “target price” higher than 200 yuan.

In the stock market, this passerby C is a retail investor. The person who gives the target price is called a research analyst.

Under the demonstration effect of “making money” by Sesame Cake A, Sesame Cake B, and Passerby C, more and more passersby come to buy sesame cakes next. There are also more and more participants in buying and selling. The sesame cake price keeps climbing, and everyone is very happy—but it’s strange: everyone has not lost money.

At this point, you can imagine it: whoever has fewer sesame cakes, meaning whoever has fewer assets, is the one who truly makes money. Whoever runs out of sesame cakes and stops participating in buying—then that person truly makes money! And those who sold are all extremely regretful—because the sesame cake price is still rising fast.

So who loses money, then? The answer is: no one loses money. Because many of the people who buy at high prices hold what everyone agrees are high-quality, equal-value assets—namely, sesame cakes. Sesame cakes are clearly better than cash. The interest cash earns in the bank is far too small. It can’t possibly compare with the sesame cakes whose price is surging. And everyone even agrees that the market has a shortage of sesame cakes—so why not buy sesame cake futures? And that’s how subscription warrants appear.

Someone asks: Do buying sesame cakes never lead to losses? Of course not. Then on which day would everyone lose money? For example, if a Price Department comes into the market and decides sesame cakes should be priced at one yuan each—regulation shows up—

Or perhaps the market suddenly has many makers of sesame cakes, and the price is set at one yuan each—like the appearance of certain theme stocks with the same narrative.

Or maybe the market suddenly has many products you can play this kind of game with—different issuers appear.

Or maybe everyone suddenly realizes this is nothing more than sesame cake!—value discovery

Or maybe no one is willing to keep playing the game of trading sesame cakes with each other anymore!—the truth is revealed

However, if one day any of these assumptions comes true, then on that day, anyone who holds sesame cakes will lose money! So who makes money? It’s whoever owns the fewest assets—meaning whoever bought the least sesame cakes.

This sesame cake selling story is very simple. Everyone thinks that people who buy sesame cakes at high prices are fools. But when we look back again at the securities market we’re in, aren’t some so-called asset revaluations and asset injections in this market basically the same? When ROE is high, and assets are injected at a large premium, and the injection-under-a-premium principle is, in essence, the same as the sesame cake story: ultimately, whoever holds the fewest assets is the one making money, and whoever is holding the least is the one achieving the higher returns.

The whole story tells us: as an investor, you should take a rational view of asset revaluations and asset injections. When you see other people trying to con you, you should respond rationally. And after you enter the market, you must always stay rational. Once people put money in, they often lose rationality. What follows is that tempers flare up. At that point, if you don’t lose, fine; but once you do lose, the damage can be severe—trading stocks may not only fail, but also affect your quality of life, especially for retail investors with small amounts of capital.

Now let’s run a small data calculation. Everyone knows the total market value of Industrial and Commercial Bank of China stock is very large. As of today, it is 21171 billion yuan, and the circulating market value is 16015 billion yuan. If you invested 50,000 yuan on today’s date five years ago and then simply held it without doing anything, what would the return be as of today? Let’s take a look together.

The first year: On December 22, 2015, the closing price of Industrial and Commercial Bank of China stock was 4.67 yuan. 50,000 yuan / 4.67 yuan = 10,700 shares. There was 31 yuan left over. So at this time, your brokerage account holdings are 10,700 shares, with 31 yuan cash balance.

The second year: On July 8, 2016, there was a dividend distribution of 10 shares receiving 2.333 yuan.

So the dividend income is 1,070 * 2.333 yuan = 2,496.31 yuan. The closing price on July 8 was 4.29 yuan, so you continue buying 500 shares. At this time, your account holdings are 11,200 shares, and your cash balance is 382.31 yuan.

The third year: On July 11, 2017, 10 shares received 2.343 yuan.

So the dividend income is 1,120 * 2.343 yuan = 2,624.16 yuan. The closing price on July 11 was 5.06 yuan. You continue buying 500 shares. At this time, your account holdings are 11,700 shares, and your cash balance is 476.47 yuan.

The fourth year: On July 13, 2018, 10 shares received 2.408 yuan.

So the dividend income is 1,170 * 2.408 yuan = 2,817.36 yuan. The closing price on July 13 was 5.36 yuan. You continue buying 600 shares. At this time, your account holdings are 12,300 shares, and your cash balance is 77.83 yuan.

The fifth year: On July 3, 2019, 10 shares received 2.506 yuan.

