Pursuing Stability: Investment Summary for 2025 and Outlook for 2026

Pursuing Stability: 2025 Investment Summary and 2026 Outlook

As the year comes to a close, it’s customary to reflect on investments made over the past year and look ahead to the next. This year was primarily focused on fully rotating into convertible bonds. Even with some cash from dividends, I reinvested in convertible bonds the next day. By December 31, the combined return across several accounts reached 33.65%. While this performance surpassed the Shanghai Composite Index (18.41%), the CSI 300 (17.66%), and the equal-weight convertible bond index (24.29%), it fell short compared to the micro-cap stock index (80.18%), the ChiNext Index (49.57%), and the North Star 50 Index (38.80%). The initial goal was to outperform the equal-weight convertible bond index by 10 percentage points, which was achieved by early December, but the negative excess return in December ultimately undermined this achievement. Overall, while the absolute return was decent, the relative performance was rather mediocre.

This mediocrity is rooted in historical context. I began investing in 2007, and over the past 19 years, my returns compared to the CSI 300 index are summarized as follows:

Looking at the overall return, while I significantly outperformed the CSI 300 index, the mystery lies in the historical market conditions. Over the 19 years, there were exactly 10 years of bull markets and 9 years of bear markets. If we separate the data accordingly, the results are as follows:

From the classification statistics, during the 10 years of bull markets, my returns were roughly in line with the CSI 300 index. However, when comparing to the total return index with dividends, I slightly underperformed. The key to my overall outperformance was not during the bull markets, but rather during the bear markets. On average, the CSI 300 index declined by 23.47% annually during the 9 bear years, while I not only avoided losses but achieved an annualized return of 6.05%. This was crucial in my ability to significantly outperform the market over these 19 years.

So how did I achieve this? It’s evident that I didn’t directly invest in stocks often throughout those 19 years. From 2016 to 2020, my annualized returns were only 13.85%, while the CSI 300 index had an annualized return of 6.91%. Although I achieved excess returns, they were not substantial. The first two years utilized a small-cap strategy, while the latter three employed a blue-chip strategy. The small-cap strategy was a quirk of the A-shares market, but in 2017, it coincided with a year of large-cap stocks, resulting in a return that lagged behind by 14.08%. This was one of the few years I underperformed, aside from 2009.

In addition to these five years of stock strategy, I invested in niche categories known as the “Four Kings”: closed-end funds, pure bonds, class A shares, and convertible bonds. These options share a common trait: they possess a natural advantage over direct stock investments. For instance, when I began investing in closed-end funds at the end of 2006, the discount rate was as high as 50%. This meant that, for example, if you bought a stock like China Merchants Bank at 20 yuan, and it halved to 10 yuan after six years, you would incur a 50% loss. However, a closed-end fund that reached maturity six years later at a 50% discount would have allowed you to indirectly hold shares in China Merchants Bank, as the discount would disappear when it transitioned to an open fund. Thus, despite the stock’s decline, you wouldn’t have lost money in the closed-end fund due to the discount rate decreasing from 50% to 0%. While I use this example to illustrate a point, it’s understood that closed-end funds do not only invest in one stock.

Thanks to the inherent advantages of these four categories compared to direct stock investments, I significantly outperformed the CSI 300 index during the nine years of bear markets. Particularly after 2021, I made a critical switch from heavily investing in blue-chip stocks like Kweichow Moutai to convertible bonds. Recently, I came across a conversation between Duan Yongping and Fang Sanwen, where Duan mentioned that when the price of Moutai reached 2600 yuan in 2021, he felt it was expensive but couldn’t find a better alternative, so he held onto Moutai. Many who sold Moutai to invest in other stocks during that time have since incurred losses far beyond that of Moutai, leading Duan to believe that holding Moutai was the better decision.

Fortunately, I found convertible bonds at that time. Although I had previously engaged in convertible bonds, the limited number of options made it difficult to leverage quantitative investment advantages. By 2021, there were over 300 convertible bonds available, and I spent several months backtesting them, concluding that their value far exceeded that of Moutai at the time. Although I sold Moutai when its price had already dropped to 2000 yuan, it is now below 1400 yuan. Since 2021, the returns on my convertible bond investments have exceeded 150%.

Although my returns in recent years have far outpaced those from holding Moutai, it does not imply that my understanding surpasses that of Duan. While my capital is not insignificant, it pales in comparison to his, and my amount allows for rotations that yield excess returns in convertible bonds, which is not feasible with his substantial funds. This highlights that there are still niches in the A-share market suitable for smaller investments, providing opportunities and advantages for smaller investors.

In the past five years, the CSI 300 index has declined for three years, yet I have maintained a positive return each year, primarily due to my choice of convertible bonds. Their asymmetric price movements help minimize losses or even prevent them during bear markets. For instance, if a stock rises by 1%, the convertible bond may rise only 0.6%. Conversely, if the stock declines, various protections may limit the bond’s drop to 0.4%. Hence, while convertible bonds may struggle to outperform the market during bull markets, the bear market percentage is notably high. I have experienced 9 bear years out of 19, nearly half of the time. Therefore, a rotation strategy in convertible bonds is particularly suited for the A-share market.

