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Teaching You to Trade Stocks 73: The Absolute Classification of Market Profit Opportunities

2007/8/23 22:35:20

When it comes to making profits, the most common idea is simply "buy low, sell high" — but this is an extremely vague notion with no real operational or guiding significance. Under this ID's theory, all profit opportunities in any market have a most definitive classification. In the language of this ID's theory, there are only two types: hub displacement and hub oscillation.

Obviously, from the perspective of the same level of trend types, hub displacement means an upward trend of that level, while hub oscillation could be consolidation at that level, or the continuation process after a new hub forms during an uptrend of that level. All profit opportunities in any market cannot escape these two modes — it's just that ordinary people use them daily without knowing, while this ID's theory makes them explicit.

Within your operational level, during hub displacement, there are theoretically no short-term trading opportunities whatsoever, unless the displacement ends and enters the formation and oscillation of a new hub. Hub oscillation, on the other hand, is the theoretical paradise for short-term trading. As long as you sell in the sell point region of any upward departure segment during hub oscillation, you will inevitably have the opportunity to buy back during subsequent hub oscillation. The only part requiring some technical skill is judging the third-type buy point — if a third-type buy point appears and you don't buy back, you might miss a new round of hub displacement. Of course, there's still a considerable chance it enters a larger hub oscillation, in which case your opportunity to buy back remains absolute.

Many people often say they can't buy back when doing short-term trades according to this ID's theory. There's nothing strange about that. If you can't even distinguish hubs, don't understand levels, can't tell hub displacement from hub oscillation, and are even more confused about third-type buy points, then if you still succeed at short-term trading, it can only mean you got lucky — a dead mouse fell right into the blind cat's paws. How can dead mice fall from the sky every day?

The above is only application at a single level. Viewing trends from the same level is like examining with a single cross-section, but when you compare different levels vertically, you gain a vertical perspective on trends.

A monthly-level uptrend might just be a small segment within a yearly-level hub oscillation. From the perspective of the yearly hub: if this uptrend is a pullback from below the yearly hub toward the hub, then the hub's position obviously constitutes resistance that needs to be digested; if it's a departure upward from the yearly hub, then the hub exerts a pull-back effect. These are the simplest of issues. What we'll discuss below is how to select extraordinarily large opportunities.

Life is finite. A yearly hub displacement constitutes the greatest investment opportunity one could possibly participate in during a lifetime. A yearly hub oscillation could easily take 100 years — if you happen to be born into such a world, it's practically a disaster. But if you encounter a yearly hub displacement opportunity, that's the most formidable long-term investment. The most formidable long-term investment is capturing and holding onto a yearly hub displacement opportunity.

Of course, for most people's lifespans, the most realistic opportunity may only be a quarterly-level uptrend process. Before this process ends, before that new yearly hub appears, the person is already gone. This yearly hub displacement process sometimes requires N generations to witness. Look at the U.S. stock market chart — the new yearly hub still hasn't appeared, it's still in yearly hub displacement. Think about how many years the U.S. stock market has been around.

So, for the most realistic profit-making, a quarterly or even monthly hub displacement is already a sufficiently great once-in-a-lifetime long-term profit opportunity on a single instrument.

A quarterly hub displacement could be a decade-long or even longer monthly uptrend. What qualities does an enterprise need to have such momentum? Even in a globalized environment, the scale of a single enterprise has its limits. And a company capable of achieving a super rally also cannot break through that limit. Therefore, the ceiling already exists in reality, and depending on the industry, the corresponding limits differ. For operations, the only thing you need to know is which enterprises can push toward the limits of their industry.

But regarding Chinese enterprises and listed companies, we can offer an additional judgment: in virtually every industry, there will inevitably be at least one Chinese listed company that pushes toward the theoretical global industry limit. This is the real-world charm of China's capital market. Because there are roughly as many truly great bull stocks as there are industries.

However, some industries have limited room for growth, and thus can be filtered out. Enterprises in such industries are destined never to have quarterly or even monthly-level hub displacement, unless they transform. Therefore, stay away from industries destined to never have quarterly or monthly-level hub displacement — enterprises in these industries will ultimately just be hub oscillations at some level. This involves fundamental analysis and comprehensive judgment of the global economy. Who says this ID's theory only deals with technicals? But any fundamentals must be meaningful only under the illumination of this ID's geometric theory. Under this perspective, you'll know exactly what level and what type of profit opportunity the fundamentals correspond to.

Once you've found the industry, it comes down to finding specific enterprises. For long-term investment, the most formidable stocks and the most formidable enterprises must ultimately correspond. Nobody is a god — no one knows who the final winner will be. But everyone knows that the ultimate winner must eventually reach, say, 10 trillion RMB in market cap, which means its market cap must pass through every number below 10 trillion RMB.

That's sufficient. From this, one can immediately deduce with 100% certainty that this enterprise is either the current industry leader, or an enterprise that will surpass the current leader at some future point. With this deduction, this ID can construct the most rational investment plan.

One: Allocate the largest proportion, say 70%, to the leading enterprises (possibly two companies), then distribute the remaining 30% among the most growth-oriented enterprises (possibly two or three). Note that in actual operation, if the leading enterprise already shows inevitable decline in its fundamentals, then of course choose the best substitute, and so on.

Two: As long as the industry hierarchy remains unchanged, this investment ratio stays unchanged, unless fundamentals show clear signs of industry position changes. Once that happens, swap stocks at equal market capitalization. Of course, if you have good technical skills, you can completely sell the surpassed enterprise at a relatively large level sell point and enter the new leader and growth companies at subsequent buy points.

Three: This is the unique weapon of this ID's theory — fully utilize operable hub oscillations (such as daily, weekly, etc.) to reduce all investment costs to zero, then continuously increase holdable positions. Note that these positions may be in new companies with growth potential or undervalued value.

Four: There is no fourth point. If one must be stated, it's to closely monitor relative valuation relationships — here, relative valuation means the relationship between market capitalization and industry standing, identifying undervalued instruments among them.

Note: any investment is only truly meaningful when the cost reaches zero.

The above strategy is the perfect combination of three independent systems: fundamentals, relative valuation, and technicals. Only when you can operate stocks this way does it begin to taste like operating according to this ID's theory.

Of course, the above is only suitable for large capital operations. For small capital, one can still follow a similar approach, just using an abbreviated version — for example, only tracking the leading enterprise, or only tracking the most growth-oriented one.

Of course, for small capital in the stage of primitive capital accumulation, using smaller levels for rapid accumulation is a faster method. But once capital reaches a certain scale, small levels become largely meaningless.

Some might ask, why don't you mention policy factors? Policy factors are nothing more than creating at most weekly-level oscillations, which precisely provide technical opportunities to reduce costs and increase positions. The crash of 1929, World War II — none of them changed the yearly-level hub displacement of the U.S. stock market. What do policy factors even amount to?