Value Investing, Contrarian Thinking, and Cycle Cognition: Long-Term Investment Logic

The core of value investing and contrarian thinking lies in “breaking away from the pursuit of short-term consensus and returning to in-depth judgment of intrinsic value.” As pointed out in the value investment discussion at the Snowball Carnival, investors who truly navigate volatile cycles do not blindly follow the trend but seize the moment when “value and certainty resonate”; through diligent research, expansion of competence circles, and dynamic rebalancing, they can both harvest profits when the market is optimistic and dare to increase positions in high-quality assets against the trend during panics, thereby enhancing the stability of the compound interest path [4]. Contrarian thinking also requires maintaining caution when most people are greedy and seeking undervalued targets with sustainable growth when most people are panicking. This strategy of “differentiated risk bearing” can create significant long-term cross-sectional returns during cycle reconstruction.

In the reality of intertwined multiple cycles (such as Kitchin, Juglar, Kuznets, and Kondratieff cycles with different frequencies: inventory-investment-population-technology cycles), value investors with cycle sensitivity can more reasonably adjust positions, valuation margins, and timing judgments. For example, emphasizing cash flow safety during short-cycle inventory adjustment phases, identifying capital expenditure recovery in medium-cycle equipment renewal and real estate cycles, and allocating to core assets with long-term compound interest in long-cycle technological innovations [3]. This approach of replacing linear causal thinking with cycle understanding allows investors to escape the trap of “only looking at current returns” and revise their expectations of risks/opportunities from a higher dimension.

Behavioral finance research reveals that human investors are often led by psychological biases such as loss aversion, overconfidence, attention bias, and confirmation bias: unwilling to stop losses when facing losses, over-chasing recent hotspots, overconfidence in their own judgments leading to frequent trading. Such behaviors not only increase transaction costs but also hinder the allocation of funds to long-term compound interest opportunities and induce short-term bubbles and reversals [1]. On another dimension, emotions (such as fear and greed) drive irrational buying high and selling low, while cognitive biases (anchoring, mental accounting) amplify non-linear market fluctuations, leading to a systematic decline in decision-making quality [2].

To reverse the above drawbacks, investors need to build a judgment framework centered on statistics and probability theory, and accumulate data samples of “asset logic-emotional response-outcome” through extensive reading and review; at the same time, strengthen the identification of their own weaknesses (overconfidence, loss aversion, group conformity), and regularly conduct behavioral “internal self-questioning” to establish discipline (such as setting rebalancing, heavy position risk alerts, and re-evaluation mechanisms after going short) [4]. The cultivation of independent thinking and contrarian thinking also includes: not taking market consensus as facts, seeking certainty in counter-cycles, replacing wrong causal inference with correlation thinking, and maintaining humility, admitting mistakes, and correcting quickly when emotions fluctuate.

Value investing and contrarian thinking are not isolated skills but form the underlying logic of long-term investment together with cycle cognition, psychological cultivation, and continuous learning. Only through the linkage of “rational framework + behavioral self-control + cycle sensitivity” can investors achieve long-term compound interest of high-quality assets and higher-quality decisions in complex and changing markets.

[1] Sina Finance, “A Brief Analysis of the Application of Behavioral Finance in Quantitative Investment”, April 24, 2025, https://finance.sina.com.cn/stock/zqgd/2025-04-24/doc-ineufhcf3801544.shtml?froms=ggmp
[2] OSL, “How Does Psychology Impact the Market”, https://www.osl.com/hk-Hans/academy/article/how-does-psychology-impact-the-market
[3] Guosen Securities, “Exploration of Technology Cycles: Ninth Edition” (PDF), https://pdf.dfcfw.com/pdf/H3_AP202502071642858321_1.pdf
[4] NetEase, “How Can Value Investors Navigate Volatile Cycles?”, https://www.163.com/dy/article/KHFPIH6J0519D8O6.html