The year of the Snake has ushered in a renewed sense of enthusiasm within the A-share market, ignited by a confluence of favorable developments such as the soaring popularity of the DeepSeek concept and the impressive box office success of the animated film "Nezha." This positivity has significantly heightened the atmosphere for investment, leading to observable profit-making opportunitiesMarket behavior has shifted, and investors are actively engaging, drawn by optimism and the potential for financial gain.

Recent statistics reveal the scale at which this enthusiasm has influenced the marketSince the arrival of the year of the Snake on February 5, the Shanghai Composite Index has risen by 2.96%, while the Shenzhen Component Index surged 5.84%, and the ChiNext Index, which includes China's NASDAQ-style stocks, climbed by 7.34%. In a broader context, Hong Kong's stock market has been even more vigorous; since February 3, the Hang Seng Index has soared by 11.64%, accompanied by a remarkable 16.69% gain in the Hang Seng Tech IndexThese figures illuminate a striking period of recovery and growth, suggesting a robust appetite for investment across the board.

Stock markets, fundamentally, encapsulate the collective value of a country’s most exemplary enterprisesIdeally viewed as a positive-sum game, the market can often devolve into a zero-sum or worse scenario due to excessive trading and speculative behaviorThis divergence raises a pressing question: what siphons off the potential profits for average investors? Investment mogul Warren Buffett encapsulates this conundrum with his "4E" principleHe argues that "expenses" and "emotions" are the principal adversaries of equity investors, often impeding their ability to realize the full benefits of their investments.

From a strictly economic perspective, historical data underscores this pointFor instance, the U.S. stock market has generated an annualized return of about 9% for investors over the past century, a figure that similarly aligns with the returns seen in the A-share market over the last two decades

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Yet, many investors perceive their actual returns to be significantly lower than what the stock market ostensibly offersThis disparity is largely attributable to the staggering trading costs stemming from high turnover rates and untimely market entries and exits.

To illustrate this, one needs to examine the earnings of A-share companies over the past 20 yearsThese firms have collectively seen their profits surge by 7.4 times, reflecting a compounded annual growth rate of 10.56%. In stark contrast, the profit figures for 2004, standing at 145.8 billion yuan, jumped to 1.2327 trillion yuan by 2023. The data suggests a healthy growth trajectory from the foundational economic activities of these enterprises.

In a comparable time frame, the U.S. stock market's annualized returns from its listed companies hover around 9.5%. Research by John Bogle, founder of Vanguard Group, confirms that from 1900 to 2016, the U.S. stock market yielded an average annual return of around 9%, consisting of 4.4% in dividends coupled with a 4.6% growth rateSuch figures highlight the intrinsic relationship between stock market performance and the underlying corporate fundamentals over time.

However, volatility often distracts investors from this long-term perspectiveStock returns are invariably tied to the long-term performance of the corporations underlying those stocksAs historical data shows, speculative gains can skew perceptions; they can be either positive or negative, contingent on what investors are willing to pay for expected returns during a given time frame.

Given that 9% represents a century-long average annualized return in the U.S. stock market, one can deduce that average transaction costs of around 6% effectively halve the actual profits that investors could glean from corporate earningsThis scenario holds especially true in the A-share market where, incredibly, the turnover rate in 2021 for the ChiNext index was a staggering 3934%. With transaction fees calculated at roughly 0.03% from a single trade and an additional 0.1% for stamp duties on both buy and sell orders, the cumulative trading costs can eclipse 6.29% for the most actively traded stocks.

Even though these transaction costs might appear negligible on a per-trade basis, compounded over years, they can significantly frustrate investors' profit margins

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A long-term annualized return of 9% can quickly be diminished to around 3% when accounting for these costsWhile many investors might cling to the belief that their returns will exceeding this threshold, the reality is grim, with only a select few managing to consistently outperform the market over prolonged periodsThe bulk of investors fall well short of achieving an annualized return matching the market average, and many face transaction costs that exacerbate this shortfall.

Emotion represents another potent adversary in the investor toolkitPeaks in market performance are frequently the product of rampant speculation, where exuberant buyers prop the prices to extraordinary levels—a scenario fraught with riskFollowing trends, particularly investing in hot sectors or high-flying stocks, often proves to be a perilous endeavorHoward Marks, the chairman of Oaktree Capital, encapsulated this notion during the Internet bubble of 2000: “I have no doubt that these developments are profoundly altering life as we know it, but I must tell you that a skeptical view is warranted.”

Shortly after Marks issued this memo in January 2000, an unceremonious collapse began to unfold in the technology sector, even absent any identifiable catalyst to precipitate the downturnAs investment enthusiasm waned, many of the once-prominent stocks plummeted 90% or moreGreed, excitement, and irrationality coalesced into a speculative frenzy, leading to significant losses as the tech bubble burst painfully for countless investors.

Emotions like envy and jealousy compel investors to chase prevailing trends, often at the expense of sound financial judgmentIn 1990, merely 20% of investment capital was allocated to aggressive growth funds, yet by the peak of the dot-com bubble in 1999, this surged to an astounding 95%. This stratospheric interest in 'hot' sectors leads many, particularly in the A-share market, to overlook valuations—essentially allowing bubbles to form and inflating the prospects for future returns to unsustainable heights.

Retracing to the A-share market’s explosive growth in 2007, we find occasions where bank stocks boasted P/E ratios of 40, while resource stocks reached up to 60. No matter how solid the companies at stake may be, exorbitant valuations necessitate longer durations for market corrections, during which investors remain exposed while they await revaluations.

In 2013, another spike occurred as sectors like “Internet Plus” and mobile gaming faced rampant speculation; however, when the inevitable correction materialized, many had suffered losses exceeding 90%. Recent adjustments throughout 2020 and the ensuing years primarily reflect the saturation of investment in elite stocks, further exacerbated by outlandish valuations lacking a safety margin.

As Howard Marks astutely observed, the difficulty lies in escaping the frenzy when others are buying eagerly whilst maintaining a cautious perspective

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