Even the best breeds must be bought at a low price.

Good breeds + good prices = good returns.

When investing specifically, it is also necessary to "wait for a good price," which means buying at a low cost.

Even the best breeds, if bought at a high price, carry significant risk.

For example, during the bull markets of 2007 and 2015, buying at positions of five or six thousand points not only fails to make money but also leads to substantial losses in the short term.On the flip side, if you buy at a low price, that is, invest during a bear market, the probability of making money in the future is higher.

For example, at the end of 2018, during the bear market in the A-share market, buying stock funds and holding them long-term would likely yield good returns.

How to determine whether a fund is currently cheap?

Valuing an actively managed fund is much more complex.

Because actively managed funds do not disclose the stocks they hold on a daily basis, which is also confidential for the fund company.Investors can only see the top ten heavy positions disclosed in the fund's regular reports, such as the situation of the last quarter.

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Fund managers may adjust their positions and change the types of stocks they hold at any time, and we cannot know the real-time holdings of the fund manager.

However, for the valuation of active funds, we can still use some methods to assist in reference.

Method one: Refer to the valuation of the same style index

For a fund manager, you can first determine what investment style the fund manager is good at, and then look at the valuation of the same style index as a reference.A-shares have style indices, such as the large-cap value index, large-cap growth index, small-cap value index, and small-cap growth index.

In the second half of 2022,

• The large-cap value index, small-cap value index, and small-cap growth index were all near historical low valuations.

• The large-cap growth index had a relatively higher valuation.

Taking the value style index as an example, it often covers a larger number of stocks, which may overlap with the holdings of many value-style active fund managers.

When the value style is at the bottom of valuations, active funds with a value style are usually undervalued as well.

Method two: Refer to the valuations of industry indices.If a fund manager heavily invests in one or two industries, the valuation of the corresponding industry can be used as a reference.

However, such industries are not many and are mainly concentrated in the directions of consumer goods, healthcare, and technology.

For example, in April-May 2022, the indices for consumer goods, healthcare, and technology all returned to undervalued levels. The active funds in these fields were also undervalued at that time.

Method Three: Star Rating

However, the above two methods are ultimately not very convenient.For instance, the investment style that a fund manager excels at and the industries they favor require considerable effort to discern. Moreover, the industries favored by fund managers may also change over time.

Every trading day evening, at the very top of our updated valuation table, there will be a row of red stars.

We will take into account the overall market valuation (such as price-to-earnings ratio, price-to-book ratio, Buffett Indicator, etc.), earnings growth, trading volume, market sentiment, and other factors, and categorize them into 5 levels.

• 5 stars: The cheapest phase of the market with the highest investment value.

• 4 stars: A relatively cheaper phase of the market.

• 3 stars: The market is generally at a normal valuation phase, with a few types of assets potentially entering overvaluation.

• 2 stars: A phase where the market is on the expensive side, with many types of assets entering overvaluation.• 1 Star: The market is very expensive, basically entering the stage of a bubble, with huge risks.

For actively managed funds, the stage that is usually suitable for investment is between 4 stars and 5 stars. At this time, it is a relatively cheap and worth allocating phase.

After leaving the 4-star level, it is usually not suitable to continue investing, and one can patiently hold on.

When reaching 3 stars and above, it is possible to consider selling to take profits.

5 Stars, the stage with the highest investment value.In the star rating system for stocks, the 5-star phase is often the most closely watched by investors. This is because the emergence of a 5-star phase is quite rare, and it tends to be very short-lived. Over the past decade, the A-share market has seen 5-star phases mainly in 2012-2014, at the end of 2018, and in 2022.

When a 5-star phase occurs, the subsequent returns are often quite favorable. For instance, in the three years following the 5-star phases in 2014 and 2018, there was an uptrend in the stock fund category.Five-Star Period from 2012 to 2014

In 2007, the A-share market experienced an exceptionally large bull market, which was followed by a catastrophic stock market crash. In 2008, due to the stimulus of the "Four Trillion Yuan Plan," another bull market emerged. From 2008 to 2010, the A-share market actually increased by more than double, which can be considered a small bull market.

After that, the A-share market entered a prolonged bear market.

By mid-2012, the A-share market reached a five-star level. During 2012 to 2014, the A-share market intermittently experienced about 10 months of five-star periods.

The years 2012 to 2014 were also the cheapest phase in the history of the A-share market.

How cheap were the A-shares at that time?Most varieties are at their historical lowest valuations, even the price-to-earnings ratio of Moutai is less than 10 times.

As a representative index of large-cap stocks in the A-share market, the Shanghai-Shenzhen 300 had a price-to-earnings ratio of only 8 times at that time.

In 2014, the overall A-share market was 10% cheaper than the Hong Kong stock market.

Not only was it cheaper compared to the Hong Kong stock market, but globally, the A-share market was at the lowest valuation level at that time.

The market from 2012 to 2014 was just too depressed.

