Insist on buying great companies near a price-to-earnings (P/E) ratio of 10.
Nothing new under the sun; the 2021 consumer stock bubble and its subsequent burst today are not without precedent. A similar event was the collapse of the "Nifty Fifty" bubble in the U.S. stock market in 1973.
At the end of 1972, the average P/E ratio of the Nifty Fifty was as high as 42 times, with Polaroid at 95 times, McDonald's at 85 times, Johnson & Johnson at 64 times, and Coca-Cola at 48 times. If you had bought Coca-Cola at that high point, by 1979, seven years later, the stock price had fallen by 41%, the valuation had dropped by 78%, earnings had grown by 121%, and the P/E ratio was 10.3 times. If you had bought McDonald's at that high point, seven years later the stock price had fallen by 42%, the valuation had dropped by 89%, earnings had grown by 183%, and the P/E ratio had fallen to 9.6 times. Johnson & Johnson's valuation dropped from 64 times to 14 times in seven years. This is very similar to Wuliangye from 2007 to 2014. If you had bought Wuliangye at a high point in 2007 with a profit of 1.5 billion yuan, a market value of 185 billion yuan, and a P/E ratio of 123 times, by 2014, seven years later, Wuliangye's market value had fallen to 55.5 billion yuan, profits had risen to 5.8 billion yuan, the P/E ratio had dropped to 9.6 times, and the stock price had fallen by 70%. Similarly, if you had bought Luzhou Laojiao's stock in 2007 with a profit of 800 million yuan, a market value of 64.5 billion yuan, and a P/E ratio of 80 times, by 2014, seven years later, Laojiao's market value had fallen to 22.2 billion yuan, profits had fallen to 880 million yuan (actual profits were 3 billion yuan), the P/E ratio had dropped to 7.4 times, and the stock price had fallen by 66%. Similarly, if you had bought Kweichow Moutai in 2007 with a profit of 2.8 billion yuan, a market value of 210 billion yuan, and a P/E ratio of 75 times, by 2014, Moutai's market value had fallen to 120 billion yuan, profits had risen to 15 billion yuan, the P/E ratio was 8 times, and you were trapped with a 43% loss. Similarly, in 2021, if you bought China Feihe with a market value of 210 billion yuan, a share price of 25.7 yuan, and a P/E ratio of 38 times, by 2024, it fell to a market value of 28 billion yuan, a profit of 4.1 billion yuan (actual profit), a P/E ratio of 7 times, and a share price of 3.4 yuan. Similarly, in 2021, if you bought Yee Hoy International with a market value of 140 billion yuan, a profit of 900 million yuan, and a P/E ratio of 156 times, it fell to a profit of 900 million yuan, a share price of 8.53, a market value of 80 billion yuan, and a P/E ratio of 9 times by 2024. Similarly, in 2021, if you bought Li Ning with a profit of 4 billion yuan, a share price of 108 yuan, and a market value of 254 billion yuan, and a P/E ratio of 63 times, by 2024, it fell to a share price of 12.56, a market value of 29 billion yuan, a profit of 3.2 billion yuan, and a P/E ratio of 9 times. Similarly, in 2021, if you bought Haidilao with a market value of 435 billion yuan, a profit of 3.8 billion yuan, and a P/E ratio of 145 times, by 2024, it fell to a market value of 58 billion yuan, a profit of 4.5 billion yuan, and a P/E ratio of 12.9 times. Similarly, in 2021, if you bought Changchun High & New with a profit of 3.8 billion yuan, a market value of 210 billion yuan, and a P/E ratio of 55 times, it fell to a market value of 32 billion yuan and a P/E ratio of 8 times. Therefore, the ultimate destination of the 2021 consumer stock price collapse is a P/E ratio of 10, very similar to the collapse of the Nifty Fifty stock bubble in 1973, which fell from 42 times in 1972 to 10 times in 1979. The average P/E ratio of our 2021 liquor and major consumer goods was as high as 60 times, and the outcome is likely to be worse than the Nifty Fifty at that time. The higher it rises, the more it falls, and the higher it is held, the harder it falls. Therefore, I have always insisted that it is not the time to bottom out for liquor now. According to these historical patterns, liquor fell to a P/E ratio of 8-10 times in 2014, and now the market value of liquor is generally 10 times larger than in 2014. It is optimistic to fall to a P/E ratio of 8-10 times. Corresponding to Moutai from 2021 to 2028, if profits rise from 50 billion to 100 billion, then the market value in 2028 will be 800 billion yuan, and the stock price will be halved to 600 yuan. If the liquor industry is in a long-term adjustment and inventory reduction in profits in 2028, from more than 70 billion in profits to more than 50 billion, then the market value will fall to 500 billion yuan, and the stock price will fall to more than 400 yuan. After all, the long-term market value of international spirits giant Diageo is more than 500 billion yuan. No matter how good the fundamentals of Moutai and Wuliangye are, they are not better than McDonald's and Coca-Cola. McDonald's and Coca-Cola can fall to a P/E ratio of 10 in 1979, and Moutai has historically reached a P/E ratio of 10 many times (in 2003 and 2014), and Luzhou