How does the crypto industry respond to a pullback?

Because in the crypto and stock markets, whether prices are rising or falling, it is not a straight-line process. After a stock rises, there will be a pullback, meaning it goes up a bit and then drops again. Many people feel confused during this decline, unsure whether to continue rising or start falling, and at this point, everyone is hesitant.

Many start predicting stock prices, and some get tangled: if I sell now and it suddenly surges, I will face the fear of missing out; if I don’t sell, I worry about the continued decline. These two fears are different in nature, but both are human fears.

Others are in a cash position, seeing stocks go up but missing the chance to buy at the low point, and when it pulls back, they consider whether they should enter the market. If they don’t buy, what if it goes up again? If it continues to fall, they can buy at a lower price. So greed and fear have always been troubling them.

But as a value investor, I believe we shouldn’t just focus on the stock price because what is the benefit of value investing? We walk on two legs: on one hand, we look at the stock price, and on the other, we look at the company’s value. When we initially bought this company, we bought at a low price, with a margin of safety, ensuring its value is higher than its price. From a capital perspective, the risk is greatest at the time of purchase because you have spent a lot of time researching one or two stocks, waiting for their prices to be very low, which costs a lot of time and effort. Therefore, after buying, don’t sell casually.

The standards for holding are different from those for buying. When holding, you don’t need a margin of safety, just ensure the price isn’t ridiculously high, and you should continue holding. Quality stocks are often overestimated, and their prices may be higher than their intrinsic value. If you sell because of this, you might not be able to buy back, or you might miss the buying opportunity, ultimately leading to missing out in a bull market, which is the biggest risk in a bull market. As mentioned earlier, many people end up losing stocks they bought, and this is the greatest risk in a bull market, so everyone should be cautious.

So how to hold? Now, when encountering a pullback, this is a very typical example. How should we respond during a pullback? What should our mindset be? Actually, this is not that complicated. What do we need to pay attention to? For value investors, we only buy or hold, and should not focus on the stock price pattern. We have already discussed in a separate episode when to sell, so what are the standards for selling?

The first is active selling, which refers to selling when you have judged incorrectly or when the company’s fundamentals change. In this case, regardless of the stock price, you should sell all at once. Because your understanding is flawed, just sell immediately, whether during a pullback or at other times. Don’t wait for a rebound to sell, or sell during an uptrend, downtrend, or sideways movement—anytime. If you find that your fundamental judgment was wrong, or the fundamentals have changed, or the initial buying conditions no longer apply, you should sell immediately.

The second reason for selling is what I mentioned in this series: you bought the stock correctly, and it has been rising. When it reaches a certain level and becomes somewhat unreasonable, you sell. For example, Moutai’s reasonable price-to-earnings ratio is 30 to 40 times; if it rises to 70 times, I think you still shouldn’t sell because it is often overpriced. Good stocks are often valued higher because everyone is paying attention, which is normal. But if it rises too ridiculously, say to 150 times, then you might need to sell some.

So if it rises very high, you sell. Pinduoduo was the same; when it got too high, you had to sell, maybe 20% or 30% of your holdings. If Moutai continues to rise and reaches a PE ratio of 200, I sell again. If the stock falls, say from 200 times to 150 times, I won’t sell. Because I didn’t sell because the company was bad, but because the price was too high. In fact, the price decline from 200 to 150 times is not enough to sell. You don’t necessarily have to buy back because 150 times isn’t low, but at least you won’t sell.

Therefore, as a value investor, you shouldn’t sell during a pullback. If you are a steadfast value investor, you shouldn’t sell. When should you sell? When the stock is rising. You can consider selling, although you can’t sell at the very top. But as long as the price is too high, you should sell part of it. If the price stops rising, you don’t need to sell anymore. It’s very simple.

If the pullback is very deep, say it drops back to a PE ratio of 20–40 times, then you should buy. If the pullback is large and returns to this reasonable PE range, you might buy more to average down. Even at 50 times, you can buy back. Why? Because when you sold the stock initially, you had some cash. During the decline, you just buy back. Selling when the PE is high and buying back when it is low is called averaging down, not buying anew. Although the action is buying, the idea is that you never owned this stock before; you buy when it is below the safety margin.

