On watering the weeds and cutting the flowers
A contrarian strategy for a broken market
Introduction
One of Peter Lynch’s most quoted lines is:
Selling your winners and holding your losers is like cutting the flowers and watering the weeds.
Warren Buffett endorsed it, and in finance, a Buffett endorsement turns advice into scripture. The principle became eternal wisdom, repeated until the end of time.
The logic is sound: let your winners compound, cut your losers short, never throw good money after bad. It is the foundation of disciplined investing, and I follow it—in most places.
But the market’s deepest irony is that it eventually punishes every rule followed with religious devotion. If genius could be bottled in short quotes, we’d all be rich and bored. The real work lies in knowing when the rule no longer applies.
This became clear in my recent year-end review - yes I do the review beginning of December. A very simple strategy in my Chinese holdings has boosted performance for the last three years. When I mention it to other investors, they push back. It sounds wrong.
So I’m writing it down—if only as food for thought or to document my folly for the future.
The Inversion
In my Chinese holdings, I water the weeds and cut the flowers. I do not do this elsewhere. China is different.
The mechanism is simple:
I establish a core position at a price that reflects a long-term valuation thesis.
If the price falls significantly (say, 25%) without a deterioration in the thesis, I add meaningfully.
Upon a full recovery to my original entry price, I sell the added shares, banking the profit and reverting to my core position.
I apply the same logic in reverse: trimming on violent, sentiment-driven spikes that dislocate from fundamentals.
I am not trading the company. I am trading against the emotional volatility of its shareholder base.
Why This Has Worked in China
This approach has helped over the past few years because Chinese stocks, particularly ADS and H-shares, have been volatile and range-bound. They swing violently, often disconnected from business fundamentals.
Just holding through these swings means enduring panic and euphoria for nothing. But by adding during panic and trimming during euphoria, you harvest a premium from the chaos. You get paid for being the calm counterparty to someone losing their mind.
The Foreign Holder Problem
I believe in large part this pattern exists because of who owns these shares. They’re held primarily by foreigners—investors who can’t read Chinese, consume the country through Western headlines, and have never used the products or walked the streets. The result is predictable: overreaction in both directions.
A variant of this plays out with Ping An. I maintain a core position in the A-shares. When a negative headline sparks a panic sell-off in the H-shares, the discount between them widens to absurd levels. I then sell the A-shares and buy the structurally identical, but cheaper, H-shares. When the panic subsides and the gap closes, I reverse the trade. Same principle: get paid for staying calm while others panic.
The Crucial Caveat: Where the Rule Still Reigns
This is niche advice. In a market characterized by strong, persistent upward trends—like the U.S. over the last decade—this is a recipe for ruin. You would prematurely sell your Amazon and average down into a value trap. In a bull market, Lynch’s wisdom is not just correct; it is the only wisdom that matters.
My point is narrow: in a volatile, sentiment-driven, and range-bound market, the inverted rule can work. For Chinese offshore stocks, that has been the reality.
A Practice, Not a Principle
In investing, everything works until it doesn’t. The edge you discover persists only until the world changes. The market sends no memo.
How long will I keep doing this? I do not know. I am certain, however, that I will eventually have to stop. The day may come when I must relearn to let my Chinese winners run.
A Final, Unlikely Bit of Wisdom
A friend recently pointed me to a speech Taylor Swift gave at an NYU graduation. (I wouldn’t know a Taylor Swift song if it hit me in the head, but I know she’s dating Travis Kelce of the Kansas City Chiefs. That’s the full extent of my expertise.)
One passage, however, applies remarkably well to the fundamental dilemma of investing:
“Every choice you make leads to the next choice, which leads to the next, and I know it’s hard to know which path to take. There will be times in life where you need to stand up for yourself, times when the right thing is actually to back down and apologize, times when the right thing is to fight, times when the right thing is to turn and run, times to hold on with all you have, and times to let go with grace. Sometimes the right thing to do is to throw out the old schools of thought in the name of progress and reform. Sometimes the right thing to do is to sit and listen to the wisdom of those who have come before us. How will you know what the right choice is in these crucial moments?
You won’t.”
That is the entire endeavor. Sometimes you follow Lynch. Sometimes you invert him. The wisdom lies in knowing that no single piece of wisdom is final. You assess the environment, you judge the context, and you make a choice.
You won’t know if it’s the right one until later. But you have to choose anyway.