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Teaching You to Trade Stocks 74: How to Avoid Policy Risks

2007/8/28 8:41:11

Policy risk is a type of non-systematic risk. It is inherently unpredictable and can only be effectively guarded against through appropriate precautions.

First, policy risks in China will persist for a long time. This is determined by the current real-world environment of China's capital market. A mature capital market should emphasize regulation over intervention. But in China's current capital market, at least for a very long time, regulation and intervention will carry at least equal weight. In certain specific periods, intervention may even become the most important priority. This is objective reality, determined by the current stage of China's economic development. It's not that anyone deliberately wants it this way, so any criticism of this is actually misguided.

Intervention comes in two types: hard intervention and soft intervention. Publishing editorials, making speeches, launching strict investigations — these are obvious hard interventions. Whether such intervention methods will never occur again is something nobody dares guarantee. As for soft intervention, it means the intervention doesn't directly target capital prices as its most immediate objective, but incorporates broader considerations, with policies that are gradual and continuous in nature.

Of course, from the intervention perspective, if soft intervention proves ineffective, then when hard intervention becomes the only option, this is actually not the regulator's tragedy but the market's tragedy. When the market's frenzy is sufficient to destroy the market itself, hard intervention becomes a necessary measure. In this regard, one should have sufficient understanding for the regulators.

There's a very wrong assertion that China's intervention only targets rising markets, never falling ones. In fact, from a historical evidence standpoint, this claim has no factual basis. In reality, interventions to halt declines have been no less frequent. The most famous example is the 325-point low of 1994 — the gap created by those three major policies is still there today. Wasn't that intervention against excessive decline? It was simply the most successful intervention. Interventions against decline, or so-called market rescues, often fail — this only shows that intervention skills need continuous improvement through practice.

One must unequivocally oppose the view that regulators are all villains, retail investors are all victims, and institutions are all conspiring with regulators to exploit retail investors. These are nothing but shameless lies from market losers or those with ulterior motives, with absolutely no factual basis — pure self-imagination.

The introduction of any policy is never decided by a single person on a whim. Under any institutional framework, as long as it's an institution, there is equilibrium. The possibility of individuals arbitrarily transcending the system has become increasingly slim. Moreover, "retail investors" and "institutions" are not abstract nouns. The attempt to use abstract nouns to obscure individual real entities and pit them against each other is merely a zombie version of certain campaign logic.

Second, one must be clear: policy is only one component force. Policy alone cannot change a long-term trend. For example, even if a hard intervention now causes a major reversal in medium-to-short-term trends, it ultimately cannot change the final direction of a great bull market. Policy only has medium-to-short-term power, not long-term power — this applies equally to the economy. Economic development is determined by historical economic trends. The reason China's economy performs as it does is fundamentally because China's economy is at this stage of historical development. Any country at such a stage would have similar development. But this doesn't mean policy is useless — a good policy promotes and extends the corresponding historical development process, acting as a positive component force.

So, policy is a component force — one whose duration and energy are not infinite. Moreover, policy is based on actual conditions. Any policy has its boundaries, and once those boundaries are exceeded, new policies must be produced, generating new component forces. Even within the same policy's duration, its actual effects change. The effect of a policy at 5,000 points versus 1,000 points obviously cannot be the same.

Understanding the characteristics of policy, there's no need to treat it like a terrifying monster. The following points are worth noting:

One: The ultimate outcome depends on the relationship between price and value. When the market enters an undervaluation phase, pay more attention to the impact of bullish policies. Conversely, during the market's bubble phase, pay more attention to the impact of bearish interventions.

Two: Ultimate profits always come from individual stocks. A stock with long-term value is the ultimate foundation for resisting all medium-to-short-term component forces. Therefore, the quality and growth potential of the enterprise behind the stock is a fundamental baseline. As long as this baseline isn't broken, everything else is just fleeting clouds. Moreover, medium-to-short-term fluctuations instead provide buy points for long-term entry.

Three: Pay attention to position management. Margin trading is no longer fashionable these days, but borrowing to trade stocks is still not uncommon. This is absolutely unacceptable — those who treat the capital market as a casino will never enter the true gates of the capital market. After entering the bubble phase, one should adhere to the fundamental principle of only holding strategically, not buying strategically. This way, any medium-to-short-term fluctuation has enough room for response.

Four: Develop good trading habits. This ID has said repeatedly: only when the cost is zero is it truly safe. This is probably the only way to thoroughly escape market risk.

Five: Greed and fear are equally culprits in creating failure. If you maintain good positions, have sufficient response capital and low costs, then let the market wind carry you as far as it can. You can stay alert to policy, but there's no need to be a bird startled by the mere twang of a bowstring, scaring yourself every day.

Six: Don't expect everyone to be able to run away one day before hard intervention is announced. Let me be clear: the secrecy level of current policy releases has become vastly different from the past. Many policies are released with very effective confidentiality. Of course, advance knowledge within a certain circle definitely exists, but this circle has become smaller and smaller, and the reaction time available is also shrinking. For large capital, that little bit of time is basically useless. This ID can say quite openly: the fairness of policies has been increasing. Those with the ability to know in advance have capital too large to fully liquidate in time. This is completely different from the past, when there was ample time to organize large-scale retreats.

Seven: Necessary hedging preparations, such as warrants, etc. Recently, the popularity of put warrants is also related to hedging expectations of some funds.

Eight: Once hard policy intervention occurs, one must flee at every possible opportunity. Historically, after any hard intervention, even if the adjustment space isn't large, the time required is considerable.

Nine: The key is still to earn sufficient profits during the uptrend. If you've already multiplied your capital N-squared times, isn't it only natural to set aside 10-20% for this erratic, neurotic non-systematic risk? Becoming the ultimate winner of the market has nothing to do with whether you escaped one day early. The capital market cannot be conquered through such singularity games alone. Keep your mentality calm — the key is reaction, not neurotic prediction.