So the dividend income is 1,230 * 2.506 yuan = 3,082.38 yuan. The closing price on July 3 was 5.67 yuan. You continue buying 500 shares. At this time, your account holdings are 12,800 shares, and your cash balance is 325.21 yuan.

As of today, December 22, 2019: the closing price of Industrial and Commercial Bank of China stock is 5.94 yuan. The value of the holdings is 12,800 shares * 5.94 yuan = 76,032 yuan. Add the cash balance of 325.21 yuan, so up to today, the market value of your holdings is 76,357.21 yuan.

So we can calculate the 5-year return from buying Industrial and Commercial Bank of China stock as: (the market value of holdings 76,357.21 yuan minus principal 50,000 yuan) / 50,000 yuan = 52.7144%

We can derive the average annual return over these five years as: 52.7144% / 5 years = 10.5429%

How to find stocks like Industrial and Commercial Bank of China—something you can invest in once for life? The recent A-share blue-chip leader stocks with the best performance (list)

1. Net profit growth 20%-40% — China Tourism Group Duty Free

2. Net profit growth 13%-88% — Conch Cement

3. Net profit growth 16%-45% — Gree Electric Appliances

4. Net profit growth 14%-50% — Piei

5. Net profit growth 15%-20% — Midea Group

6. Net profit growth 43%-75% — Mindray Medical

7. Net profit growth 28%-43% — Oupokang

8. Net profit growth 30%-60% — Kweichow Moutai

9. Net profit growth 32% — Luzhou Laojiao

10. Net profit growth 23% — Haitian Flavouring

11. Net profit growth 15%-20% — Ping An of China

12. Net profit growth -29%-59% — Tongce Medical

13. Net profit growth 15%-33% — Vanke A

14. Net profit growth 33% — Aier Eye Hospital

15. Net profit growth 25%-179% — Tigermed

16. Net profit growth 20%-40% — Oriental Yuhong

17. Net profit growth 10%-31% — Shanghai Airport

18. Net profit growth 9.8%-42% — Wuliangye

19. Net profit growth 25% — Hansoh Pharmaceutical

20. Net profit growth 30%-38% — Shandong Sinocera Glass

For listed companies’ financial reports, focus on these three indicators

First, look at revenue and net profit. Net profit is the performance we often talk about. If there is net profit, it can provide returns to investors. Profit is the core support for a listed company’s share price. When reading the financial report, you should focus on changes in net profit—whether it increased or decreased, and by how much. Buying stock is actually buying expectations. Using the ratio of market value to net profit gives the P/E valuation, then compare it with the industry’s valuation averages to judge whether it’s overvalued or undervalued. Then, combine that with the net profit growth rate to judge future valuation expectations. Besides net profit, revenue is also very important. Because only if revenue continues to grow can net profit continue to grow. If revenue keeps growing but net profit is poor, it may just be short-term performance fluctuations. But if revenue declines significantly, you must be very careful.

Second, look at cash flow. A company’s operations generate cash inflows. If revenue continues to grow, but cash from sales of goods or provision of services is far lower than revenue, it means the cash flow is unhealthy and there may be a suspicion of financial statement fraud. Besides looking at cash inflows from sales of goods and provision of services, you also need to look at net cash flow amounts—whether they match net profit. If net profit is very high but net cash flow can’t keep up, it indicates that the company’s profits may only be accounting profits, without real cash inflows into the company’s accounts. There may be financial statement fraud, or there may be a large amount of accounts receivable. These are all financial safety risks. An excellent company needs ample cash flow support.

Third, look at the asset-liability ratio. To grow bigger, a company necessarily needs leverage. That’s an important factor in how the company becomes listed and keeps getting bigger with the help of the capital market. But if the asset-liability ratio is too high, be careful. The company will have heavy repayment pressure. Once operations run into trouble and it can’t repay, it can default—leading to breach, or even being liquidated at the request of stakeholders, which could directly crush the company. Different companies have different asset-liability ratios. Generally, asset-heavy companies have higher asset-liability ratios, while high-turnover companies and light-asset technology companies have relatively lower asset-liability ratios. In the composition of liabilities, pay special attention to short-term liabilities, which are the biggest repayment pressure.

These three indicators are the most important indicators. For many stock investors who don’t understand accounting details very well, they can provide a fairly intuitive way to understand a company’s fundamentals.

How to use MACD to escape the top? Four world-class methods:

1. Use the MACD low-level “golden cross twice” to buy:

In real usage, investors may feel that if you follow “golden cross to buy, dead cross to sell” completely, it’s hard to profit or you might even end up trapped with losses. Therefore, you can use a method of buying with a low-level “golden cross twice,” as shown in the chart below.