However, there are pros and cons. Selecting products suitable for retail investors with a relatively conservative strategy is fundamentally why I have significantly outperformed the CSI 300 index over the past 19 years, while also leading to mediocre returns in bull markets, especially during strong rallies. This year’s mediocre return is ultimately a result of this long-term approach, but I do not regret it. For someone of my age, a more conservative stance is increasingly appealing.

After discussing the past year, there isn’t much to say about the current year. This year has been one of maturity in strategy, largely spent in a fully invested rotation of convertible bonds. Although the maximum drawdown calculated from March 18 to April 7 was -8.50%, and the day after Trump initiated the tariff war saw a -5.69% drop, monthly calculations indicate that only in April did I experience a slight loss of -0.13%. The other months yielded positive returns.

This year has been marked by gradual growth, resulting in a particularly calm market. The only adjustment made to the strategy was changing the fixed threshold in the convertible bond rotation strategy to a floating one.

To explain what a threshold in convertible bonds entails, most convertible bonds have a strong redemption condition that requires the closing price of the underlying stock to be at least 130% of the conversion price for 15 out of 30 consecutive trading days. In other words, if the premium rate is 0, the price of the convertible bond rises from 100 yuan to 130 yuan, increasing the likelihood of strong redemption once it surpasses 130 yuan. Hence, during the convertible bond rotations, it is crucial to set a price limit; the threshold serves as this limit. In the past, during more bear than bull markets, I set it at 131 yuan. The fact that I achieved positive returns, particularly in the 2022 bear market, attests to the rationality of this low threshold.

This year is different; the strength of the bull market is more than anticipated, leading to instances where I could not keep up with the convertible bond equal-weight index. A few months ago, I made a significant adjustment by switching from the fixed threshold to an automatic floating threshold, which is calculated based on the market median. This means that when the market is hot, the threshold rises automatically, and conversely, it lowers in a bear market.

The results from this adjustment have been noteworthy: my actual return stands at 33.65%. Although this year I lagged behind the floating threshold strategy, I still significantly outperformed the previous year’s 131 threshold strategy and the equal-weight convertible bond index. Particularly in the last four months from September to December, my real performance exceeded both the floating threshold and 131 threshold strategies, but in December, due to the surge in high-priced bonds, I lagged behind the equal-weight convertible bond index considerably.

The floating threshold strategy essentially acts as a buy-high-sell-low strategy. As the median increases, indicating a hot market, many well-known investors tend to reduce their holdings as the median rises. Why, then, do I still automatically increase the threshold? The crux of the matter is that historical highs and lows are merely historical and do not predict future performance. When Moutai reached 2600 yuan, many expected it to reach 3000 or higher, but the peak at 2600 is only clear in hindsight. Just like during the 2007 bull market, many experts began to reduce their positions at 3000 points, only for the market to climb to 6400, with some proclaiming that 10,000 points was not a dream. While preemptively reducing positions isn’t wrong, gauging the right degree is challenging. Fortunately, the decline in convertible bonds is far less than that of stocks, which is why I adopt a full-rotation strategy. In essence, it’s about accumulating sufficient profits and preparing for downturns. I avoid making short-term judgments on bulls and bears, as we retail investors often lack the ability to predict. Thus, I concentrate my focus solely on one indicator: the equal-weight convertible bond index. As long as I can exceed the equal-weight convertible bond index by 10 percentage points every year, even if I encounter a bear market like 2022, where the equal-weight index dropped -6.47%, I can still maintain a positive return—albeit a reduced one. This small margin is especially precious in a bear market like 2022.

Consequently, my investment strategy is straightforward: I benchmark against the equal-weight convertible bond index, striving to beat it by 10 percentage points each year. I do not need to concern myself with other market fluctuations. Although this year I only exceeded the equal-weight convertible bond index by 9.36%, it is still quite close to 10%. Had I adhered to the original 131 threshold strategy, my performance would have been nearly in line with the equal-weight convertible bond index, and I would not have exceeded 30%.

Compared to professional convertible bond funds, this year, my returns surpassed over 90% of convertible bond funds among 75 options. While my scale is not as large, it demonstrates that individual investors can leverage their advantages in this field, proving that amateurs can indeed outperform professionals.

In summary, this year’s results are a simple reflection of the accumulated experience over 19 years. Looking ahead to the new year 2026, the Shanghai Composite Index and the CSI 300 Index have both risen for two consecutive years. Historically, the CSI 300 index has never seen three consecutive years of increases, and the Shanghai Composite Index has only achieved this from 2019 to 2021. As investors, we naturally hope for continued growth in the upcoming year. However, I sense that 2026 will not be as stable as 2025. Personally, I will continue to invest conservatively in convertible bonds. The truth is often harsh, and the facts can be unpalatable. It’s essential to be prepared for multiple outcomes.

Finally, I would like to summarize my investment philosophy in a few points:

• Do not shy away from learning from every investment master, but do not follow blindly, even when it comes to Buffett.
• Find investment products and strategies that suit retail investors, as outperforming professionals is possible.
• When faced with issues, look for reasons within yourself rather than complaining, as complaints solve nothing.
• Choosing is more important than effort; what matters most is learning to make better choices.
• Prioritize breadth over depth, and diversification over concentration; this approach suits most retail investors.
• Practice is the only standard for testing the truth; quantitative models at least replace our experiences accumulated with real money.

I wish everyone a smooth investment journey and success in 2026!