How to Say Goodbye to "Making Quick Money and Losing Big Money"? Follow the Long-Term Trend, Go Against Public Opinion in the Short Term! KuanDe Investment: Be a "Contrarian" in Investing

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In long-term investment practice, the counter-cyclical thought deserves further recognition and understanding.

For most investors, broad-based investment, short-term counter-cyclical, and long-term pro-cyclical are precisely a junction of long-term investment, rational investment, and value investment in practice.

Why is it necessary to discuss pro-cyclical and counter-cyclical?

We often feel that during phases when the market performs well and expectations converge, investment decisions typically become easier. Price increases provide more intuitive positive feedback, and allocation actions are more easily driven. Therefore, whether individual investors increase their exposure to risk assets or institutions find it easier to promote product fundraising when the market environment is relatively smooth, this reflects a strong pro-cyclical characteristic.

This pro-cyclical tendency is not solely driven by emotion; there is also a certain realistic basis behind it.

There is indeed a degree of trend continuation phenomenon in the market: assets that have performed strongly in the past may still maintain relative strength in subsequent periods. Thus, the appeal of being pro-cyclical is not just because it aligns more with intuition, but also because it can indeed provide a better short-term experience during certain phases.

However, the problem is that the phase where it is “easier to make decisions” in the short term may not necessarily be the phase that offers the most attractive risk compensation in the long term. The reason is that when expectations are more consistent, trading is more crowded, and risk appetite is higher, asset prices often have already reflected a lot of optimistic expectations, and the risk compensation that can be obtained in the future may shrink relatively. If one continues to add positions in this phase, the risk exposure in the same direction in the portfolio may accumulate more quickly, and once the market environment changes, volatility and drawdowns can also be amplified more easily.

Therefore, our discussion of counter-cyclical thought is not to deny the existence of trends, nor is it to simply advocate “doing the opposite of the market.” Its more important meaning lies in establishing a relatively stable allocation discipline in long-term investment: maintaining necessary restraint when the market is more favorable, avoiding letting short-term performance dominate long-term decisions; and when market divergences increase and risk compensation changes, still being able to advance allocations based on established principles, rather than being completely led by short-term emotions and fluctuations.

In this sense, counter-cyclical thought is primarily a discipline that constrains pro-cyclical inertia. What it seeks to address is not “who can better predict the market,” but how to keep the arrangement of funds, allocation principles, and risk boundaries consistent under different market conditions.

Why does the investment experience often begin as “easy” and later become “difficult”?

From the perspective of market rules, pro-cyclical strategies often appear “easier” during many phases not only because investor emotions are high, but also supported by ample empirical research.

Research on cross-sectional momentum by Jegadeesh and Titman (1993), and time-series momentum by Moskowitz, Ooi, and Pedersen (2012), both indicate that assets that have performed strongly over a certain period may maintain relative strength in subsequent periods. This suggests that there is indeed a degree of trend continuation phenomenon in the market, and pro-cyclical strategies can achieve good short-term experiences during certain phases, which is not entirely without basis.

However, it is also necessary to recognize that trend continuation does not imply that trends can be simply and continuously extrapolated. Further research, such as that by Daniel and Moskowitz (2016), also suggests that the returns of momentum strategies are significantly state-dependent: they tend to perform better when trends are clear and markets are relatively stable, while rapid reversals following large market fluctuations are more likely to experience concentrated drawdowns. In other words, the issue with pro-cyclical strategies is not whether they are effective during certain phases, but rather that this “effectiveness” itself is unstable; once market conditions change, the gains accumulated by relying on trend continuation may be significantly given back in a short time.

For individual investors, this “easy first, difficult later” experience is often further amplified by behavioral biases. The positive feedback during the initial profit phase easily reinforces the feeling of “current judgment being correct,” leading investors to interpret temporary trends as more certain trends; however, when trends begin to weaken or even reverse, adjustment actions often do not happen as promptly. Existing unrealized gains can raise psychological reference points, making drawdowns easier to perceive as “losses of profits already in hand”; meanwhile, behavioral biases such as loss aversion can cause investors to hesitate when they should exit and to delay when they should control risks. As a result, pro-cyclical strategies not only amplify dependence on trends but also easily heighten reliance on existing profit conditions.

Thus, many investors face not a continuous, smooth path of pro-cyclical profits, but rather an experience of rapid initial profits followed by concentrated risks: it is easier to gain positive feedback in the initial phase, and it is also easier to form a subjective impression of “strategy effectiveness”; but once trends reverse, risks will often be quickly exposed, and prior gains may be significantly given back in a short time. The most concerning aspect of pro-cyclical strategies is not whether they initially appear “effective,” but whether this short-term ease will unknowingly deepen the portfolio’s reliance on a single market direction and reduce investors’ sensitivity to changes in risk boundaries.

