What is the fault tolerance rate?

"Fault tolerance" is a common word in the game, which means that you are not easy to kill after you make a mistake.A real example is the QR code, which is often recognized by the system as soon as we scan it halfway, because the QR code has the requirement of fault tolerance, as long as several key parts are not obscured, it may be swept out.

We usually think about how not to make mistakes, but there is a decision-making idea that if mistakes are inevitable, it is better to think about how to reduce the consequences of mistakes.

The first way to improve the rate of fault tolerance: the margin of safety

The most common way to improve fault tolerance is the margin of safety, which is, in popular terms, "buy cheaply"-but "buying cheaply" does not necessarily improve fault tolerance.

There are two "buy cheaply":

One is that investors think that the upward space is larger than the downward space, which is a kind of "odds thinking".It is usually the kind of companies that reverse their transformation after a long period of decline, and the success rate itself is not high.

This kind of "buying cheap" has no margin of safety and cannot improve the fault tolerance rate, because it is difficult to bottom out the fundamentals, and many well-known white horse companies have too many players, so their share prices can hardly be bottomed out and can fall again at any time.

Another kind of investment idea, pays more attention to the downside space is small (rather than the upside space), the loss probability is small, this is a kind of "winning probability thinking".

The biggest characteristic of this kind of companyThey are all in some declining traditional industries with low growth rate.It is either some silly, black and rough general manufacturing industry, or raw material enterprises that do not seem to have much technical content, and some unpopular industries that do not even understand the data, mainly in machinery and equipment, traditional materials, basic chemicals, and other industries.

A common feature of these industries is a marked decline in demand, which has been shunned by investors, resulting in absolute low valuations, but demand will not disappear, falling to a certain extent and stable.

They are not the big white horses in distress like Ping an Vanke Hengrui, which has a huge decline, butThe "forgotten corner" that has drifted with the current at the bottom for a long time.There are many stocks you have never heard of.ROE has been at the level of 510% for a long time.

But if you carefully analyze the fundamental and financial data, these companies are not bad, some have low gross profit margin but high net profit margin and no expenses, some profits are mediocre but have almost no interest-bearing liabilities, and some products have very small space but very stable demand. they are like the colleagues around us who can never do big things but never make mistakes.

The reason why the finance is very healthy, because this kind of enterprise also has one common characteristic--Good competition pattern and slow technological progressAfter all, no company will invest heavily in a declining track, and the original tail players can't stand this kind of "low gross margin does not grow" business, the result must be "If there is no increase, the profit will be stable. "Even better than those "sophisticated" industries that require a lot of research and development, and there is little risk of being eliminated in technological iterations.

TheirsThe common "disadvantage" is that the growth rate is low.This has become an "original sin" in A shares, causing most investors to pay little attention to it.With low valuations and no fame, there are few game funds, which leads to any change in the fundamentals of the industry, which is likely to lead to a good market increase.Many of the top 5% growth last year were such companies.

Both are "bought cheaply", but the results are different.For the former low price, the most likely result is to continue to fall after buying the wrong price, while for the latter low price, the most likely result is not to rise.Therefore, the latter is a more fault-tolerant investment method.

The former investment opportunity is more like value arbitrage, while the latter is closer to deep value investment.Many fund managers of this style are almost full of unpopular companies, which do not seem to rise, but in fact one or two burst out every season, contributing all the profits of the portfolio and then disappearing in the next season.

This kind of fund has also become the star who has substantially outperformed the market in the past half a year.

So "buying cheaply" is only superficial. These companies are cheap most of the time, but when you notice them, they are the most expensive.

The margin of safety is a fault tolerance rate for stock selection, in addition, there is a trading fault tolerance rate-such as a stop loss.

The second method to improve fault tolerance: anti-logic

The most common means for individual investors to improve the fault tolerance rate is the "stop-loss method", which sells unconditionally after a fixed loss in order to control the loss.

But the problem is that a fixed stop can only limit the amount of loss after each error, but increases the proportion of loss-making transactions, so stops can only improve fault tolerance in the short term, but have no effect in the long run.

More importantly, as a value investor, falling stock prices mean that they are more cost-effective and should buy rather than sell. The idea of stop-loss is contrary to the idea of value investment. Most of the ups and downs of stock prices in a few days are random fluctuations or affected by the buying and selling of funds, and do not hide fundamental information.

Of course, anyone may be wrong in judgment, correct in judgment or wrong in execution, and the environment may change if the execution is correct, and if there is a mistake, it must be corrected.

So stop loss itself is not wrong, wrong is "stop loss according to the decline", the real "stop loss" condition is that the fundamentals may have changed.

