Facing the market, facing our investment targets and capital, when we contemplate whether we should invest, we inevitably want to know, how much money can we make in the future? How long will it take? The former corresponds to the potential space in an investment, while the latter corresponds to the time aspect. Considering the relationship between time and space, "trading time for space or trading space for time," represents two forms of decision-making patterns.

In Einstein's theory of relativity, time and space are not separate and static entities; rather, their relationship is interdependent. This groundbreaking theory revolutionized the understanding of the world under classical mechanics. In fact, this theory, when extended to broader fields, might also hold true.

Let's assume the asset price is A, the investment period is T, and the investment return is F(A). From a human perspective, we would hope to achieve the greatest returns in the shortest possible time. Mathematically, this is expressed as seeking the extremum of F(A) = A' - A. Different investment strategies will have different solutions, and the composition of investment strategies is an understanding of time and space.

Taking fund investment as an example, for funds, the main factors affecting the net value fluctuation are the changes in the prices of underlying assets and the investment behaviors of fund managers. Regarding the underlying assets of funds, taking stocks as an example, why do stock prices fluctuate? In the long term, the stock of a company reflects the ownership of the enterprise, so the company's long-term profitability is the foundation of its stock price. In the case of a non-listed company, the return on shareholders' investment depends entirely on the company's operational results, where the shareholder return = corporate dividends + reinvestment returns. By measuring the trend of the Wind All-A Index and the changes in the ROE of constituent companies, it can be observed that over a long period, the two are essentially close, and the potential space for stock investment returns is fitted to the space of corporate performance growth.

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However, we can also see from the chart that stock prices often deviate from the growth of the enterprise, even far exceeding the ROE level. This can be attributed to the fact that the business cycle of a company and the trading cycle of the market are different.

The operation of a company is usually presented in the form of quarterly, annual, or even 3-year, 5-year plans, and there are not significant short-term changes. However, stock trading can change on a minute-to-minute or even second-to-second basis. Different investors have different assessment periods, and the market's different expectations also present different anticipations for price presentation, with more expectations leading to greater price volatility.

Take an example: a technology company with a huge growth potential may currently have a low profit level or even losses. If we look at a ten-year perspective, the company's value is much higher than the current one. Trading time for space, it is cost-effective to pay a price higher than the current stock price to purchase equity. For investors currently holding the stock, selling the stock can allow them to obtain future returns in advance or to sell and exit, and transactions will occur. Prices will be formed, and when the number of such transactions is large enough, the price changes will also be significant. Therefore, in the short term, investors' trading behaviors are the main factors causing stock price fluctuations. Imagine that when 99.9% of a company's stock is locked up, the 0.1% of circulating shares can be traded at a high frequency, completely detached from the company's fundamentals. Although the price may not reflect the company's true value, it can cause significant fluctuations in short-term investment returns.So, the impact mechanism of time on the return space varies with different durations. The shorter the time, the more it is related to capital flow and investor expectations, and the greater the uncertainty; the longer the time, the fewer factors affecting stock price changes, the more it fits the fundamentals, and the higher the certainty.

This is also why long-term funds and medium to large-scale funds tend to adopt value investment methods based on fundamental analysis. By extending the time, they reduce short-term uncertainty and gain the return space of long-term corporate growth, which is called "exchanging time for space."

When we invest in funds, we need to understand the impact of time on asset prices at different scales. If the fund manager assesses companies from a long-term perspective, the investors also need to match the corresponding long time. If it's a high-frequency trading strategy, then "long-term" may not be the most suitable. From this perspective, the long-term and short-term strategies of the fund manager are also changes of time to space.

Exchanging space for time is often reflected in military strategy as retreating to advance, preserving people and losing ground, and striving for a longer resistance time. As we discussed earlier, if the goal of investment is to minimize time T while maximizing the return F(A), then it is obvious that the strategy of exchanging space for time is not suitable for investment. However, such situations are not rare in the actual market. For example, there is an excessive belief in the long-term beautiful story of a certain type of asset, believing that its fundamentals will always be good and get better, while ignoring that the valuation has become a bubble. When the bubble bursts, there will be a large loss. Some companies with excellent fundamentals can indeed rise again over time, but this time may be very long.

