"Black Swan" Attack! How to Navigate the Storm? A-shares Diverge, Beware of Permanent Capital Loss!

The impact of the conflict between the United States, Iran, and Israel on global stock markets is still unfolding. Last week, the Shanghai Composite Index continued to move downward, but the performance of individual stocks has already started to diverge. This is also a period when listed companies report their annual results in large numbers. Companies with strong performance and reasonable valuations are seeing robust price action, with many hitting new highs or challenging historical peak levels. However, in just a little over a month, several former “hot” stocks that lacked earnings support have been cut roughly in half.

Looking over a longer time frame, this stock-market cold wave is not something to be afraid of. In fact, the share prices of some companies with excellent performance have long since far exceeded the high point of the Shanghai Composite Index 10 years ago, when it reached 5,178 points. For example, the share prices of Midea Group, China Shenhua, and Fuyao Glass have each risen about threefold over the past 10 years. Investing in stocks like these has meant an annualized return of roughly 15% over the past decade.

But even the share prices of outstanding companies will rise and fall with the broader market—especially when the overall stock market outlook is dim. For instance, from June 12, 2015 to February 1, 2016, A-shares went through a major shock driven by deleveraging. The Shanghai Composite Index fell from 5,178 points to 2,638 points. Midea Group declined by 28%, while China Shenhua fell by 47%.

Over the long term, solid performance combined with a reasonable valuation can become the foundation for weathering stock-market storms. However, poor performance paired with an expensive valuation may expose investors to permanent capital losses.

Once near a halving, yet able to successfully cross the bull and bear markets

On June 12, 2015, the Shanghai Composite Index set a second-highest historical intraday level of 5,178 points. On that day, Midea Group’s highest share price was 103.77 yuan (post-adjustment for dividends and splits). By March 31, 2026, Midea Group’s closing price on that day was 430.68 yuan (post-adjustment for dividends and splits). Its ten-year share-price gain was 3.15x.

Breaking it down into valuation and performance, sustained strong performance played a stabilizing role. According to Midea Group’s 2025 annual report, the net profit attributable to shareholders was 43.95B yuan. The 2015 annual report showed net profit attributable to shareholders of 12.7B yuan. Over 10 years, earnings increased by 2.46x. From the valuation perspective, Midea Group’s current price-to-earnings ratio is 12x, whereas at the 5,178-point level the company’s valuation was 14x—valuations have fallen slightly.

From the perspective of dividends, Midea Group’s cumulative dividends over the past 10 years were 19 yuan per share. At the 5,178-point level, the company’s highest intraday share price was 38.7 yuan. This implies that over a decade, cumulative dividends have recouped almost half of the share price at that time. It is also worth noting that the company’s 2025 annual report proposes a dividend of 38 yuan per 10 shares. For an investor who bought at 38.7 yuan when the market was at 5,178 points in 2015, this means the dividend yield is now above 10%.

At the 5,178-point level, China Shenhua’s highest intraday share price that day was 32.71 yuan (post-adjustment for dividends and splits). By March 31, 2026, its closing price was 125.5 yuan (post-adjustment for dividends and splits). Its ten-year share-price gain was 293%.

Breaking it down into valuation and performance again, the sustained improvement in earnings drove the rise in the share price. Over 10 years, China Shenhua’s net profit attributable to shareholders increased by 2.3x. From the valuation perspective, at the 5,178-point level, China Shenhua’s price-to-earnings ratio was 15.7x; its current valuation is 18.7x—valuations have risen slightly. From the perspective of dividends, China Shenhua’s cumulative dividends over the past 10 years were 19.5 yuan per share. When the market was at 5,178 points, the company’s share price was 26 yuan. This means investors have almost recouped 75% of the share price at that time using cumulative dividends over 10 years.

“Two birds in the woods are not as good as one bird in hand”

From the rear-view mirror perspective, holding tightly to these companies with strong earnings can help you get through the hardest period for the stock market and ultimately achieve good investment performance. But doing this is not easy. Price fluctuations and ups and downs can break investors’ resolve, causing people to give up when they should be holding steady the most.

Recently, several former “hot” stocks that lacked earnings support have been cut roughly in half within just a little over a month, with their share prices snapping back to where they were before the rise overnight. Looking back at the rally that took place at the 5,178-point level, nearly all of those once-hot stocks had declines of almost 70% or more over the past 10 years, and there is virtually no chance they will return to the price peaks from back then.

The temptation of concept-driven hype is a major hurdle investors must pass. People are naturally inclined to enjoy stories—especially grand narratives involving cutting-edge technology, national strategies, or solving world-class problems. These companies often package themselves as “disruptors,” but they cannot produce credible revenue figures. Their real “product” is not goods, but hope.

As legendary fund manager Peter Lynch once said: “The reason you buy is because the company has good results. And a major mistake that investors make is that they buy because they think a company has potential. You shouldn’t buy a stock because of potential. The common characteristic of these stocks is the lack of actual earnings support—they are good at promotion and short on profitability.”

Peter Lynch also said that the biggest mistake investors make is that they don’t understand the companies they own. Another big mistake is that they buy because they value some potential of a company.

“They hear a rumor that the company has huge potential, but it doesn’t have profits right now… You have to look at other companies and then see whether these potentials come true later. I don’t think you should buy a stock because of some potential. You buy because the company has good results.”

Great companies give investors plenty of time to get in, but people are always too impatient. Peter Lynch suggests that you wait until the company has already achieved stable and reliable profitability before considering buying their stocks. He said, “If you’re skeptical, just check back later.”

A-share value investing expert Zhang Yao has also said: “Even among stocks tied to certain tracks, there is room for value investing, but the requirements for capability are higher. Traditional value investing is strong in certainty and doesn’t demand as much from investors. And because certainty is high, shareholding stability is high too—so investing becomes easier.”

As Buffett once said: “During the time we’ve managed Berkshire, we have never tried to select a tiny number of winners from the ocean of not-so-good companies. We don’t think we’re that smart. Instead, we try to estimate how many small birds are in the shrubbery and when they will appear. One bird in hand is worth two in the bush.”

Round after round of market action shows that once the wind changes direction, it is almost impossible for popular stocks in popular industries that lack earnings support to return to the peak levels of their share prices at that time. Investors, therefore, suffer permanent capital losses. In fact, for ordinary investors, if there is a risk of permanent capital loss that they cannot afford, this kind of investment should not be included in an investment portfolio.

But those patient investors who base their decisions on fundamentals such as strong performance, reasonable valuation, and sustainability can achieve substantial returns over the long term. Zhang Yao’s “20 years, 2,000x” returns and Buffett’s “60 years, 30kx” returns both illustrate this principle.

(Companies mentioned in this article are cited only as examples; please do not use this as a basis for investing.)

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