Not chasing hot topics but still making money: why do these three undervalued indices always come out on top?

How can AI · Low Valuation Strategy use fundamentals filtering to avoid value traps?

The highest level of martial arts mastery is not relying on flashy moves but winning with a simple, solid iron sword—this is “Great skill appears simple.” In A-share investing, the low valuation strategy is like this misunderstood “iron sword.”

Many believe that low valuation strategies are too conservative and can’t make big money, even thinking that value investing doesn’t work in A-shares. But looking back at the ten-year trend, popular high-valuation sectors are volatile and experience large pullbacks, while indices like Dividends, Free Cash Flow, and Value 100—all low valuation indices—have quietly shown steady upward trends over ten years, becoming true long-term winners in the stock market.

Finding the “Value Anchor” of Valuation

Simply put, valuation is the stock price divided by the company’s true value.

The stock price is the number we see on the market—low price doesn’t necessarily mean undervaluation; we also need to consider the company’s intrinsic value. A company’s value is its real operational strength and earning capacity. So, how do we measure a company’s value? We need to find a reliable “reference point,” or what we call a “value anchor.” Commonly, investors look at cash dividends, free cash flow, net assets, and net profit to find this anchor.

First, dividends. The actual cash dividends paid into investors’ accounts are real and cannot be faked. A dividend-based strategy focused on cash dividends isn’t just about “receiving income”; 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 development dividends to shareholders. Investing in dividend strategies isn’t just about chasing high yields but about choosing reliable companies that can pay stable dividends over the long term without relying on asset sales for one-time payouts.

Next, free cash flow. Some companies show high accounting profits but actually can’t collect the money—these are “pseudo-growth” companies with high receivables. Free cash flow is the actual cash a company can freely use after deducting daily operations and necessary investments—like the company’s “lifeline.” A strategy anchored in free cash flow ignores fake profits on paper and focuses on whether the company can earn real money, effectively exposing those with good-looking financials but dried-up cash flows. It’s a reliable approach balancing stability and growth.

Finally, net assets. Net assets can be understood as the company’s “fundamentals.” When the stock price falls below net assets, it’s like buying assets at below their actual value—this often occurs during industry or economic downturns and is a contrarian opportunity. But this isn’t about blindly picking cheap stocks; one must avoid sunset industries and companies with assets that keep depreciating, or risk falling into a “value trap.”

How to Easily Invest in Undervalued Companies?

Once you understand the “value anchor,” finding these undervalued companies can be time-consuming for ordinary investors. Fortunately, some indices have already selected and bundled good stocks for you. Investing in funds that track these indices allows you to implement a low valuation strategy with one click.

The CSI Dividend Index is straightforward: it selects large-cap, highly liquid companies with stable dividends for three consecutive years, ranked by dividend yield, and weighted accordingly. The rule of “dividends for three years in a row” filters out companies unwilling to pay dividends. It doesn’t chase short-term surges but relies on dividend reinvestment and compound growth, making it especially stable through bull and bear markets.

The Guzheng Free Cash Flow Index specifically screens for companies with reliable cash flows. It first excludes financials, real estate, and highly volatile stocks, then requires positive and consistent cash flow and good profitability. It selects the top 100 companies based on free cash flow rate, trusting real cash inflows and offering strong risk resistance.

The Guzheng Value 100 Index uses a multi-dimensional valuation assessment. It first excludes illiquid and loss-making companies, then scores based on profitability, dividend yield, and free cash flow rate. The top 100 stocks with the highest scores are chosen, requiring low stock prices, healthy operations, and willingness to pay dividends—making it a comprehensive low valuation strategy.

A Decade of Long-Term Bull Market with Low Valuation Strategies

You might wonder, since low valuation strategies don’t chase hot topics or rapid gains, how can they make money long-term? The core reason is simple.

The biggest risk in investing isn’t earning little but losing a lot. High-valuation stocks tend to crash when sentiment shifts, while low valuation strategies avoid bubble stocks. Their prices are inherently attractive, acting like a “protective shield.” When the market declines, they tend to fall less and preserve capital.

From a human nature perspective, investors tend to chase rising stocks and sell falling ones. But indices have regular rebalancing rules: when valuations are high, they reduce holdings; when valuations are low and attractive, they buy more. This automatic contrarian operation helps prevent emotional mistakes.

True low valuation isn’t about buying junk stocks cheaply but about filtering out loss-making and cash-flow-challenged companies, leaving only stable, high-quality businesses. This “fundamentals filter” ensures inclusion of resilient “ballast” companies rather than blindly picking cheap stocks.

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

Data source: Wind, as of March 17, 2026

At its core, investing is a long-distance race testing patience and cognition. Today’s hot concept or sector may fade tomorrow. Low valuation strategies may seem dull, but after experiencing market ups and downs, you’ll realize that adhering to common sense and respecting value is a reliable way to safeguard wealth.

Great skill appears simple. Low valuation value investing has been effective in A-shares and becomes more reliable over time. Instead of panicking during market volatility and chasing gains or selling in fear, it’s better to focus on long-term investing. Use low valuation as a “heavy sword” in your asset allocation, patiently waiting for time to bring returns.

Risk warning: Funds are risky; investments should be cautious.