Layout Three Undervalued Indices, Steadily Seize the Value Bull Market

The highest realm of swordsmen in Jin Yong’s novels is to abandon all complicated and flashy sword techniques, wielding a heavy Xuan Iron sword, and understanding the truth that “a heavy sword has no edge; great skill appears simple.”

In the long river of A-share investment, the low valuation strategy is exactly such a heavily misunderstood Xuan Iron sword.

Looking back over the past decade of the capital market, we have witnessed too many moments of “sharpness” and their abrupt end. From the surge of leverage funds, to valuation bubbles in core assets, and to the fiery hype of various grand concepts. In this volatile market with frequent style shifts, countless investors favor those prominent sectors, believing that “value investing in A-shares is like chasing a fish up a tree,” and the low valuation strategy is often labeled as “too conservative” or even “unsuitable.”

However, when we clear away the market noise and open a ten-year historical scroll, we see an extremely shocking truth:

When those once highly praised high-valuation sectors experience sharp declines and their sharp edges break, a group of seemingly plain, concept-free indices—such as dividend, free cash flow, and value low-valuation indices—not only prove highly resilient in bear markets but also quietly chart a continuous upward “ten-year long bull” curve over time.

Data source: Wind, total return index, from December 31, 2012, to March 16, 2026

Value investing has never failed in A-shares. What fails are often our biases about the word “value” and the investment discipline lost in frenzy. Today, let us return to basic investment principles, deeply analyze the underlying logic of the low valuation strategy, and understand why this “no-edge heavy sword” can become the ultimate winner in A-shares’ long race.

Finding the “Anchor” of Value: Different Understandings Lead to Different Definitions of Value

We understand valuation from a more unified perspective, with a concise formula: Valuation = Price / Value.

“Price” is a number on the screen, driven by human greed and fear; while “value” reflects the true weight of a company in its business operations. The reason why the low valuation strategy is often misunderstood is that people tend to only see its superficial “cheapness,” ignoring its positive investment significance in seeking different “value anchors.” For example, consider some common valuation indicators:

Table: Typical Value Definitions and Anchors

Investors often look for “value anchors” through cash dividends, free cash flow, net assets, and net profit:

In a macro environment full of uncertainties, financial statements may have room for adjustment, but the actual cash distributed to investors cannot be faked. A dividend-based strategy anchored on cash dividends may seem clumsy—simply “collecting interest”—but its core is an extreme pursuit of “certainty.” It tends to select industry giants that have endured cycles, with restrained capital expenditure, abundant cash flow, and a willingness to generously return dividends to shareholders.

Investing for dividends is not just about seeking high yields; its subtlety lies in identifying the continuity and sustainability of dividend history, avoiding the “one-time dividend trap” caused by asset sales or other偶然因素.

Some investors anchor on free cash flow to explore the true lifeblood of a company. Their logic is that the income statement reflects the “face,” while the cash flow statement reveals the “inside.” Free cash flow measures the “liquid assets” a company can freely allocate after maintaining daily operations and necessary investments. It does not pursue superficial prosperity but demands strong cash-generating ability to convert profits into real cash. This advanced strategy balances “value background” and “growth vitality,” sharply piercing through illusions of “pseudo-growth” with high receivables and thick profits on paper but long-term cash flow drought.

Additionally, net assets and net profit are often used as “value anchors.” The former symbolizes the courage of contrarian investing and perseverance at cycle bottoms; the latter is the most common metric but also the most easily distorted illusion.

When the stock price falls below net assets, it indicates that investors are buying the core assets of the company at a price below replacement cost. This often occurs at the bottom of macro or industry cycles, seemingly “picking up cigarette butts,” but actually representing the most courageous contrarian positioning. However, this requires precise macro cycle foresight, thorough asset quality assessment, and avoidance of “value destruction traps” in sunset industries with permanent impairment risks.

Using net profit and P/E ratio as valuation measures is the most straightforward and widely used method in the market, suitable as a rough reference for broad index allocation. Yet, net profit is easily affected by industry cycles and accounting policies. For example, cyclical stocks often have very low P/E ratios at cycle peaks; blindly buying at such times can lead to double losses when the cycle reverses.

The Art of Rules: Three Classic Indices of “Great Skill Without Art”

Investment philosophy needs a practical carrier. In passive investing, index construction rules are a perfect embodiment of systematizing and disciplining the above philosophies. They lack fancy timing tricks but demonstrate an evolution from “extreme simplicity” to “multi-dimensional balance” through “great skill without art.”