No matter the reason—whether Moutai suddenly drops, or the crypto or stock market declines, or the plasticizer incident back then—if its PE ratio drops to 15–20 times, or even 25, you should buy. This indicates a margin of safety. So the principle is: don’t sell during a pullback; sell when the price is too high; and if the decline is deep, consider buying back because your initial sale was not because the company was bad, but because the price was too high. When it falls sharply, you should buy back, so you won’t miss out. The number of shares can return to the original amount; in the market, making money depends on price difference or on the number of shares.

Many people say, “My stock has risen 100 times, but I only bought one share,” which is very tragic. In the crypto and stock markets, the most important thing is not to lose your stocks. When you watch the series about selling, you will see that when the PE ratio is very high, you sell; when it is low, you buy back. If the company is fundamentally good, you can hold on. This creates a passive strategy of selling high and buying low, rather than a predictive one. When you think it has peaked, you sell. This is passive: high PE ratio, sell; low PE ratio, buy back.

If you have good stocks like Moutai, don’t sell easily. Like Mr. Yuanlin, the so-called stock god, who bought stocks in 2003—almost 20 years ago—and still hasn’t sold. Moutai also has a very high price; he has held it all along. Does he not know it is overvalued? Moutai has gone through many pullbacks. Have you seen him sell? Not once. He has never sold a single share. This is an example set by the stock god. I also explained the reason behind it. So what you are doing here is a passive high sell and low buy strategy: when the valuation is high, buy more to lower your average cost.

And you haven’t lost your stocks. Losing stocks means you have to spend more time finding new stocks and waiting for the margin of safety again. Finding stocks requires skill, and in a bull market, waiting for the margin of safety might not even be possible. I mentioned before that in a bull market, high-quality stocks are often overvalued, and without a margin of safety, chasing high is unwise. Chasing high is not a good habit. Buying stocks at overvalued prices is also not ideal. That’s why good stocks should not be discarded lightly.

In this situation, you should not sell during a pullback. To reiterate, we should sell at high prices and not sell at low prices. This answers the question of this netizen: a good stock should not be sold during a pullback. But it might fall further, which is possible. You cannot predict the crypto or stock market. The only thing you need to consider is not to sell your stocks easily.

Once the price becomes absurd, sell it—if the price continues to be absurd, keep selling. Ultimately, if the market’s frenzy exceeds your expectations, you will naturally sell all your stocks. In such cases, if the stock declines, you can add some positions, forming a natural low-buy high-sell strategy.

Some stocks have shallow pullbacks but last a long time. Besides the magnitude, time is also an important factor. During a prolonged pullback, you need to consider how to view quality companies in a sideways market. The stock price may not rise, but the company keeps earning money, making a lot of profit. For example, if you spend 1 million to buy a restaurant, and it is for sale at 1 million but no one wants it, yet the restaurant earns a few percent annually, and the profit is stored in a safe.

You might not have cash now, or you may not want to buy, but you definitely don’t want the stock price to go up. You hope it stays sideways, with no price increase, while the company continues to generate profits and store the money in the safe. That’s great—sooner or later, it will go up. If I were you, I would buy this stock and hold it, waiting for it to rise. Why? Because it earns money every year, like a stationary car that keeps adding fuel to the tank. The car will move eventually; it’s just a matter of time.

Why can a person see what others cannot? Because of this—when analyzing problems, you need to see movement within stillness. That’s your superpower. It sounds profound, but it’s actually simple: just look at its profits. Has its gross margin changed? Is its gross margin increasing? Is its profit increasing? If profits are increasing and the stock price isn’t rising, that’s the best scenario. So why worry? Just keep buying, or at least hold and not sell.

You must have patience. When other stocks rise, don’t chase high by buying others’ stocks. Ultimately, this exposes you to unnecessary risk. You might also lose your golden rice bowl. Therefore, I want to clarify: regardless of the duration or magnitude of the pullback, as a value investor, you should not sell during a pullback. Stocks might fall again, but that’s okay. You should not sell when the stock price is falling; you should sell when the PE ratio is very high during an uptrend.

If the stock continues to fall sharply, and you sell what you previously sold, then buy back, this achieves a high sell and low buy effect, reducing your cost and increasing your stock holdings. When the stock finally rises, you profit from the space of the decline, while lowering your cost. This way, the number of shares you hold increases compared to before. Isn’t that a good thing? So don’t worry about the so-called phenomenon of a pullback.