This point is especially important for long-term investment. Without constraints on position size, exit, and allocation rhythm, pro-cyclical strategies can easily evolve from a temporarily effective allocation behavior into passive followings of short-term market emotions. For most ordinary investors, the real challenge often lies not in recognizing the trend itself, but in still being able to act according to established rules when the trend changes. For this reason, discussions about pro-cyclical and counter-cyclical strategies cannot merely rest on simple right-or-wrong judgments, but need to further integrate different targets and holding periods for understanding.

Pro-cyclical and counter-cyclical choices under different targets and periods

Pro-cyclical and counter-cyclical strategies cannot be discussed abstractly without specific contexts. Only by combining target types and investment cycles can their return logic, risk characteristics, and applicable boundaries become clearer. Therefore, it is necessary to examine relevant behaviors within the dimensions of “target type—investment cycle—pro-cyclical/counter-cyclical.”

Within this framework, there is no absolute superiority or inferiority between pro-cyclical and counter-cyclical strategies; rather, in different “target—cycle” combinations, they correspond to different sources of returns and primary risks. Generally speaking, pro-cyclical strategies rely more on price continuation and mainly bear the risk of concentrated releases during trend reversals; counter-cyclical strategies rely more on price returning to the mean or emotional recovery and primarily face risks where the duration of irrationality may exceed expectations, and the allocation process may be under prolonged pressure. The more common investment scenarios can be summarized into the following categories:

(1) Individual stocks or broad-based indices × Short-term × Pro-cyclical. This combination most easily manifests as chasing highs and cutting losses. In the short term, prices are more easily influenced by emotions, liquidity, and trading congestion, rather than being driven solely by fundamental changes. Relevant research repeatedly shows a significant reversal phenomenon in short-term markets; in such environments, if investors further add excessive trading and emotional decision-making, returns can easily be significantly eroded. For most ordinary investors, this is typically not a combination with a high win rate.

(2) Broad-based indices × Long-term × Pro-cyclical. This combination often requires investors to have a profound judgment about medium- to long-term social and economic changes, and to enter at relatively reasonable price levels, then persist long-term to ride through short-term market fluctuations. What it aligns with is not the short-term market itself but rather the longer-term economic growth and market evolution direction, which is usually a relatively reasonable long-term investment approach.

(3) Individual stocks × Long-term × Pro-cyclical. This is a high-risk, high-reward investment method. It requires investors to conduct continuous and in-depth research on companies, forming strong judgments about industry competition patterns, corporate quality, and potential risks, while also having the ability to withstand significant volatility and losses. In the long run, wealth creation within a single industry is often concentrated in very few companies; those that can continuously excel are usually just a handful of leading firms, while most participants may not be able to realize their initial growth expectations. For this reason, if one lacks sufficient research and selects stocks in a relatively dispersed or nearly random manner, the probability of achieving unsatisfactory results is often higher. In this sense, individual stocks in a long-term pro-cyclical strategy are essentially a low win rate, high payout, and high-risk investment approach that requires extremely cautious participation.

(4) Individual stocks or broad-based indices × Short-term × Counter-cyclical. This combination is often easier to profit from, although it may still bear some short-term pressure in the execution process; its logic is exactly the opposite of “individual stocks or broad-based indices × short-term × pro-cyclical.” This approach can particularly be combined with “broad-based indices × long-term × pro-cyclical” as one of the entry methods for long-term broad-based investment. For individual investors, this combination of “long-term pro-cyclical and short-term counter-cyclical” is usually more feasible than purely following short-term trends.

(5) Individual stocks or broad-based indices × Long-term × Counter-cyclical. This approach is not a common mainstream investment direction; it is more akin to crisis investment or a supplementary allocation aimed at extreme situations. It typically does not bear the primary source of returns in the portfolio but is used to improve the overall performance of the investment portfolio when significant changes in cycles occur or when a clear trend reversal happens. Functionally, it is more suitable as a supplement to mainstream investment tools rather than a core allocation, so its actual proportion is often relatively small.

Overall, for individual investors, what is more worthwhile to adhere to is not simply moving with the market or mechanically opposing the market, but rather establishing a more stable investment discipline between long-term and short-term, direction and price. Based on broad-based investment, complying with the long-term attributes of risk assets, while using counter-cyclical methods to constrain chasing highs and cutting losses in the short term, is often a more feasible path. To some extent, broad-based investment, short-term counter-cyclical, and long-term pro-cyclical represent a junction of long-term investment, rational investment, and value investment in practice.

The practical implications of counter-cyclical thought in long-term allocations

What counter-cyclical thought truly aims to solve is not how to accurately judge tops and bottoms, but rather: how to reduce the mismatch between fund behaviors and changes in risk compensation.

