Summary of Key Points
This has been a highly contentious topic in the A-share investor community recently, essentially discussing the rationality of the “lazy value investing method.” Many financial bloggers advocate that one can identify the types of “good companies” that Buffett loves—those with low valuations and high earnings—by using a single financial indicator that meets both criteria, without the need to analyze complex financial reports or industries. They even claim that Buffett himself would buy such companies without hesitation if he were in the A-share market, ensuring a guaranteed profit. However, many ordinary investors who have tried this method have lost more than they have gained. The core issue at the heart of the debate is whether this “shortcut to learning from Buffett” is a way for ordinary people to easily make money or a trap disguised as value investing.
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Detailed Explanation of Each Point
1. What exactly is the “single financial indicator” for stock selection?
The so-called “miraculous indicator” that’s circulating online is nothing more than the earnings yield—in simple terms, it shows how much actual net profit a company will distribute to each dollar you invest in its stock. For example, if a company’s stock price is 10 yuan and it earns 2 yuan in net profit per share for the previous year, then investing 10 yuan in one share means you’ll earn 0.2 yuan per year, resulting in an earnings yield of 20%.
Why do people think this indicator meets the criteria of both low valuation and high earnings? It combines two key factors: a high earnings yield indicates either strong profitability or a particularly low current stock price. There’s even a simple rule among bloggers: if the earnings yield is greater than 10%, it’s a better investment than depositing money in a bank or buying financial products.
2. Why do people assume Buffett would buy such companies if he were in the A-share market?
This isn’t entirely baseless. Buffett’s core investment philosophy has always been to buy good companies at prices far below their true value. He bought Coca-Cola and later Apple, using this indicator as a key reference. In the A-share market, however, the earnings yield of many industry leaders is 2-3 times higher than that of their counterparts in the US market. For instance, a consumer leader that earns 10 billion yuan in a year might have a market value of 100 billion yuan in the US, but only 50 billion yuan in the A-share market, making it like finding a “discounted quality target” that would take years to come by in the US. With such opportunities readily available in the A-share market, it’s no wonder some suggest that Buffett would buy them all.
3. The first major pitfall of using the single indicator: The “high earnings” may be inflated
Many people lose money using this method because the high earnings yield might not come from the company’s main business but from temporary gains. For example, a company in the clothing industry might earn 10 million yuan from its main business but then sell an office building, increasing its annual profit by 90 million yuan. This temporarily high earnings yield makes the company seem like a low-valuation, high-earnings target, but if the building is sold, the profit may return to normal, trapping investors who bought the stock at that peak.
4. The second pitfall of the single indicator: A “low valuation” doesn’t guarantee stability; it might actually mean the stock will fall further in price
This is what’s known as a “value trap” in the investment world. A stock with a valuation of 5 times might seem like it can’t fall much further, but it could drop to 2 or 1 times. For instance, many education and internet companies with high earnings yields and low valuations were once seen as excellent investments, but a policy change could disrupt their operations, turning their high earnings into zero. Similarly, companies in cyclical industries (like coal or steel) might experience sudden profits due to rising commodity prices, only for those profits to disappear when prices drop, trapping investors at the peak.
5. How can ordinary people use this indicator to avoid pitfalls when following Buffett’s approach?
The indicator itself isn’t misleading; Buffett uses it too. The problem is relying solely on it for investment decisions. Ordinary investors can use it as a first filter to identify companies with an earnings yield greater than 10%. Then, spending a few more minutes to verify three things can reduce the risk of making mistakes by 90%:
- Check if the current year’s profit comes from the company’s main business, not from one-time gains such as selling assets or government subsidies.
- Review the company’s annual reports over the past five years to see if its earnings have been stable.
- Assess whether the company faces significant policy risks or threats from new technologies. Companies in stable industries (like those selling soy sauce or utilities) are generally more reliable.
Buffett never claimed that one number could guarantee success. Before buying a company, he would investigate all relevant parties. If you’re too lazy to do this and rely solely on the earnings yield, you’re likely to become a victim of investment scams, with little chance of making a profit or even preserving your capital.