---
title: "Views on the current market: Valuations are not low, but it's too early to talk about a bubble."
type: "Topics"
locale: "zh-CN"
url: "https://longbridge.com/zh-CN/topics/32110417.md"
description: "We have come across too many famous sayings about investment, so many that the same issue can have two completely opposite philosophies. Buffett said, 'Be fearful when others are greedy, and greedy when others are fearful.' But when Buffett is greedy, it is precisely when most of us are fearful. Investment philosophy is essentially a matter. Philosophy is great, but it has two inherent flaws: one is that it can't build lithography machines, and the other is that it can't make you money. What we need is not philosophy, but basic methodology..."
datetime: "2025-07-23T01:05:35.000Z"
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  - [zh-HK](https://longbridge.com/zh-HK/topics/32110417.md)
author: "[锦缎研究院](https://longbridge.com/zh-CN/profiles/2576456.md)"
---

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# Views on the current market: Valuations are not low, but it's too early to talk about a bubble.

We are exposed to too many famous sayings about investment, so many that the same issue can have two completely opposite philosophies.

Warren Buffett said, "Be fearful when others are greedy, and greedy when others are fearful." But when Buffett is greedy, it is precisely when most of us are fearful.

Investment philosophy is essentially a matter of philosophy. Philosophy is certainly good, but it has two inherent flaws: it cannot build lithography machines, and it cannot make you money.

What we need is not philosophy, but fundamental methodology.

Today, the book we are going to discuss is called "Big Money Thinks Small: How Outstanding Investors Think and Decide," written by Joel Tillinghast, known in the industry as "T God," a public fund manager.

Although his historical performance cannot compare to Wall Street giants like Buffett and Simons, in the public fund arena, T God is considered a banner figure. T God wrote a book about his stock-picking experiences in public funds, which is "Big Money Thinks Small: How Outstanding Investors Think and Decide."

Today, from a practical methodological perspective, we will try to analyze the stock-picking logic and ideas used by the author in the book.

## **01 Why Does "T God" Reject the Top-Down Macro Stock-Picking Approach?**

The English name of this book is "Big Money Thinks Small," which can also be translated as "Big Money Thinks Small." The intended meaning is that when investing in stocks, one should not focus on top-down macro policies but rather on the inherent qualities of the company itself.

Top-down and bottom-up are two approaches to stock selection.

The top-down approach is typically used by macro strategists or those involved in asset allocation. It starts with analyzing macroeconomic policies, followed by meso-level research on cycles, consumption, technology, and other broad categories, then identifying potentially promising industries within these categories, and finally focusing on listed companies.

The bottom-up approach is the opposite, starting directly with the company, comprehensively analyzing its fundamentals, valuation, etc., and then accounting for the potential impact of macro policies on the company.

**The fundamental reason T God opposes the top-down stock-picking method is his rejection of the theoretical framework of macroeconomics. He believes that economics is questionable in terms of both its stance and scientific rigor.**

Economics is, first and foremost, political economics, with an underlying stance.

In Chapter 7, T God writes: "When I worked at Drexel Burnham Lambert, one of the most frustrating projects was trying to prove that President Reagan's tax cuts greatly benefited the economy. Because many clients and all senior staff at Drexel were in the highest income tax bracket, the desired conclusion was obvious."

The starting point for economists' models may not be objective. "Keynes's model was more about guiding government policy preferences than predicting future economic trends." "On Wall Street, the primary purpose of predictions is to sell, and after the sale, they never reflect on the accuracy of their earlier predictions."

Not only is the stance questionable, but the scientific rigor is also widely criticized.

"Because economic theory is built on abstract and non-constant definitions, the idea that economic models can perfectly predict economic trends seems laughable."

For physics models, "a single counterexample is enough to invalidate an entire scientific theory." "This does not apply to economists. If they did this, the entire field of macroeconomics would cease to exist." "The theories economists cling to have been disproven countless times and cannot prove the validity of the theory."

From this, the author's conclusion is quite interesting.

For an economic theory or model, the debates among economists and their conclusions are essentially meaningless. A correct result does not prove the model is correct, and an incorrect result does not prove the model is wrong. Moreover, poor results do not mean the policy will not be adopted, as there is also the issue of stance.

This line of reasoning directly negates the entire macroeconomic analysis framework, and the results derived from this framework are naturally hard to be convincing.

