Investment

When others are pessimistic and selling, buy in; when others are euphoric and rushing to buy, sell out. All of this requires the greatest courage, but it will also provide the most substantial profits. “Buy low, sell high” is an ancient maxim, but investors who are lost in the market cycle often make the opposite move. The appropriate approach should be to adopt contrarian behavior: Buy when the crowd is averse, and sell when the crowd is enthusiastic. Market extremes of “only encountered once in a lifetime” seem to appear once every ten years. While the frequency may not be high enough for investors to make a living from it, for any investor, attempting to do so should be an important part of their trading strategy.

The desire to earn more, the fear of missing opportunities, the personality trait of comparing oneself to others, the influence of the group, and the dream of successful investment—these factors are almost universally present. Therefore, they have a profound collective influence on most investors and the market, resulting in errors that are frequent, widespread, and repeatable. Seven Mindsets Leading to Erroneous Decisions Many people possess enough talent to analyze data, but few can deeply observe things and withstand the powerful influence of the psychological aspect. In other words, many people will reach similar conclusions based on their own analysis, but due to different psychological influences, they will take drastically different actions based on those conclusions. The biggest investment bias does not come from information or analysis, but from mindset. ...

Especially during bull markets, you often hear many people say: “High-risk investments bring higher returns. If you want to make more money, then take on higher risks.” In fact, it is impossible for high-risk investments to reliably generate high returns. Why? The answer is simple: If high-risk investments can reliably generate high returns, then their risk isn’t high! The correct way to say it should be that, in order to attract capital, high-risk investments must offer higher potential returns, higher guaranteed returns, or higher expected returns, but this absolutely does not mean that higher potential returns will definitely be realized. ...

It is best to acquire stocks during a market crash, especially those that are forced to be sold regardless of the price. There is nothing better than this; many of our best trades are made for this very reason. However, we have two observations: You cannot rely solely on buying stocks from forced sellers or selling stocks to forced buyers for a living, as they won’t always appear in the market—they only emerge during extreme crises and rare bubbles. In our world, buying stocks from forced sellers is the best thing, so the worst thing is becoming a forced seller. This means it is crucial to arrange your finances well; you must ensure that you hold stocks even in the most difficult times, without being forced to sell them. This requires both long-term capital and strong psychological fortitude. ...

We learned in our basic course in microeconomics that the demand curve slopes downward, meaning that as the price increases, the quantity demanded decreases. In other words, when prices are high, the quantity demanded is lower, and when prices are low, the quantity demanded is higher. This makes perfect sense, which is why stores perform better when they run sales. While this operates in many places, it is far from the case in the investment world. Here, many people prefer to buy assets when prices rise because they feel it confirms their decision; conversely, they are less inclined to buy when prices fall because they begin to doubt their initial purchase decision. ...

For value investors, “asset” is not merely a concept for short-term investment because it has appeal (or because others find it appealing). An asset is a tangible item that should possess clear intrinsic value; if it can be acquired at a price lower than its intrinsic value, it should be considered for purchase. Therefore, intelligent investment should be based on the estimation of intrinsic value, and these estimations must be calculated rigorously using available information. (George) The Most Important Thing (THE MOST IMPORTANT THING)

Assumptions of Efficient Market Theory There are many investors who put effort into research. They are smart, diligent, objective, proactive, and well-prepared. They can all obtain available information, and the channels through which they obtain it are roughly the same. They can buy, sell, or short (i.e., bet on a decline) all assets. Due to these reasons, the Efficient Market Hypothesis posits that available information will smoothly and effectively integrate into prices, adjusting when the price deviates from the intrinsic value, thereby eliminating the discrepancy. ...

Investment Thinking Must Be Unique To maintain returns above average, one requires exceptional insight, intuition, a sense of value, and an understanding of market psychology. To achieve this, one needs second-order thinking. Doing the right thing might be a necessary condition for successful investing, but it is not a sufficient condition. You must do more right things than others, which means your way of thinking must be unique. What is Second-Order Thinking? First-order thinking says: “This is a good company, so buy this stock!” Second-order thinking says: “This is a good company, but everyone thinks this company is good, so it isn’t a good company. This stock is overvalued, the market price is too high, so sell!” First-order thinking says: “From a forward-looking perspective, economic growth is sluggish and inflation is rising, so sell the holdings!” Second-order thinking says: “The economic outlook is terrible, but everyone is selling stocks out of panic, so we should buy!” First-order thinking says: “I believe this company’s earnings will decline, so sell!” Second-order thinking says: “I believe the decline in this company’s earnings will be less than expected; an unexpected surprise will push the stock price up, so buy!” What Second-Order Thinkers Consider What range of outcomes might occur in the future? Which outcome do I believe will occur? How high is the probability that my view is correct? What is the market consensus? How large is the difference between my expectation and the market consensus? How closely does the market price of this asset align with the price believed by the market consensus? And how about the price according to my view? Is the consensus sentiment reflected in the price overly optimistic or pessimistic? If the market consensus proves to be correct, what impact will that have on the asset price? If my expectation is the correct one, what impact will that have? There is a clear and significant difference in the workload between first-order thinking and second-order thinking. The number of people capable of second-order thinking is clearly much smaller than the number capable of first-order thinking. First-order thinkers look for simple formulas and easy answers. Second-order thinkers know that successful investing is contrary to simplicity. This doesn’t mean you won’t encounter many people who try to make investing sound simple, which I call “mercenaries.” Brokerage firms want you to believe that everyone is capable of investing, and that every trade only requires ten dollars. Fund companies don’t want you to believe that you are capable of investing, but they want you to believe that they are capable of investing, so you will put your money into actively managed funds and pay higher management fees.