Table: Overview of Three Classic Low-Valuation Indices

The CSI Dividend Index, with its extreme focus on cash dividend anchoring, is a “time compound machine” that traverses bull and bear markets. It strictly screens for large-scale, liquid companies with stable dividends for at least three consecutive years. The top 100 are selected based on average dividend yield and weighted by dividend rate.

The strict requirement of “dividends for three consecutive years” directly excludes companies lacking dividend sincerity. In a turbulent market, the CSI Dividend Index does not chase short-term surges but relies on continuous dividend reinvestment, demonstrating the astonishing power of long-term compounding. The Harvest CSI Dividend ETF (515180), tracking this index, has a scale exceeding 12 billion yuan, making it the largest ETF tracking this index.

The CSI Free Cash Flow Index is a “touchstone” for identifying high-quality growth. It targets the company’s core operation by focusing solely on free cash flow. After excluding financials, real estate, and high-volatility stocks, it sets strict quality thresholds: cash flow must be consistently positive, with excellent profitability, selecting the top 100 companies based on free cash flow rate.

It does not believe in superficial prosperity but trusts real cash inflows. In the current macro shift from high-speed growth to high-quality development, “cash is king” provides the portfolio with strong risk resistance. The Harvest CSI Free Cash Flow ETF (159222), tracking this index, has achieved an excess return of 6.22% since its April 2025 listing, ranking first among similar ETFs, with tracking error of only 0.07%.

The CSI Value 100 Index is a multi-dimensional defensive “low valuation basket” that abandons single indicators for a composite valuation approach. After excluding low-liquidity, loss-making, and poor-quality stocks, it scores companies across profitability, dividend yield, and free cash flow, selecting the top 100 with the highest overall scores. This multi-dimensional cross-validation effectively compensates for the blind spots of single valuation metrics. It demands cheap assets, healthy operations, and willingness to pay dividends—embodying the wisdom of low valuation strategies.

Historical Revelation: Why Has This “No-Edge Heavy Sword” Forged a Ten-Year Long Bull?

Once we clarify the logic and tools, the ultimate question re-emerges: why does this seemingly uncreative, never trendy strategy achieve long-term excess returns in A-shares? The answer lies deep within the objective laws of the capital market:

A heavy sword has no edge, using a margin of safety to withstand unknown storms. Howard Marks once said, “The most important thing in investing is not making money but avoiding losses.” The high volatility of A-shares often causes high-valuation assets to undergo significant corrections when sentiment recedes. The low valuation strategy fundamentally rejects paying for bubbles; its restrained valuation levels build a solid margin of safety, giving the portfolio an unshakable survival bottom in systemic risks.

Great skill without art, using disciplined rigor to conquer human weakness. Ordinary investors are prone to “chasing highs and selling lows,” but the greatest charm of index investing is its discipline. Regular rebalancing mechanisms automatically reduce holdings when valuations are high and buy when quality assets fall below fair value. This “eliminate the weak, keep the strong, buy low and sell high” dynamic optimization may seem dull but replaces the most counterintuitive human behavior with systematic contrarian operations.

Chart: Changes in the allocation weight of home appliance sector in the Value 100 Index, reflecting the “buy low, sell high” discipline

Data source: Wind, as of March 17, 2026

Quality as a foundation, clearing the fog of “low valuation traps.” True value investing is not blindly bottom-fishing in junk assets. Excellent low-valuation indices generally embed strict fundamental constraints—excluding loss-making companies, requiring continuous dividends, and strong cash flows. This “fundamental filter” ensures that the included companies are resilient backbone enterprises of China’s economy, fundamentally dispelling the market’s misconception of “picking up scraps.”

Investing is ultimately a long-distance race of cognition.

In a market full of temptations and noise, low valuation strategies may seem lonely and even dull. They lack sharp blades, cannot satisfy fantasies of overnight riches, and won’t bring the most dazzling glory at market peaks. But after experiencing cycle rotations and understanding the ebb and flow of capital markets, you will find that it is these principles—sticking to common sense and respecting value—that form the strongest defense for wealth preservation.

Heavy sword without edge, great skill without art. Value investing in A-shares is not only effective but enduring. Instead of riding the waves of market turbulence, entrust your confidence to time and common sense. Let this misunderstood low valuation heavy sword be your ballast in asset allocation, quietly harvesting the long-term rewards of patience and value over time.