**T God believes the more reliable model is Leontief's input-output model, although this model does not perform well in typical light-asset industries like media and computers.**

Of course, T God also offers two empirical conclusions.

One is that the stock market is a leading indicator of the macroeconomy, not the other way around. The premise of the top-down analysis is that macroeconomics determines stock trends, but empirical evidence shows that the stock market often bottoms out and starts rising before the macroeconomy does.

The second is that conclusions drawn from focusing on interest rate levels differ from those drawn from focusing on interest rate changes. Periods of relatively low interest rates often indicate poor economic conditions and weak corporate profitability, corresponding to weak stock market performance. However, lowering interest rates stimulates macroeconomic investment, improves corporate profitability, and benefits the stock market.

The logic of the two is opposite, and the conclusion drawn may depend more on your portfolio.

T God believes that if you want to profit from top-down analysis, you need to: "First, accept contradictory information; second, analyze the accuracy of information dialectically; third, be willing to change your mind."

The representative of domestic macro investing is Li Bei of Banxia Investment. Her macro analysis is indeed high-level, but the results are mixed.

## **02 How to Deal with Financial Fraud?**

If we pay attention to daily news, we will find that in recent years, reports exposing financial fraud have become increasingly rare.

Because people have realized that the risk-reward ratio of exposing financial fraud is clearly mismatched. If you are good at financial analysis, digging deep into a fraudulent company at most earns you a few more followers, but the fraudulent company has every incentive to pressure you.

"In early 1998, an analyst at a fund company—Scarlett—called me in tears, saying that Enron had called her research supervisor, demanding she cancel her research on Enron and firing her. Later, she found out her phone was tapped, she was followed, and she was forced to find another job."

How to identify companies engaged in financial fraud is not the focus of this book, nor is it the focus of most investors. If you have even a basic understanding of financial analysis and browse stock forums, you will have a rough idea of the quality of a company's financial statements.

The problem lies in two things: first, whether you are willing to believe there is a problem with their finances, and second, whether you can resist their stock's rise.

T God uses Enron as an example. Before Enron's collapse, there were too many signs of abnormality. "If you want to avoid scams, you must give up the surge in Enron's stock before its collapse."

A major issue in exposing financial fraud is that accounting standards themselves are flawed. Accounting represents a perspective, not facts. As long as the accounting standards used comply with regulations, the accounting conclusions are hard to dispute. But we know that choosing different accounting standards can lead to vastly different results.

Why is accounting important in capital markets? Because accounting is the language of economics. Understanding its nuances can help you avoid pitfalls.

Charlie Munger once said, "Don't wrestle with a pig. You'll both get dirty, but the pig will enjoy it." T God's advice is the same: "Life is too short to spend time on meaningless things. There are thousands of other stocks to choose from." "Researching Enron is part of the job for bank and insurance analysts, but for fund managers, simply not buying Enron's stock is enough."

So, for companies you suspect may be engaged in financial fraud, just avoid them. Screen them out, don't argue.

## **03 Investment and Speculation**

There is a joke: the difference between investment and speculation is like the difference between Mandarin and Cantonese.

Language carries inherent connotations, including positive and negative ones. The word "speculation" sounds negative, so in capital markets, everyone claims to be a value investor.

To eliminate the negative connotations of language and avoid arrogance and overconfidence, T God provides criteria for distinguishing between investment and speculation.

Based on the depth of research and whether the object of study is a single event or the whole, T God divides trading behavior into the six types shown in the figure above.

It seems clear, but the problem lies in defining the depth of research. Is 100 hours of research "in-depth"? Is less than 10 hours "no research"? Some people are naturally gifted and can understand the logic in minutes, while others may never grasp it in a lifetime.

So, even according to the author's logic, the distinction between investment and speculation remains blurry.

If we read the entire book, we can find some methods from T God's summarized rules that can improve investment success rates:

1\. "The investor's advantage should come from long-term observation and analysis." "Since 1928, the market has experienced 25 single-day declines of more than 20%, which is quite unsettling. Strangely, in the past 87 years, the S&P 500's total return has only been below -20% in 6 years." This means that after a major decline, the market is likely to rebound quickly.

