A friend previously asked, does buying when undervalued and selling when overvalued according to valuation help with investment returns?

Some time ago, I read a research report titled "2022 Public Mutual Fund Investor Profit Insight Report."

It was published by fund companies such as Invesco Great Wall, Bank of Communications, and Xingquan, in collaboration with China Securities Journal.

It also contains statistical data on this aspect.

Contrarian investing is difficult.

First, let's look at how many investors invest in bull and bear markets, respectively.This report compiles data from mid-2017 to mid-2022.

It includes 5-star ratings at the end of 2018, and 3-star ratings at the beginning of 2018 and the beginning of 2021. Two smile curves have emerged.

If we divide the market into five positions from low to high,

(1) The largest proportion of buying and selling stock funds occurs at the high position of 60%-80%.

That is, the majority of people buy stock funds after a significant increase.People who bought at the high positions of 60%-80% and 80%-100% of the index account for a total of 45.17%.

(2) Within the historically lowest range of 0-20%, investors only make up 12.26%.

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From this data, it is evident that the majority of investors tend to invest in stock funds after a significant bull market rally.

The investment value of stock funds is high during bear markets, but only 12.26% of investors take action at this time.

In other words, buying when undervalued and selling when overvalued is a classic example of 'contrarian investing.' It is the opposite of the mainstream retail investor's approach.

Performance of buying when undervalued and selling when overvaluedCan buying when undervalued and selling when overvalued enhance returns?

(1) Only achieving undervalued buying

Investors who buy at the bottom when undervalued have a profit ratio of 88.67%. The average annualized return rate is 13.15%.

This is higher than investors who do not invest at the bottom.

(2) Only achieving overvalued selling

Investors who take profits at high levels have a profit ratio of 94.07%, with an average annualized return rate of 12.66%.

This is also higher than investors who do not take profits at high levels.Here, investors who take profits at high positions are not all those who bought in undervalued.

Some only opened accounts and entered the market after the bull market had risen more than halfway.

Therefore, the average annualized return rate is not higher than the average annualized return rate of bottom investors.

But it is still higher than the average return rate of other investors.

(3) The most ideal is to both buy undervalued and sell overvalued.

For this group of customers, the proportion of profit-making individuals reaches 98.54%, and the average annualized return rate reaches 21.09%.Significantly outperforming other investors.

However, correspondingly, the number of such individuals is the smallest, accounting for only 0.35%.

What does 0.35% mean?

Among 1,000 investors, there are only three and a half.

The admission rate for 985 universities in the college entrance examination is also around 1%-2%.

In other words, achieving the strategy of buying low and selling high is as difficult as getting admitted to a top-tier 985 university.How to Help Everyone Invest Against the Trend

Actually, the purpose of updating the star ratings and valuation tables every day is also to help everyone do a good job of "buying low and selling high."

Many investors in actively managed advisory portfolios and index-enhanced advisory portfolios are experienced drivers who have been paying attention for a long time and can achieve "contrarian investing."

After investors have mastered investment methods and market valuations, they can achieve contrarian investing.

Stock funds invested at the bottom of a bear market, when the next round rises to more than 3-star ratings, will also yield relatively ideal returns.

This is also what I hope to help everyone do well.Good variety + good price + long-term holding = good returns.