When the market is most valuable is not when everyone wants to buy stocks, but when even the auntie sweeping the floor next to you can tell you exactly how high a certain stock will rise. History’s repeated cycles of bull and bear markets tell us that when every person in the market is avoiding purchasing these assets, it is often when stock prices are at their lowest. If you look at things from a long-term perspective, market downturns are precisely the opportunity for value investors to pick good stocks. Therefore, you must know how to exit when the crowd is roaring, and enter when it is dark—that is true selling high and buying low. ...

Recently read Enough_ True Measures of Money, Business, and Life by John C. Bogle, which gave me a deeper understanding of the essence of the market. Rather than technical analysis and frequent trading, it is about long-term commitment to corporate value. I want to organize these thoughts for future review and hope they can inspire friends who are exploring the path of investing. Let’s dive into some insightful quotes about investing and what they truly mean. ...

Two months ago, I made a trade my first conscious speculative trade , and one month ago, I made another rationalization . It now seems this was a completely failed speculation. I have learned some lessons: Speculation is a negative-sum game Due to the existence of transaction costs. No matter how sound your analysis is, speculation is bound to fail In this stock market, there are countless people who are smarter and have better judgment than you. You are playing against hundreds of millions of shareholders. This is not the issue of “among three, there must be a master”; this is billions of people on the stage—many are dumber than you, but tens of thousands are stronger than you. If you speculate, you are merely someone else’s profit. ...

You are not invincible. If you admit that luck brought you success, the key to dealing with failure is to structure your financial life in a way that, even if you make a terrible investment or mess up your financial goals, it won’t crush you. This way, you can hang in there until the goddess of fortune arrives. First, the hardest financial skill is stopping the chase after achieving the goal. ...

Market Crashes Are Not Something You Should Avoid A market crash is a cost that must be paid to gain market returns, and you absolutely should not try to evade it. You also cannot evade it; if you try to cheat, you will be severely punished for it. You will lose many high-quality assets at the low point. Volatility is Akin to a Fee, Not a Fine. Market returns are never free, and they will never be free. They demand a price from you, just like any other product. You are not being forced to pay, just as you are not being forced to go to Disneyland. You could go to a local county fair for only ten dollars, or stay home for free. You might be just as happy, but usually, you get what you pay for. The market is the same. The cost of volatility/uncertainty—that is, the price of obtaining returns—can be called the entrance fee, allowing you to acquire returns far greater than those offered by low-cost parks like cash and bonds.

Thank you very much for your further elaboration! You emphasized the satisfaction derived from your past investment achievements, and the deeply ingrained concept of “avoiding lifestyle creep,” which allows me to understand your confusion more precisely. Your current dilemma is completely understandable, as it touches upon the core of personal growth and value transformation. Your successful investment history has shaped your source of fulfillment, and your principle of “avoiding lifestyle creep” has historically been the foundation of your success. Now, you are feeling a new need, but your past tenets seem to be hindering your acceptance of this change. ...

The Only Normal Source of Wealth Must Be Production The core reason why the vast majority of people fail is not because they don’t engage in production, nor is it because they never accumulate, but rather because they fail to accumulate for a sufficient period of time. Consequently, the amount of money is insufficient, and thus, they fail to acquire or master true wealth. Life should be centered around production. Everything else, no matter what it is, must be ranked after it. Nothing is more important than production—at least, until basic necessities are met. ...

The stock market is a powerful wealth-building tool and you should be investing in it. But realize the market and the value of your shares will sometimes drop dramatically. This is absolutely normal and to be expected. When it happens, ignore the drops and buy more shares. This will be much, much harder than you think. People all around you will panic. The news media will be screaming Sell, Sell, Sell!

Throughout my investment journey, I have come to trust the S&P 500 and consider it the core of my wealth storage. By understanding the US Constitution, the free society, and the powerful military behind it, I believe that the S&P 500 represents the strongest companies and the most stable economy in the world. Here’s why I made this decision and the thinking behind it: The US Constitution and Free Society are the Strongest Guarantees I firmly believe that the US Constitution and the free society structure are among the most valuable assets in the world. The rule of law and the powerful military, particularly the aircraft carrier, provide a unique guarantee for global investors. If the US Constitution protects investors’ rights and the economy relies on the free market, it will provide a solid foundation for my chosen assets. ...

The Market is Equivalent to an Average-Intelligence Person As a participant in the trading market, it is unlikely that you will sell at the absolute peak, and it is also difficult for you to buy at the absolute bottom… Why? The reason is very clear and very simple: People are Impulsive and Emotional The highest point and the lowest point are both caused by the “impulsiveness” of a small portion of traders… ...

Frequency is the Fundamental Factor That Determines Everything Short-term, it acts like a voting machine; long-term, it acts like a weighing machine. The Higher the Trading Frequency, the Closer the Trade is to a Zero-Sum Game The result of frequent trading is the accumulation of transaction fees, which eventually devours all your profits and principal. The shorter the prediction, the closer it is to a coin flip; the longer the prediction, the closer it is to true logical deduction… ...

Capital Exhaustion at Entry There are many frustrating laws in the trading market, such as: Whenever you need money, the market crashes! It might not seem logically supported, so you might temporarily doubt it, but you will definitely experience the power of this law. For all beginners, this law is almost eternally true: As soon as you buy, it starts falling; As soon as you sell, it starts rising… Why does this paradoxical situation occur? Because the fundamental reason for the end of every market cycle is capital exhaustion at entry. In other words, when even the auntie selling tea eggs on the street starts discussing stocks, the market’s “entry capital” is already on the verge of running out… Think about it: even someone completely unrelated to the topic knows this. When it’s time to rush in and make money, doesn’t that mean the market cycle is over? ...