2\. Low-volatility stocks tend to have positive returns: "Historically, stable, low-risk stocks often outperform expectations, while those that look attractive, tell good stories, and are highly volatile often disappoint."

3\. Historical prices are essentially meaningless: "If the market is efficient, then historical stock prices have no predictive value for future trends! In other words, investors gain nothing from studying historical prices."

4\. Avoid leverage. "Wall Street has invented too many novel and complex financial products." "The reason these inefficient markets are profitable is because professionals use their expertise to fool outsiders."

5\. Rapid growth in financial business requires caution. "Explosive growth in loans by financial companies is a precursor to financial crises. Money is the ultimate commodity. Financial companies can only achieve rapid growth by lowering interest rates or credit standards."

6\. The price-to-earnings ratio (P/E) is a core stock selection criterion: "Always prefer stocks with low P/E ratios and avoid those with high P/E ratios." "Looking at market history, at any stage, if you randomly pick a stock with a P/E ratio over 30, the outcome is usually not good."

7\. Every bubble initially has a rational component. "Free money, or at least loose monetary policy, is a prerequisite for every bubble." "Public moral standards are distorted during bubbles." "Realizing something is crazy doesn't mean it will stop." "True believers should stick to their faith—either ride the bubble and collapse with it, or resist the temptation and steadily profit in normal markets."

8\. Be cautious about timing. "Almost no one can consistently succeed in switching between stock picking and timing, especially in high-frequency markets."

9\. Turnarounds are hard to find. "Except for cyclical industries, companies with poor profits do not return to average levels—they eventually go bankrupt."

10\. Unless you are a professional, avoid tech stocks. "Tech billionaires need not only exceptional insight but also extraordinary luck." "The element of luck is often overlooked because success is so prominent. In reality, failure is everywhere but ignored." The so-called "chosen ones" in stories are reserved for protagonists.

11\. Distinguish between project profitability and corporate capital profitability. For a company, understanding the difference between ROCE (Return on Capital Employed) and ROE (Return on Equity) can reveal whether the company's projects are profitable or if it is leveraged. Companies with strong project profitability and low leverage are more competitive.

## **04 About Low P/E Ratios**

**A key point T God repeatedly emphasizes is that when selecting stocks, the P/E ratio should be low.**

"If you convert the P/E ratio into a yield, based on mean reversion logic, a 1% increase in yield usually brings investors a return greater than 1%."

This is a chart from the book comparing index P/E ratios and long-term returns.

If the median initial P/E ratio is less than 15x, the 10-year return is 317%. When it exceeds 25x, the return drops to 65%.

We have listed the current P/E ratios of major A-share indices. The CSI 300 is currently at 13x, while the STAR 50 and CSI 2000 have P/E ratios exceeding 100x.

We know that financial activity itself is a cycle of boom and bust, so corporate profits are cyclical. To balance this cycle, there is an indicator called the Shiller P/E ratio, which uses the average earnings of the past 10 years to calculate the P/E ratio.

The Shiller P/E ratio can explain the historical bull and bear performances of the U.S. stock market, such as the 1929 crash and the 2000 dot-com bubble burst. The problem is that in recent decades, this indicator has been significantly higher than the average historical level.

Historically, when the starting Shiller P/E ratio is below 12, the market's annualized return over the next 10 years can exceed 10%. But when this P/E ratio exceeds 25, the annualized return over the next 10 years drops to just 0.5%.

Choosing stocks or indices with low P/E ratios can increase your survival rate in the stock market.

## **05 Which Industries Are Likely to Thrive Long-Term?**

Cultural workers must have culture, and fire hydrants must have water. Both refer to the same thing: the probability of investment success.

T God cites a report by three scholars from the London Business School, which studied the performance of all stocks in 15 industries from 1900 to 2016, yielding some interesting conclusions.

Over these 100+ years, "the best-performing industries in the U.S. market were tobacco, electrical equipment, chemicals, food, and railroads; the worst were shipping, textiles, steel, paper, utilities, and coal. In the U.K., the best-performing industry was brewing."

Railroads, though not highly regarded in the transportation industry, benefit from local monopolies, limited competition, and long-term dividends, resulting in strong performance. In contrast, freight and shipping face intense competition.

"The investment returns of consumer staples are higher than other industries because customers are stable and unwilling or unable to switch brands. The tobacco industry is monopolistic, specifically an oligopoly."

