Recently, memory chips and optical communications have undoubtedly been the hottest investment themes on Wall Street over the past several months.

For ordinary investors, whether to stand "in the light" or keep it "in the chip" depends on three things: first, whether the company and industry are clearly understood; second, whether the valuation can be reasonably calculated; and third, whether you are truly being honest with yourself.

"Joining the herd" or not is not the core of investing. If you don't see clearly, can't calculate properly, and are merely swept along by optimistic market sentiment, then chasing "light" as part of a herd carries enormous risk. But if you see clearly, calculate properly, and stay true to your own principles, then what others do—whether they join the herd or not—doesn't matter.

1. Can You See Clearly?

Buffett's $35 billion investment in Apple a decade ago, now worth $185 billion, is one of the most successful investments in history.

Seeing clearly was the prerequisite for Buffett's investment in Apple. In 2017, Buffett spoke publicly about Apple for the first time, explaining his view: "Apple is more like a consumer goods company than a technology company. We can analyze Apple's business model using moat theory. The customers of IBM and Apple are different—they are projects driven by two different types of decisions."

Companies in the "optical" industry are not consumer goods companies. They are more like IBM than Apple. Whether optical chips or optical modules, they are intermediate goods that need to be embedded into downstream companies' products before reaching consumers through those downstream companies' offerings.

Ordinary investors cannot directly track products of "optical" companies the way they can with consumer goods. Instead, their information about the optical industry comes from third parties like institutions. By the time this information reaches ordinary investors, a time lag has already occurred. And if you're an outsider, you can't even tell whether the information is true or false. People generally cannot play a game they don't understand well.

Munger once said, "I have no right to speak on an issue unless I can refute my own arguments more forcefully than others." The same applies to investing. Unless you truly understand the industry and the company, you will always be at a disadvantage—rushing to buy when prices rise and rushing to sell when prices fall.

An investment edifice must be built on the foundation of "understanding." During the ten years that Duan Yongping and Buffett held Apple, Apple's stock price was repeatedly "cut in half." Someone who did not understand Apple would have struggled to hold on during those declines. The standard for truly understanding a company is having the willingness to buy more shares when the price falls, not running away.

2. Can You Calculate Clearly?

"Understanding" is a qualitative measure. The valuation at which you buy is the quantitative measure. When Buffett first bought Apple a decade ago, its forward P/E ratio was only about 10x. Even when he added to his position, Apple's valuation did not exceed 15x.

Even for a leading company with ample cash reserves, strong operating cash flow, continuous dividends and buybacks, pricing power, and a dominant share of global consumer mindshare, Buffett did not act blindly. He only swung the bat when the price was extremely cheap and fell within his comfort zone for buying.

Value investors are instinctively wary of "hot companies in hot industries" because such companies are often priced too high to offer the margin of safety they seek. The so-called margin of safety sounds like a financial term, but it is actually a mindset of self-protection. With this mindset, even if something terrible happens, the investor will not lose too much.

Currently, the valuations of "optical" companies are far above the overall market average and also above the valuations of comparable companies in developed markets. Some investors might use projected profit growth over the next three to five years to justify that these companies are not expensive. But the difficulty with investing is that over three to five years, companies face too many uncertainties. If you don't leave enough room for these uncertainties, then when bad luck strikes, valuations and stock prices will plummet.

Buffett bought Apple at a 10x valuation, meaning that even if Apple had no future growth, he would have recovered his cost in ten years. Apple had already captured investors' psychological mindshare, and its competitive landscape was unlikely to change much within that decade. Value investing veteran Zhang Yao, who achieved "20 years, 2000x returns," earned nearly 10x returns on his investment in Shaanxi Coal Industry over the past decade. His principle was to invest based on valuations that were cheap by current standards and even cheaper by future standards.

Zhang Yao set out an even clearer standard: invest in companies that can pay back their purchase price in 5 to 6 years through dividends. This standard encompasses low valuation, high dividends, strong cash flow, sustainable profits (not necessarily high growth), and high business visibility—all straightforward value investing criteria.

Buying well enables selling well. Margin of safety is a mechanism for error tolerance. In the long run, mistakes will inevitably happen, and bad luck will strike. Investing requires preparing for this—avoid aggressive valuations and leave ample room for error.

3. Can You Make Independent Decisions?

When a hot sector rallies dramatically, it is easy for bystanders to lose rationality. People struggle to go against market sentiment, especially when those around them appear to be making easy money. But decisions based on market sentiment are like playing a game of "passing the parcel"—investors are betting that they are not the one left holding the last hand. Market sentiment is a fuel, and fuel eventually runs out. When it has absorbed all the buying power, the shift from bullish to bearish happens imperceptibly.

Buffett once described the market as a "church with a casino attached" in an interview. People can freely switch between the church and the casino. Currently, there are still more people in the "church" (value investing) than in the "casino" (short-term speculation), but the allure of the casino has become extremely strong.

If an investor makes an independent judgment based on the industry, company, and valuation, then whether others "huddle" together or not does not matter. Don't avoid investing just because it's a "crowded trade," and don't invest just because it's not. But if the decision is based on market sentiment, then you have placed the fate of your investment in the hands of others.