A friend asked, when will the returns improve after investing for over a year?

By consistently investing in the undervalued area and waiting for the market to rise, you will go through a complete cycle of "buying at undervaluation - holding at normal valuation - selling at overvaluation," and the returns will naturally increase.

This is what we often refer to as the "smile curve."

In the past 10 years, there have been a total of 3 smile curves, and currently, we are on the left side of the 4th smile curve.

The market is still relatively depressed, so if short-term returns are not good, there is no need to worry too much.The First Smile Curve: 2012-First Half of 2015

From 2012 to 2014, it was the largest and longest bear market in the history of A-shares.

During these three years, the overall market fluctuated mainly between 4 to 5-star levels. The 5-star level also appeared intermittently, lasting for about half a year in total.

By the middle of 2014, looking globally, A-shares were among the cheapest in the world.How cheap were A-shares at that time?

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- The price-to-earnings (P/E) ratio of the CSI 300 reached its historical low, only 8 times.

- Moutai's P/E ratio had once fallen below 10 times in 2014.

- A considerable number of stocks had P/E ratios of only three to four times.

However, hope is born out of despair.

In the second half of 2014, a series of continuous and intensive interest rate cuts began.

As interest rates fell and the market was flooded with more funds, A-shares started to rise gradually. This also marked the right side of the smile curve for this cycle.The chart below illustrates the trend of the CSI All-Share Index from mid-2014 to mid-2015.

In the short term, the effect of making money began to attract more and more investors.

In the first half of 2015, the overall A-share market reached a 1-star bubble phase.

Second smile curve: second half of 2015 - 2017

However, when something is valued too highly, it will eventually be devalued, and when something is devalued too low, it will eventually be revalued.After June 2015, the A-share market began a continuous decline, with large, medium, and small-cap stocks all falling.

By the beginning of 2016, the overall market had dropped to a 4-star level, and the fluctuations in the rise and fall of different varieties also showed a more obvious differentiation.

Small and medium-cap stocks had risen too much in the previous bull market, and even after the decline in the second half of 2015, they were still relatively expensive.

Therefore, from the beginning of 2016 to the end of 2017, small and medium-cap stocks, represented by the CSI 1000, continued to fall.

In contrast, large-cap stocks did not rise as much in the first half of 2015 as small and medium-cap stocks, and they also fell more in the subsequent decline. Therefore, at the beginning of 2016, large-cap stocks returned to a relatively cheap position first.During the years 2016-2017, large-cap stocks experienced an uptrend. In particular, the large-cap value style saw a significant increase, with sectors such as banking, insurance, and real estate performing well across the board.

By the end of 2017, led by large-cap value stocks, the market once again reached a 3-star rating.

It even briefly touched a 2.9-star level.

The Third Smile Curve: 2018-Early 2021

In 2018, due to trade frictions, the A-share market began to decline, marking the start of a new smile curve.

- The CSI 300 index fell by 25% for the year;

- The CSI 500 index fell by 33% for the year.Overall, the valuation situation for large-cap stocks is still acceptable. Although the stock market crash in 2015 led to a drop of 50-60%, there was also an upward trend in 2016-2017.

Small and mid-cap stocks, however, have not seen an increase since June 2015.

Therefore, from the second half of 2015 to the end of 2018, over the span of three to four years, small and mid-cap stocks experienced a very long bear market, with a significant decline, with the CSI 1000 and CSI 500 both falling by more than 70%.

By the end of 2018, the valuations of the CSI 500 and CSI 1000 were close to their historical lows.

The market returned to a 5-star rating, and this cycle of the smile curve also reached its bottom.However, the 5-star rating at the end of 2018 only lasted for one month. As soon as the New Year's Day of 2019 passed, the market rebounded swiftly.

Within two to three months, the market rebounded to a 3.9-star level.

Afterward, it slowly moved upward amidst fluctuations.

Including in February-March 2020, there was also a 20%-level correction.

But overall, it was still on an upward trend.

By the end of 2020 and the beginning of 2021, the market reached a 3-star level.

This wave of increase was primarily led by high-ROE blue-chip stocks.The term "white horse stocks" here refers to some of the leading stocks with strong profitability in various industries, such as white liquor and pharmaceuticals in the consumer goods sector.

Fundamentals such as the 60, 120, Hong Kong small and mid-cap, retirement, pharmaceutical, and growth-oriented funds that are adept at the consumer industry, which we had previously undervalued for regular investment, by the beginning of 2021 had reached a 3-star rating and were mostly overvalued, leading to profit-taking.

The Fourth Smile Curve: From the beginning of 2021 to the present

In 2021, the overall market fluctuation was not significant, and the entire year was essentially oscillating around a 4-star level.Since the beginning of 2022, the stock market has been influenced by a combination of factors such as overseas interest rate hikes, regional conflicts, and mask mandates, leading to a decline in the market, which has been fluctuating around the 4-5 star level.

At present, the market is still on the left side of this smile curve and has not yet entered the right side of the upward phase.

This is also the reason why some investors have experienced temporary losses in the recent period.

However, there is no need to worry about short-term losses.

Near the current 5-star level, the market will have minor fluctuations, but there is not much room for the overall market to go further down.

This is precisely the right time to invest in stock funds.

We just need to accumulate high-quality and inexpensive fund shares, persist until the right side of the smile curve, and take profits, and the returns are likely to be quite good.Summary

Regardless of market fluctuations, our approach remains constant: we buy when opportunities arise from declines, sell when opportunities arise from increases, and patiently wait during other times. We also have confidence in accompanying everyone through this cycle's smile curve to the next stage of profit-taking.