Risk compensation is not fixed. Classic research represented by Fama and French (1989) shows that variables such as valuation levels, credit spreads, and term spreads often reflect the characteristics of expected returns on risk assets changing with market conditions: when valuations are more compressed and credit spreads and term spreads are higher, the subsequent medium- to long-term expected returns of risk assets are usually higher; whereas when market expectations are more consistent, valuations are high, and risk appetite is strong, future risk compensation tends to converge. From a market structure perspective, research on intermediary asset pricing further points out that when the capital that bears the risk allocation function is passively contracted during pressure phases, and the market’s marginal risk-taking capacity decreases, the market often needs to offer higher compensation to attract long-term funds back into participation; when constraints ease, this part of the compensation gradually falls back.

However, in reality, fund behaviors often do not unfold along this rhythm. On the contrary, funds are more likely to concentrate their exposures during phases that are “easier to make decisions,” while reducing participation during phases that “require more patience.” As a result, the holding path that investors ultimately experience often does not equal the long-term return path of the assets themselves, but rather overlays the additional disturbances brought about by concentrated fund inflows and outflows.

In this sense, counter-cyclical thought resembles a mechanism for smoothing allocation rhythms. It does not deny trends, nor does it require investors to act against the market at every stage; rather, it emphasizes maintaining a sense of boundaries when trading is more crowded, expectations are more consistent, and risk compensation may be relatively thin; and when volatility increases and divergences rise, it also enables the advancement of allocations based on more stable rules, rather than completely losing sight of long-term perspectives due to deteriorating short-term experiences.

Therefore, the practical implications of counter-cyclical thought in long-term allocations are not about “anti-market,” but “anti-inertia.” What it seeks to counteract is a natural but not always beneficial behavioral pattern for long-term outcomes: overdoing it when the market is favorable and doing too little when the market is unfavorable. Only through smoother allocation arrangements, more regularized entry and rebalancing, and more consistent timelines and communication can investors attempt to control the disturbances of short-term emotions on long-term outcomes within acceptable limits.

From the perspective of investor education, this point is particularly important. Long-term investment does not mean completely ignoring short-term prices, nor does it mean taking the same action in every market phase. A more reasonable understanding is that long-term investment emphasizes determining direction based on long-term logic, while counter-cyclical discipline seeks to minimize the losses caused by behavioral biases and timing mismatches at the execution level. The two are not contradictory; rather, they complement each other.

The manifestation of counter-cyclical thought in fundraising

If the aforementioned logic is further extended to institutional practices, it becomes evident that counter-cyclical thought applies not only to the allocation decisions of individual investors but also to product fundraising, capacity management, and supply arrangements.

The reason is that investors’ real experiences depend not only on the long-term performance of the assets themselves but also on the stage at which the funds enter the portfolio. Even if the strategy itself is relatively stable, if products are more likely to concentrate and expand during phases of high market sentiment and significantly increased risk appetite, then the entry price, phase of position building, and subsequent holding experience of investors will all be affected. In other words, the pace of fundraising itself can shape the return paths that investors actually experience.

This is also why, for counter-cyclical thought to be truly implemented, it must not remain at the conceptual level but should also be reflected in institutional arrangements on the supply side. Specifically, when markets are more favorable and expectations are more consistent, it is necessary to maintain necessary constraints on product capacity and promotion pace to avoid the simultaneous expansion of scale and risk exposure in the same direction; when market volatility rises and divergences widen, clearer timeline arrangements, more consistent communication standards, and smoother fundraising rhythms are needed to reduce the interference of fund behaviors on allocation execution.

The purpose of these arrangements is not to pursue the “best sales timing” at any given stage, nor to deliberately oppose the market, but to ensure that fundraising activities align with allocation principles and risk boundaries. The smoother the market, the greater the need for rhythm; the hotter the market, the greater the need for boundaries. Only when capacity management, supply arrangements, and long-term allocation disciplines are mutually aligned can counter-cyclical thought become more than just a slogan, but truly improve investors’ long-term holding experiences.

The value of counter-cyclical thought

Ultimately, the value of counter-cyclical thought lies not in its ability to eliminate market volatility, nor in its capacity to help people accurately judge tops and bottoms, but in its ability to help investors and managers continuously constrain pro-cyclical inertia under different market conditions, reducing the repeated accumulation of short-term emotions and behavioral biases in the long term. What it emphasizes is not simply “doing the opposite,” but maintaining boundaries when the market is smoother and adhering to discipline when the market is tougher, ensuring that fund arrangements, risk-taking, and long-term goals remain consistent. To some extent, true long-term investment is never about constantly doubling down during pro-cyclical times and retreating during counter-cyclical times; rather, it is about maintaining a set of allocation principles that are not excessively swayed by emotions amid cyclical changes. The significance of counter-cyclical thought lies precisely in this.

The content of this article is based on Kuande Investment’s understanding and discussion of counter-cyclical fundraising and related concepts and does not constitute any investment advice regarding its funds.

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