"The strong performance of chemical stocks may be because the healthcare industry was included in this sector in 1900."

"Overall, commodity industries have mediocre profits. These are typically capital-intensive industries where companies oscillate between large-scale bankruptcies and booms."

"For utility companies, survival and business certainty are far more important than pursuing high profits."

The combined experience is that the U.S. industrial structure makes consumer goods the most likely sector to produce long-term bull stocks. Simply put, these industries change little and easily build brand moats over time.

Of course, probability and payoff are mutually exclusive. The tech industry has low success rates but high payoffs. Here, we must quote the saying: "On Wall Street, there are old traders and bold traders, but no old, bold traders."

## **06 Final Thoughts: Views on the Current Market**

After entering March 2025, the general feeling is that making money has become much harder, with rapid rotations and no sustainable trends.

Many describe this market as a "dead dog market."

"Confessions of a Stock Operator" has a saying: "A man walks his dog on a leash. The dog runs ahead, then lags behind, rarely in sync. But as long as the man keeps walking, the dog will eventually reach the destination." In the stock market, the dog is the stock price, and the man is the company's intrinsic value.

Now, the man keeps walking, but the dog lies down and refuses to move.

The reason is simple. The Shanghai Composite Index has broken through 3500. Historically, beyond this point is a roaring bull market. But the problem is, few truly believe in a bull market. Even those shouting "the bull is here" may not be fully convinced—it's just part of their job.

In August last year, we mentioned that A-shares would see a bull market. The logic remains unchanged: the East rises while the West falls, plus a shift in household asset allocation.

The East-rise-West-fall framework is sound, but the rapid advancement of stablecoins has led to a new judgment: the dollar's control may not decline as quickly as we expected.

From a first-principles perspective, wealth cannot be created out of thin air—it can only be transferred. And wealth transfer is the fastest way to get rich.

We all know that since 1980, the world has experienced four dollar cycles. Each cycle was accompanied by a financial crisis and a wealth transfer. This time, the wealth transfer brought by stablecoins will exceed the total of the previous four dollar cycles.

Stablecoins, as they currently appear, are not much different from WeChat Pay or Alipay—essentially a 1:1 relationship with fiat currency. If dollar-backed stablecoins circulate globally, they will seize the monetary sovereignty of small and medium-sized countries, and even the yen and euro may not be spared.

This super blood pack could extend the dollar's lifespan by another decade.

Currently, the process for ordinary citizens to hold dollars is cumbersome, requiring bank exchanges and often facing cross-border restrictions, with SWIFT transfers being slow and expensive. But stablecoins bypass these issues—investors can transfer funds across borders with a few taps on their phones, with near-zero fees. Without restrictions, stablecoins will first gain popularity in high-inflation countries like those in Latin America and Turkey, then spread elsewhere.

The spread of stablecoins is similar to the adoption of mobile payments. But any financial innovation must be anchored to core underlying assets. Dollar-backed stablecoins will create massive new demand for dollars, possibly leading to deflation. If combined with rate cuts and quantitative easing, the dollar could thrive again.

So this East-rise-West-fall scenario may result in: "When Wanglaoji and Jiaduobao fight, Heqizheng loses." The underlying assets of stablecoins can only be two: the dollar and the yuan.

Regardless of the specifics of East-rise-West-fall, the starting gun will be the Fed's rate cuts, a new round of liquidity, a rally in Hong Kong stocks, and then a main uptrend in A-shares.

Before the starting gun fires, this dead dog market may persist for a while.

As for the shift in household asset allocation we often mention, look at the chart above from Huachuang Securities' fixed-income team. The coupon rates for newly issued industrial bonds, a representative of credit bonds, have fallen below 3% in 2025. Although these issuers are high-quality, over a 10-year horizon, is a risk premium of less than 3% really justified?

This shows that after the real estate and infrastructure boom, the real economy struggles to find underlying assets with returns above 5%. Thus, households must and will shift assets to stocks—all that's missing is a wealth effect.

Finally, back to T God's book. T God always emphasizes valuation. **Objectively speaking, apart from the Shanghai Composite and CSI 300, A-share valuations are not low, and bubbles may even exist.**

But T God also said, "Free money, or at least loose monetary policy, is a prerequisite for every bubble." At least for now, it's too early to talk about bubbles.

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