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Institutional Thinking Framework

The key reason why institutional investors can survive and profit in the complex and ever-changing market is that they have a systematic thinking framework. Understanding this framework will help individual investors develop rational investment thinking habits and improve decision-making quality.

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Three Core Elements of Institutional Thinking

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Risk-First Thinking Mode

The primary consideration of institutional investors is not how to obtain high returns, but how to control risks. This thinking is particularly evident in the 2025 economic downturn environment:
  • Goal Setting: Set reasonable annual return targets (usually 10-15%), avoiding blind pursuit of high returns
  • Tail Risk Assessment: Use VaR (Value at Risk) models to assess potential losses under extreme conditions
  • Position Control: Adjust positions according to market risks, maintain high cash proportion when uncertainty is high
  • Diversification: Allocate across assets, industries, and markets to reduce the impact of single risk sources
VaR Model Example: Institutions typically calculate daily VaR at 95% confidence level to ensure that the maximum daily loss does not exceed 1-2% of total funds.

Risk Control Tools

Common Indicators

Application Scenarios

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Practice of Contrarian Thinking

Institutional investors are good at adopting contrarian strategies when market sentiment is extreme, which requires strong psychological endurance and independent judgment:
  • Bear Market Layout: Gradually build positions when the market is fearful and valuations are extremely low (such as after the Russia-Ukraine war in 2022)
  • Bull Market Cash-In: Gradually reduce positions when market enthusiasm is high and valuations are bubbly
  • Stay Away from Hotspots: Avoid chasing market hotspots, focus on undervalued quality assets
  • Long-term Perspective: Not be disturbed by short-term fluctuations, adhere to long-term investment logic
Classic Case: After the outbreak of the Russia-Ukraine war in March 2022, the A-share market fell sharply. Institutional investors bought consumption blue-chip stocks that were wrongly sold off against the market and gained more than 20% returns within half a year.

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Data-Driven Decision Process

Institutional investors’ decisions are based on a large amount of data analysis, rather than subjective judgments:
  • Fundamental Analysis: In-depth study of financial indicators such as P/E, ROE, cash flow
  • Technical Analysis: Use technical indicators such as volume pools, FVG gaps to identify market trends
  • Quantitative Models: Develop and apply various quantitative strategies, such as momentum strategies, mean reversion strategies
  • Behavioral Finance: Study the behavioral patterns of market participants to find market anomalies
Key Data Indicators:
  • P/E (Price-to-Earnings Ratio): Institutions generally believe that the current reasonable P/E of the market is between 18-22 times
  • Volume Pools: Identify the inflow and outflow of institutional funds
  • FVG Gaps: Find opportunities where price deviates from value
  • Order Flow: Analyze the direction and strength of large orders
Individual investors can start by paying attention to basic indicators such as P/E and trading volume, and gradually develop their own data-driven decision-making habits.

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Practical Application of Institutional Thinking

Applying institutional thinking to personal investment requires the following steps:
  1. Establish Risk Awareness: Consider possible losses before investing, set reasonable stop-loss levels
  2. Cultivate Contrarian Thinking: Remain calm and think independently when market sentiment is extreme
  3. Value Data Analysis: Learn to use basic financial and technical indicators to assist decision-making
  4. Develop Investment Plans: Make clear investment plans in advance, avoid impromptu decisions
  5. Keep Learning and Iterating: Continuously learn new knowledge and methods, optimize your investment framework

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Case Analysis: How Institutions Responded to the 2025 Bear Market

Since 2025, in the face of macro environment with slowing GDP growth (4.5-5%) and liquidity tightening, institutional investors have adopted the following strategies:

Asset Allocation Adjustment

Industry Selection

Stock Selection Strategy

Trading Strategy

Result: As of June 2025, the average drawdown of institutional investors who adopted the above strategies was only 1/3 of the market, demonstrating the effectiveness of the institutional thinking framework.

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Transition from Institutional Thinking to Personal Investment

Applying institutional thinking to personal investment does not mean completely copying institutional practices, but rather learning its core logic and adjusting according to personal circumstances:
  • Simplify Models: Complex quantitative models are not needed, focus on core indicators
  • Focus on Competence Circle: Apply institutional thinking in areas you are familiar with
  • Flexible Adjustment: Adjust strategies according to personal capital scale and risk tolerance
  • Long-term Persistence: The transformation of thinking mode takes time, maintain patience and discipline
Understanding the institutional thinking framework is an important step in improving investment capabilities. In the next section, we will explore the essential information sources for institutional investors, helping you get closer to institutional decision-making quality.