Laojiao has historically reached a P/E ratio of 5 many times (in 1994 and 2014). I don't know why many people have such confidence in believing that history will not repeat itself this time. Those who bought Tongrentang at a P/E ratio of 60 times in 2021, Haidilao at a P/E ratio of 80 times, and Pien Tze Huang at a P/E ratio of 150 times are all very confident that the history of the collapse of the Nifty Fifty bubble will not repeat itself. As a result, the stock prices have fallen in a mess today. If history repeats itself, by 2028, Haidilao's profits will be 7 billion yuan, the market value will fall to 70 billion yuan, and the stock price will fall to 12 yuan. By 2028, Tongrentang's profits will be 2 billion yuan, the market value will be 20 billion yuan, and the stock price will be halved to 15 yuan. Pien Tze Huang's profits will be 4 billion yuan in 2028, the market value will be 40 billion yuan, and the stock price will fall by two-thirds to 70 yuan. Don't think that the fundamentals of these stocks are more awesome than the Nifty Fifty in the 1970s. In fact, everyone is the same. Pien Tze Huang and Moutai are the most awesome, which is the result of institutional, stock price, and media brainwashing propaganda. If it really falls to the price I said, the decline is more tragic than the Nifty Fifty at that time, and the reason is that the bubble they speculated in was bigger than the Nifty Fifty. For example, the average P/E ratio of the Nifty Fifty in 1972 was 42 times, with the highest Polaroid at 95 times, and the average P/E ratio of liquor and major consumer goods in 2021 was 60 times, with the highest Pien Tze Huang at 167 times.
Looking back, Buffett bought the Washington Post in the 1970s at a P/E ratio of 12 times, See's Candies at a P/E ratio of 12 times, and Geico Insurance fell from 60 to 3 to bottom out. They all bought great companies at a low price. As a result, the Washington Post made 20 times in 10 years, See's Candies made 10 times in 10 years, and Geico Insurance later rose by 200 times.
Some people say that although I bought great companies at a high price and was trapped, I still made a lot of money in the long run. This is true. If you bought McDonald's in 1973 and held it until 2019, you made 500 times, but if you bought McDonald's near a P/E ratio of 10 in 1979 and held it until 2019, you made 1000 times and saved 7 years to make several times on other cheaper companies. If you learn from Buffett to buy great companies near a P/E ratio of 10, you will buy the Washington Post at a P/E ratio of 12 times in 1974 and See's Candies at a P/E ratio of 12 times in 1972, make 10 times in 10 years, and then switch to McDonald's and Coca-Cola with low P/E ratios. Your profit will be nearly 10,000 times. Similarly, from 1973 to 2019, choosing to buy excellent companies near a low valuation of 10 times P/E ratio, you can make 10,000 times, and choosing to buy excellent companies at a high valuation of 40 times P/E ratio or even 90 times P/E ratio, you can only make 500 times. The gap is huge.
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Of course, here we only talk about McDonald's, which has the highest increase in the same period, and others such as Coca-Cola and Johnson & Johnson only increased by more than 200 times in the same period (from 1970 to 2019). Buffett is constantly switching excellent companies to make money, such as buying Coca-Cola at a P/E ratio of 14 times in 1987, buying PetroChina at a P/E ratio of 3 times and a dividend yield of 15% in 2002, and selling it at 8 times in 2007 (a perfect operation, similar to the big shot Wang Wen buying Yanzhou Coal Industry at a P/E ratio of 3 times and a dividend yield of 15% in 2019, which is Yankuang Energy, and making 10 times in 2024, and now buying cyclical stocks Shaanxi Coal Industry and China Shenhua, COSCO can refer to Buffett's buying point), selling Johnson & Johnson and other companies at a P/E ratio of 14 times in 2016 and buying Apple, selling Apple in 2024, and U.S. banks and others bought more than 200 billion U.S. dollars of U.S. Treasury bonds, more than the Federal Reserve bought, Buffett is constantly selling the first and second largest positions (similar to Buffett selling most of the stocks in 1969 and buying U.S. Treasury bonds), indicating that the U.S. stock market bubble is imminent, and the seven major kings of the U.S. stock market, Tesla, Apple, Nvidia, Amazon, Microsoft, Google, and Meta, the ultimate destination in the future will be the 10 times P/E ratio of the Nifty Fifty in 1970 and the 80% plunge of the Nasdaq index after the collapse of the dot-com bubble in 2002. But 90% of people will say that this time is different, although looking back 10 years later, it is likely to be the same.
Finally, a quote from the Bible story, what has happened before will happen again, what happens here will happen elsewhere, there is nothing new under the sun.
Insist on buying excellent or even great companies below a P/E ratio of 10. Dynamic switching is a good way to survive and make money in the market for a long time.