Taking the mixed-type fund index as an example, this long-term upward asset, the historical high points have all been surpassed in the later period. However, as shown in the figure below, if you enter at the highest point and hold still, it will take several years to break even. Therefore, when investing in funds, remember that "trees cannot grow to the sky" and be alert to valuation bubbles. This is a necessary condition to avoid "exchanging space for time."

In fact, for fund investors, the options for time and space are not the same. Time is a must-answer question, and space is an optional question. Due to the existence of economic and market cycles, good and bad times must be faced by us. It can be said that only when the time in the market is long enough, encountering a big drop is almost inevitable.

When investing, facing the power of time, investors are extremely small, and only by adapting to the current time and waiting for the future time can they succeed. However, for space, it is an optional question. We can choose to invest in different assets, and at the same time, different assets show different investment spaces, which is a blend of time and space.

The most perfect investment situation is to invest in the best space at the best time. In this way, the power of time and the power of space will form a huge joint force. This joint force may be a multiplication effect, an exponential effect, and not just an addition effect. When the power of time and the power of space burst out at the same time, their energy is very amazing. When investing, everyone hopes to see this situation, which is the so-called "Davis double play."

If the most perfect moment cannot be achieved, then we can try to change the strategy. When the space of an asset is not perfect enough, we can seek new assets and new spaces. For example, if a company's short-term growth has reached its limit and the future development space has narrowed, we can look for opportunities with larger spaces. When in an irreversible downward cycle, it is difficult to change time, and we can try to seek phased rebound opportunities, using space to "compensate" for time.Of course, the imperfections of these strategies are not only due to the inability to form the best combination of spatiotemporal forces but also because they require stronger cognitive abilities and psychological qualities, as well as the favor of luck. Accepting these imperfections means that we, as investors, need to lower our expectations and endure fluctuations, which is a necessary course in investing.

For equity funds, we use the dynamic price-to-earnings (P/E) ratio of the stock market as a benchmark for whether their prices are expensive. The higher the purchase price, the lower the potential return on investment.

Taking the Wind All A index as an example, by selecting data from January 1, 2010, to June 1, 2022, we can observe that when the P/E TTM (Trailing Twelve Months) is close to the standard deviation interval of (-1), it is often the bottom area of the market index, laying a substantial foundation for future returns. When the P/E TTM is close to the standard deviation interval of (+1), it enters an area with a smaller return space. Whether the market will rise immediately in the bottom area, it can be seen that from November 2011 to September 2014, below the standard deviation (-1), similarly, after reaching the top, it does not fall immediately. However, we can observe that in the bottom area, although it will not develop immediately, due to the low price and limited downside, the investment may "lose time" but not "lose space." At a certain inflection point, it will welcome the upward force of both time and space. In the top area, it is possible that after "losing space," it will take a long time to make up for the space loss.

How to view time from different dimensions is a kind of wisdom; how to analyze the space and development prospects of different assets is a kind of vision. For time, we emphasize the virtue of being like water, looking lightly at the seasons. For space, we emphasize continuous self-improvement, needing to continuously enhance cognitive abilities in terms of breadth and depth, which can be expanding new investment spaces or discovering changes in the original investment spaces across different time dimensions.

From the perspective of the goals of fund investment, space is the investment return we hope to achieve, and time is the inevitable process that must be experienced. If we cannot grasp the best inflection point of time and space, then "exchanging time for space" by grasping a reasonable market investment range, being more composed about time after investing, and believing that we will receive the gift of time and space.

The views in this article represent only the original author and do not represent the company's position. They are for reference only and are not intended as investment advice. Fund investment carries risks; please choose carefully.