Recent market movements have been significantly influenced by the extreme volatility in the South Korean stock market. While the South Korean market saw a substantial rebound today, ending a multi-day slump, this has not fully alleviated investor concerns.

The earlier phenomenon of widespread retail trading and aggressive leverage-taking in South Korea fueled a sharp market rally, particularly in leading semiconductor stocks, which subsequently triggered massive profit-taking sell-offs. The South Korean market has entered a pattern of wild swings, frequently hitting circuit breakers in both directions. This reflects growing investor divergence and significant disagreement over investments in chip stocks, which is also indicative of substantial market froth.

Overnight, U.S. stocks showed overall stability and rebounded, with some previously hard-hit semiconductor stocks staging strong recoveries. This has provided a degree of confidence boost to the A-share market. While the A-share market shows some signs of stabilization compared to earlier periods, significant volatility remains the dominant theme. Therefore, maintaining a reasonable portfolio allocation, one that allows for both offense and defense, continues to be advisable. Particularly for technology stocks that have seen excessive gains, it is prudent to take profits and reallocate into dividend-yielding stocks or other sectors.

The fundamental outlook for the AI and technology industry remains positive, with a supply-demand imbalance for chips potentially persisting for the next two years. However, the rapid short-term price appreciation has accumulated substantial profit-taking pressure, making pullbacks somewhat inevitable. Overall, the broader market uptrend persists, though sector rotation is likely. The recent short-term volatility and adjustments have caused panic among many investors, especially those using leverage, who are finding the environment particularly challenging.

Following the recent surge in margin financing balances past 3 trillion yuan, the advice is to decisively reduce leverage. When leverage is employed, time becomes an adversary rather than an ally. It is possible for a leveraged stock to plummet and then surge again to new highs, but an investor might face a margin call before that recovery happens. Numerous such cases have already occurred. It is crucial to avoid complacency, overcome greed, and firmly commit to deleveraging.

The second step is to reduce portfolio exposure. Keeping one's position size within a reasonable range leads to a more stable investment mindset.

The third step involves balanced allocation. This means investing in both technology growth stocks to capture opportunities across key sectors, as well as in undervalued blue-chip stocks. This balanced approach provides flexibility for both market advances and retreats, rather than concentrating bets on a single sector. Over the past year or so, focusing solely on semiconductors and computing power would have been a highly successful strategy. However, it is now time to step back, lock in profits, and secure the investment gains accumulated over this period.

Back in June, it was suggested to focus on the innovative drug sector in July. This followed a May 11th announcement clarifying that innovative drugs, especially those within their patent period, would be protected from centralized procurement policies, which would only apply to mature generic drugs. This directly addressed investor concerns about potential price controls on innovative drugs. The innovative drug sector has since emerged strongly, with today's collective rally generating significant positive returns. This long-suppressed sector is finally getting its moment.

Compared to generic drugs, innovative drugs are more competitive, particularly with opportunities for global expansion. Serving as a research and development base for major international pharmaceutical companies through CXO/CRO models is a key advantage, leveraging China's engineering talent pool, large number of medical graduates, and relatively lower costs. The rally in innovative drugs has drawn capital attention to broader biopharmaceutical development. The six key sectors identified earlier, including semiconductors, computing power/algorithms, humanoid robots, commercial aerospace, solid-state batteries, and biopharmaceuticals, have taken turns outperforming. The current focus is on the rise of the biopharmaceutical sector.

This market trend is underpinned by solid logic: strong policy support and the massive shift of household savings into capital markets seeking new investment opportunities. With bank deposit rates declining—some fixed-term rates have fallen below 1%—and approximately 75 trillion yuan in time deposits maturing this year, significant capital is seeking new avenues. While the current market is not in a full-fledged bull run, it still offers considerable profit potential. This has led to a significant recovery in fund sales this year, presenting new allocation opportunities for investors. The resurgence in fund sales also provides a continuous stream of incremental capital to the market, a key driver of the current trend. While sector rotation may occur, the underlying trend of a slow and steady long-term bull market remains intact, which should inspire confidence.

The first half of the year was characterized by extreme market divergence, with opportunities almost entirely concentrated in the top two sectors: semiconductors and computing power. For the second half, the priority is to preserve the gains from the first half by taking timely profits from richly valued sectors—a view consistently advocated since late May, which has proven correct. The focus for the remainder of the year should be on navigating sector rotation, spreading investments across different sectors to mitigate risk. Failing to do so could lead to significant losses during market fluctuations.

The crucial message bears repeating: reduce leverage, reduce leverage, reduce leverage. Berkshire Hathaway's Warren Buffett once warned that the only way smart people he knows have gone broke is by using leverage. As long as investors avoid leverage, they can weather market volatility. But once leverage is introduced, time can quickly turn from friend to foe. Investing is a lifelong endeavor, not a pursuit of quick riches or overnight success. Buffett's ability to endure for 61 years stems from his commitment to investing in companies with clear prospects and avoiding speculative bubbles. Achieving an annualized return of 19.9% over 61 years, compounded, has resulted in a 60,000-fold return. While his short-term performance has never been the most spectacular, over the long term, he has outperformed nearly everyone—a lesson worth learning.

As discussed, adapting value investing principles to the Chinese market context involves combining them with tactical positioning based on market cycles and policy interpretation. This is crucial because the A-share market, being an emerging market, experiences greater volatility and faster sector rotation compared to mature markets like the U.S. Proper position sizing and allocating capital to policy-supported directions are key determinants of investment success.