In the article "if you don't know what's wrong, persistence is meaningless", I think that there must be corresponding "anti-logic" in any investment logic:

The "anti-logic" of R & D of new products is the failure of R & D.

When a blockbuster new product comes on the market, its "anti-logic" is that it does not sell well, or that although it sells well, it affects the sales of the old product.

The "anti-logic" of expanding production capacity is that the rate of good products has been unable to reach the standard for a long time.

With large customers, its "anti-logic" is the loss of operational autonomy, a great increase in receivables, and even ups and downs in performance.

Successful investors can accommodate two opposing logic in their minds so that they can stop or change their investment strategies at any time:

This is the difference between research and actual investment, do research, as long as you think a certain logic is reasonable, there is room for profit, butBefore actually investing real money, we must find the "anti-logic" of this logic, and there must be corresponding signals. This is the first way to improve the fault tolerance rate: both investment logic and anti-logic.

So fundamental stop loss is a kind of stop loss in advance, once there is a certain "anti-logical" condition, you must stop the investment, instead of thinking well at first, having a little setback and taking the problem too seriously.

However, many investors may find it easy to think of the reasons for failure, but it is difficult to find signals in actual investment.

In addition to common methods such as capacity circles, in-depth research, and continuous tracking, there is another way to improve "fault tolerance": reduce uncontrollable "key variables" in investments.

The third way to improve fault tolerance is to reduce uncontrollable variables.

There is an investment proverb: don't look for upward Alpha in the downward beta.

Alpha and beta are a set of relative concepts, the meaning is not unique, the most common meaning is "individual stocks and industries", each stock is up 10%, and the plate is up 7%, so the individual stock alpha is 3%, and the industry beta is 7%. It means that 7% of the income is from choosing the right sector, and 3% is from choosing the right stocks.

"looking for Alpha in the downward beta" is like sailing against the current. If you can earn 10%, but the plate is down 10%, you get nothing in the end.

But I personally don't agree with this sentence, becauseIndustry beta and individual stock alpha are two completely different research capabilities:

Both beta and alpha need to study the fundamentals and prosperity of the industry, but there are more differences and different requirements for competence:

Beta is a top-down investment method, the research method pays more attention to logical deduction, and needs to consider the macro environment, market style and capital preference.For example, the prosperity of photovoltaic in the first half of the year is very high, and the valuation is not expensive, but the serious loss index in the first four months is entirely due to macro and style reasons.

In contrast, Alpha is a bottom-up investment method, and the research method pays more attention to empirical research.In order to deeply understand the management level of products and enterprises, we need a lot of field research, visit suppliers and dealers, ask industry experts for advice, and some industries also need to master high-frequency data.

There is a bias in human ability. When analyzing the income attribution of an account, if Alpha is not as good as the overall income of the account, it means that you are better at top-down logic deduction, and if Alpha exceeds the overall income of the account, it shows that you are better at bottom-up empirical thinking.

"Don't look for upward Alpha in the downward beta."This method requires the ability to judge and track both beta and alpha returns, which increases the unknowable factors in the analysis and is more prone to errors.

A good investment system focuses on either Alpha or Beta.

Buffett's investment is basically based on the long-term alpha of individual stocks, rarely considering the industry beta and not looking at the macro.

In the "buy cheap" approach mentioned in the first approach, fund managers' positions tend to be concentrated in traditional industries where there is no beta, because this is the only industry where there is a bargain opportunity and a system of abandoning beta.

On the contrary, there are many investment masters who are good at asset allocation, abandoning individual stock alpha completely and pursuing beta of industry or large-class assets.Asset allocation master David Swenson believes that in the three major sources of investment income, "asset allocation, timing and stock selection", in the long run, 90% of the income belongs to asset allocation, while timing and stock selection contribute only 10% of the income.

Be an investor with high "fault tolerance"

"if we get rid of our 10 most successful investments, we are a joke," Munger said.

The reverse holds true: a lossmaking individual investor may become a top expert if he removes the 10 biggest lossmaking investments over the years (in fact, only five is enough).

The real master is not not to make mistakes, but not to make fatal mistakes.An investor with a high fault tolerance rate tends to have the following characteristics:

Good at calculating the gains and losses of interests, tolerating small mistakes in exchange for great achievements

Get used to the changing environment and be good at dealing with all kinds of complex situations

Believe in the rule of February 8 and pay more attention to your strengths rather than overcome your weaknesses.

If there are some dangers that cannot be avoided, focus on what you can control. There is no room for anyone who is wrong, who will waste his life correcting his mistakes rather than expanding his achievements.