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

（Source: Tencent’s Choice Stocks Finance）

The impact of the U.S.-led Iran war developments on global stock markets is still ongoing. While the Shanghai Composite Index continued to fall last week, individual stocks have already started to diverge in their performance. The recent period is also the time when listed companies disclose their annual reports in large numbers. Companies with strong performance and reasonable valuations have seen robust momentum, and many have either hit new highs or are challenging historical peaks. However, several former hot stocks that lacked performance support were cut in half within just a little over a month.

Viewed over a longer time horizon, the stock market’s cold spell is not that frightening. In fact, the share prices of some companies with strong performance have long surpassed the previous high of 5178 points reached by the Shanghai Composite Index 10 years ago. For example, the share prices of companies such as Midea Group, China Shenhua, and Fuyao Glass have risen by 3 times over the past 10 years. Investing in such stocks implies an annualized return of around 15% over the past decade.

But even the share prices of outstanding companies will rise and fall with the overall market, especially during periods when the broader stock market trend is gloomy. For example, from June 12, 2015 to February 1, 2016, A-shares went through a round of market shock caused by deleveraging. The Shanghai Composite Index fell from 5178 points to 2638 points; Midea Group declined by 28%, and China Shenhua declined by 47%.

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

At one point nearly cut in half, yet managed to cross the bull and bear markets

On June 12, 2015, the Shanghai Composite Index set a second-high historical level at 5178 points. On that day, Midea Group’s highest share price was 103.77 yuan (post-adjustment). Then, on March 31, 2026, Midea Group’s closing price on that day was 430.68 yuan (post-adjustment). Over 10 years, the stock price increased by 3.15 times.

Breaking it down into valuation and performance, sustained strong performance played a role in stabilizing everything. The 2025 annual report shows that Midea Group’s net profit attributable to shareholders was 43.95 billion yuan. The 2015 annual report shows that Midea Group’s net profit attributable to shareholders was 12.7 billion yuan; this is a 2.46x increase in performance over 10 years. From the valuation perspective, Midea Group’s current price-to-earnings (P/E) ratio is 12x, while at the time of 5178 points the company’s valuation was 14x—its valuation has slightly declined.

From the perspective of dividends, over the past decade Midea Group’s cumulative dividends totaled 19 yuan per share. At the time of 5178 points, the company’s highest share price on that day was 38.7 yuan, meaning the cumulative dividends over 10 years nearly recovered half of the share price at that time. Also worth noting, the company’s 2025 annual report proposed to distribute a dividend of 38 yuan for every 10 shares. For an investor who bought at a price of 38.7 yuan per share at 5178 points in 2015, this means the dividend yield has already exceeded 10%.

At 5178 points, China Shenhua’s highest share price on that day was 32.71 yuan (post-adjustment). Then, on March 31, 2026, the company’s closing price was 125.5 yuan (post-adjustment). The stock price’s increase over 10 years was 293%.

Breaking it down into valuation and performance, the sustained improvement in performance drove the rise in the stock price. Over 10 years, China Shenhua’s net profit attributable to shareholders increased by 2.3 times. From the valuation perspective, at 5178 points China Shenhua’s P/E ratio was 15.7x, while China Shenhua’s current valuation is 18.7x—its valuation has risen slightly. From the perspective of dividends, China Shenhua’s cumulative dividends over the past 10 years were 19.5 yuan per share. At 5178 points, the company’s share price was 26 yuan, meaning investors used the cumulative dividends over 10 years to nearly recover 75% of the share price at that time.

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

Although, from the standpoint of hindsight, holding onto these companies with strong performance can carry you through the stock market’s hardest times and ultimately deliver solid investment returns, it is not easy to do so. Stock price ups and downs easily wear down investors’ resolve, causing people to give up precisely when they should stick with it.

Recently, several former hot stocks that lacked performance support were cut in half within just a little over a month, and the share prices returned overnight to where they were before the rally. Looking back at that rally around 5178 points, the declines of those once-hot stocks over the past 10 years were almost all more than 70%, and there was almost no chance of them returning to the stock price peaks of that time.

The temptation of concept-driven hype is a major hurdle that investment must pass. People naturally like to listen to stories—especially grand narratives involving cutting-edge technology, national strategies, or solutions to world-class problems. These companies often package themselves as “disruptors,” yet they can’t produce respectable revenue figures. Their real product is not goods, but hope.

As the legendary fund manager Peter Lynch once said, “The reason you buy a stock is because the company has good earnings. And one of the biggest mistakes investors make is that they buy because they think highly of a company’s potential. You shouldn’t buy a stock because of some potential. The common feature of these stocks is a lack of tangible earnings support; they are good at selling hype and short on profits.”

Peter Lynch said the biggest mistake investors make is that they don’t understand the company they hold, and another major mistake is that they buy because they value some potential of a company.

“They hear a rumor that the company has a lot of potential, but it doesn’t have profits right now… You have to look at other companies to see whether those potentials turn out to be real later. I don’t think you should buy a stock because of some potential. You buy it because the company has good earnings.”

Great companies give investors plenty of time to buy, but people are always too impatient. Peter Lynch suggested that once a company has already achieved stable and reliable profits, then consider buying their stocks. He said, “If you’re skeptical, check back later.”

A-shares value-investing heavyweight Zhang Yao also once said, “There is value investing among play-the-field (track) stocks, but the requirements on capabilities are higher. Traditional value investing is strong in terms of certainty and doesn’t demand as much of investors. And because certainty is high, holding stability is also high—so investing is easier.”

Warren Buffett once said, “In the years we’ve been in charge of Berkshire, we have never tried to pick the tiny number of winners from the vast ocean of companies that simply aren’t going to make the grade. We don’t claim to have that kind of wisdom. Instead, we try to estimate how many small birds there are in the bushes and when they will appear. One bird in the hand is worth more than two birds in the woods.”

A series of market moves shows that once the wind direction changes, the once-hot stocks in popular sectors that lack performance support have almost no chance of returning to the peak levels of their time. Investors are thus faced with permanent capital losses. In fact, for ordinary investors, if there is the risk of permanent capital loss they cannot afford, this kind of investment should not be included in their portfolio.

But those patient investors who base their strategy on fundamentals such as solid performance, reasonable valuation, and sustainability can achieve substantial returns over the long term. Zhang Yao’s “20 years, 2000x” return rate and Buffett’s “60 years, 30kx” return rate both demonstrate this pattern.

（The companies mentioned in this article are provided only as examples; please do not rely on this information to make investments.）

Source: China Merchants Securities (CITIC) China

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