Investors lacked interest in A-shares, and the Shanghai Stock Exchange had a daily transaction amount of only over 50 billion yuan. The stock market was deserted.However, hope is born out of despair.

There are still many investors who have recognized the investment value of A-shares and quietly buy stock assets.

After July 2014, A-shares began to rise.

By the end of the year, they had increased from over 1900 points at the bottom to over 3000 points.

In half a year, they rose by 50%.

However, the Shanghai Composite Index only includes stocks from the Shanghai Stock Exchange and lacks stocks from the Shenzhen Stock Exchange.If one looks at the CSI All-Share Index, the rise in this bull market has been even more significant.

The short-term profit effect began to attract an increasing number of investors.

Eventually, in June 2015, it reached a 1-star bubble valuation.

This is also a characteristic of A-shares, "three years without business, and then feast for three years."

▼The 5-star in 2018In the first half of 2015, the A-share market experienced a significant bull market.

However, by June 2015, the valuation of A-shares had become extremely high, entering a one-star bubble phase.

Such high valuations cannot be sustained in the long term. Subsequently, the stock market valuation returned to normal, and the overall A-share market fell by more than 50%.

After this decline, the market gradually cooled down and fluctuated sideways for two years.

By 2018, there was another decline.

How "grim" was the market in 2018?For example:

- In 2018, the median decline among over 3,000 domestic stocks was 33%.

- The median decline among 805 domestic stock funds was 27%.

- The CSI 300 Index fell by 25%, and the CSI 500 Index fell by 33%.

- 2018 was also the second year in the past 20+ years with the largest single-year decline in A-shares, second only to the 2008 financial crisis when it fell by 64%.

In this context, in December 2018, the market presented a 5-star opportunity once again.

Undoubtedly, after more than four years, A-shares have reached a period with high investment value once more.After a full year of decline in 2018, investor confidence once again hit a low point.

However, in the midst of the market's despair, a rebound also began to brew.

Following the Spring Festival in 2019, A-shares bottomed out and rebounded, experiencing a sharp increase in the first quarter of 2019.

In 2019, the CSI All-Share Index of A-shares rose by 31%. In 2020, the CSI All-Share Index of A-shares rose by 25%.

For two consecutive years, the performance of A-shares has been among the top in the world.Of course, it is also because the decline in 2018 was quite significant, creating a 5-star opportunity.

As the saying goes, "Don't just see the thief enjoying the meat, forget the beatings he endures."

The good profit effect has attracted a large number of investors to enter the market.

At the beginning of 2021, A-shares reached a 3-star level. At that time, there was not a single undervalued variety left in the valuation table.

Many new stock funds raised more than ten billion, and the market was very hot.

Many new investors started with stock funds at the beginning of 2021.However, the 3-star rating at the beginning of 2021, compared to the 5-star ratings at the end of 2018 and between 2012-2014, is overvalued by a significant margin.

From past market experiences, we can observe the following:

- 5-star ratings are relatively rare, typically occurring once every 3 to 5 years.

- 4-star opportunities are more frequent, with an average occurrence of about once every 2 years.

Investing in stock funds, it is not difficult to wait for investment opportunities rated 4 to 5 stars.

Bull and Bear Signal Board: A summary of more valuation indicators.Besides the star rating, are there any other indicators that can help judge the market's valuation?

Yes, there are mainly two types: quantitative and qualitative.

**Quantitative signals**

These mainly include: star rating, Buffett Indicator, stock-bond ratio, and book-to-market ratio percentile, etc.

**Qualitative signals**

These mainly include:Mainly: financing balance, trading volume, new stock break-even rate, old fund size, new fund size, new account opening number, etc.

In fact, when using a single signal, there may be errors, and the information conveyed may not be accurate.

But if multiple signals all show that the current market is in a bearish slump or a bullish boom, then the accuracy is greatly improved.

So these signals often need to be combined to make a judgment.

Buying cheap does not mean rising immediately.

A common confusion for investors is: why does the market continue to fall after buying in an undervalued stage of the market?"Entering undervaluation for investment" and "Entering undervaluation will not fall" are two completely different things.

The former is considered from the perspective of investment value. Buying in the cheap phase of the market is equivalent to "buying something worth 1 yuan for 0.6 yuan"; it's a good deal, and that's when we would invest.

The latter, however, is based on valuation to predict short-term fluctuations, but short-term ups and downs often have little to do with short-term valuations. There are too many factors that affect short-term fluctuations, such as capital, sentiment, and policy, making the impact of valuation on short-term movements relatively weak. But when time is extended to 3 to 5 years, buying undervalued will likely yield good returns in the end.So, even when investing in stock funds at a cheap stage, it is necessary to use idle money that you won't need for at least 3 to 5 years.

We have already understood how to select active funds and how to judge the investment opportunities in the market.

When faced with the many candidate funds that have been selected, what should be done specifically when investing?