But when operating, pay attention to:

(1) During divergence, whether it breaks through or penetrates the previous high (low) level.

(2) In the high area, as long as there is a possibility of top divergence, generally choose to sell; don’t bet on it flipping back to positive again, unless a big bullish candle or a limit-up occurs.

(3) This is an excellent method for finding short-term buy/sell points. The short-term swing is more than 15%, but the medium-term trend still needs to be analyzed together with long-term patterns and other factors.

2. Use MACD to capture the best sell point:

Its meaning is that after a large rally, the stock price appears to move sideways, forming a relatively high point. Investors—especially those with larger capital—must unload at the first sell point or reduce position. The technique for judging whether the first sell point is established is that the stock price goes sideways and then the MACD issues a dead cross to sell, as shown in the chart below.

After the first sell point forms, some stocks may not experience a big drop. Instead, after a pullback that serves as a cover, they pretend to break upward to stage an exit. This is the last surge before the bull-side main force unloads. It’s also called a “false-wave breakout.” The high point formed at this time often becomes the highest point of a bull market rally. So it’s also called an “absolute top.” If you can’t successfully exit at that moment, the consequences can be disastrous.

The technique for judging whether an absolute top is established is to sell when there is divergence between price and MACD. That means when the stock performs a false-wave rally and makes a new high, but the MACD cannot simultaneously make a new high. The divergence between the two signals that the stock has likely topped. When selling at an absolute top, you must never wait to sell after the MACD dead cross. Because when the MACD dead cross happens, the price has already fallen a lot. Selling at a false-wave top must refer to candlestick patterns.

3. MACD top divergence escape strategy:

After top divergence, if the stock’s high keeps turning lower, then you need to sell the stock.

4. Combined judgment for sell points:

When a set of patterns such as a dead cross of the 5-day moving average and the 10-day moving average in the high area, a MACD dead cross, and price action like high-volume then moving into bearish candles, appears in combination, technical analysis needs to be comprehensive. This can improve the probability of success. If a particular stock shows sell-point signals across multiple technical points, it’s worth paying close attention.

MACD “Three-Strike” Tactics

1. First strike—MACD bottom-picking technique

① After a wave of decline, it rebounds

② The stock price falls again to make a new low

③ The low point of the MACD DIF line does not make a new low

④ MACD golden cross confirms the bottom divergence—this is the buy signal

Operation takeaway: When MACD golden cross confirms the bottom divergence, you can buy.

2. Second strike—MACD capture the main upswing

① After a wave of上涨, it adjusts (pulls back)

② During the adjustment, the price does not break the prior low

③ MACD forms a golden cross slightly above the 0-axis position

④ If a strong bullish candle appears, it is the buy signal

Operation takeaway: When MACD forms a golden cross slightly above the 0-axis and then a strong bullish candle appears, you can buy.

3. Third strike—MACD escape the top technique

① After a wave of上涨, it adjusts

② The stock price makes a second wave rally and makes a new high

③ The high point of the MACD DIF line does not make a new high

④ MACD dead cross confirms the top divergence—this is the sell signal

Operation takeaway: When MACD dead cross confirms the top divergence, you can sell.

Maintain a good trading mindset

The Festinger Principle: In life, 10% is made up of what happens to you, and the other 90% is determined by how you react to what happens. In other words, you can’t control the first 10%, but you can completely determine the remaining 90% through your mindset and behavior. This can be called the “butterfly effect” of emotions. Sometimes most of our trading actions are prompted or assisted by emotions: opening a position is done with impulsive momentum. During holding, emotions seem to gradually calm down, and disappointment and pain then arise naturally; when closing a position, it’s even worse—endless longing and regretful remorse come one after another.

So where is trading difficult? It’s difficult in achieving unity of knowledge and action. But throughout the trading process, everyone will be affected—more or less—by issues related to mindset. And whether your mindset is good or bad often directly affects how strictly you execute your trading system. People who can control their emotions and adjust their mindset can ensure execution. That’s what we often say: 70% mindset, 30% technique. And if you’re not swayed by emotions and can achieve unity of knowledge and action, stable profitability isn’t far away.

Your mood isn’t everything in trading, yet it can determine everything in trading. If your mood is good, trading goes well. If your mood is bad, trading falls apart. We often don’t lose because of the market—we lose because a bad mood interferes with our trading, reduces our ability, and disrupts our thinking, causing us to lose to the market. Control your mood, and trading becomes calm. A good mindset shapes a good mood, and a good mood shapes your best self.

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