In 2022, when the market was at a 5-star rating, many friends increased their positions.

Some friends asked Screw Nail, if one buys in during a 5-star undervaluation, what kind of returns can they expect in the future?

Today, let's discuss this with everyone.

There are mainly three parts of the returns.

Returns from corporate earnings growth.Investing in the stock market, the most fundamental source of returns still comes from the profits generated by the growth of the underlying companies.

The century-long history of the U.S. stock market has an average long-term annualized return rate of approximately 9% to 10%.

The A-share market, relatively speaking, is still in its early stages, with a long-term average annualized return rate of 10% to 12%.

Therefore, the long-term annualized return rate of stock assets is roughly around 10%.

This rate of return is roughly equivalent to the long-term profit growth rate of companies.

In other words, when it comes to stock market investing, over the long term, the main earnings come from the profit growth of the companies behind the stocks.Taking the CSI 300 as an example, over the past 10 years, the market has often experienced significant ups and downs.

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In the middle, for instance, the years 2014, 2015, 2016, 2020, and so on, have seen short-term fluctuations and declines in profit growth.

However, when looking at a longer time frame, the profits of the companies behind the index have been growing upwards over the long term, which also drives the index to rise.

Warren Buffett once said something quite interesting:

Regardless of the type of asset, the rate at which its price increases cannot exceed the rate of its profit growth over the long term; this is an inescapable reality.

This conclusion holds true for both the U.S. stock market and the A-share market.The long-term annualized average return rate of the stock market has historically been around 10%.

When we invest in funds, the underlying stocks held by the funds typically have a higher profitability than the average of the market.

Profits from undervaluation to overvaluation

In addition to earning returns from the growth in corporate profits, we can also earn returns from the increase in valuation when we buy in the undervalued area.

As we mentioned earlier, the long-term annualized return rate of the stock market is 10%, which is not low. So why is there a saying that "seven losses, two breaks even, and one profit"?Let's take an example.

If there is a top tycoon who buys all the A-shares in the market. After that, he holds onto the stocks without selling or making any moves.

In the end, his long-term annualized return rate is most likely to be around 10%.

However, in reality, the stock market is not a single person trading, but rather hundreds of millions of investors buying and selling from each other.

Since each person has a different judgment of the stock's value, there will be disagreements on the stock price.

With disagreements, there will be trades.Some people bid high, while others bid low.

If you buy at a high price, there is also a significant risk of loss.

In the long run, stock prices fluctuate around the value of the stock.

Economic development itself is cyclical, and the growth of corporate profits also has a certain cyclicality. This gives rise to the cyclical appearance of bear markets and bull markets.

Therefore,

• When the stock price is below the value of the stock, it is undervalued;

• When the stock price is above the value of the stock, it is overvalued.If you buy in the undervalued area and sell in the overvalued area, in addition to obtaining the long-term profit growth from the stock itself, you can also earn the profit from "undervalued to overvalued."

Especially in a 5-star investment, it is the stage with the highest investment value for stock funds.

From undervalued to overvalued also requires a cycle.

Historically, on average, every 3-5 years, there is a 5-star level bear market (such as 2012-2014, late 2018, 2022); on average, every 3 years, there is a bull market at the 3-star level or above (such as 2015, early 2018, early 2021).

In the current context, the market has recently fluctuated around 4.8-4.9 stars. It is also a relatively cheap position in the bear market. However, even if you buy in the undervalued area, you should be mentally prepared to hold patiently until the next profit-taking.The benefits brought by new stock subscriptions and securities lending

There are also other sources of income, such as "new stock subscriptions" and "securities lending."

**New Stock Subscriptions**

Many stock investors are familiar with the operation of "new stock subscriptions." When holding a certain market value of stocks that meet the conditions, and if there are new shares available, many people will actively participate in the subscription of new shares.Hitting new IPOs does not guarantee a 100% chance of getting allocated shares.

However, once you do hit a new IPO, there is a high probability of a positive return when the new shares are listed (although there is also a possibility, albeit small, that some new shares may break even).

In a bull market, participating in new IPOs can roughly increase the annualized return by about 3%-5%.

In a bear market, the returns from new IPOs are lower, and there may even be instances of breaking even, making it unsuitable to participate in new IPOs at that time.

Publicly offered mutual funds that hold stocks with a certain market value can participate in new IPOs.

The returns from new IPOs are directly incorporated into the net asset value of the fund.

Typically, the market value of stocks held by a fund, ranging from 200 million to 1 billion, will yield better results from participating in new IPOs.Margin Lending

Another source of revenue is an operation frequently conducted by public mutual funds, especially index enhancement funds or index funds, known as margin lending.

Margin lending refers to the practice where index funds "lend out" the stocks they hold to earn a certain return. This return can sometimes be high and sometimes low, but on average, it can provide an excess return of about 0.5%.

SummaryStock market investment can yield profits from three parts in the long term:

- The first part is the returns from the long-term growth in corporate profits.

- The second part is the returns from the market moving from undervaluation to overvaluation.

- The third part is the additional returns earned through activities such as new share offerings and securities lending.

However, in the long run, among the three:

- Earnings from corporate profit growth are the most significant;

- Money from valuation increases depends on whether the market provides 5-star opportunities;

- Other returns serve as supplementary income.