I shared some of the reading notes of "smart investors" with you yesterday.Howard Max: a successful investment does not lie in "buying good", but in "buying good".Continue to read the second half today to hear how Howard describes these investment ideas that have played a similar faith role in his investment career.

Howard Marks has been writing the Investment Memorandum since the 1990s. In his January 2000 investment memo, he predicted the bursting of the technology stock bubble and rose to fame, and the Investment Memorandum became a must-read document on Wall Street.

Combined with these memos, Howard lists the elements that he believes are essential for investment success, forming the "most important thing to invest" that has poured into his 43 years of investment experience and thinking. Buffett watched it twice and was full of praise and highly recommended it.

Reverse investment

Most investors are trend followers, but investing in excellence requires a second level of thinking-a more complex and insightful way of thinking that is different from ordinary people.

Warren Buffett suggested: "The less cautious others are about their own affairs, the more cautious we should be about our own affairs.He encourages us to act the opposite of others: to be contrarian, to buy when people are snub and to sell when people are after them.

It is one thing to accept the concept of reverse investment, another to apply it to practice: we never know how far the pendulum of the market can swing, nor how far it will swing in the opposite direction when reversed; and, because of the volatility of the market, no tool (including reverse investment) is completely reliable.

Markets can be overvalued or undervalued and may remain so for a period of time or even years.

In addition,Reverse investment itself can become so popular that it can be mistaken for group behavior. It is not enough to invest in the opposite of Volkswagen. You must know where Volkswagen is wrong.

In short, there are two basic elements of outstanding investment:

1. See the quality that others do not see or value (and not reflected in the price).

2. Turn this quality into reality (or at least be accepted by the market).

Finally, let's talk about "skepticism". It is generally believed that skepticism is to say "No, things are too good to be true" at the right time. But during the subprime crisis in 2008, it occurred to me that sometimes skepticism also requires us to say, "No, things are too bad to be true." "

Skepticism and pessimism have different meanings. When over-optimistic, doubt advocates pessimism; but when over-pessimistic, doubt advocates optimism.If we can buy when everyone else is selling and turn out to be right afterwards, this is the way to get the highest return with the lowest risk.

Looking for a bargain

The process of carefully building a portfolio requires:

First, a list of potential investments

Second, the estimation of intrinsic value

Third, the perception of price relative to intrinsic value

Fourth, the understanding of risk and its impact.

Usually the first step is to ensure that the investment under consideration meets certain absolute criteria and that the starting point for building a portfolio cannot be unlimited. For example, investors will first narrow the scope of investment to acceptable risk, some areas they do not want to touch, regardless of the price of the securities.

After defining the "feasible set", the next step is to select the investment from it and identify the investment with the highest potential return-risk ratio. "Investment is the training of relative choice." We must choose the best from the existing possibilities.

When making a choice, price is the main factor in outstanding investment.The key is not what you buy, but how much you spend. The inability to correctly distinguish between good assets and good deals has left most investors in trouble.

A bargain means that the price is lower than the value, and the potential return is higher than the risk, which often arises from the fact that investors cannot treat the asset objectively and do not have a comprehensive understanding of the asset through the appearance. or fail to overcome some traditions, prejudices or constraints that are not based on value.

Our goal is to find assets that are undervalued.The best opportunities are usually found in things that most people don't want to do.

Cheapness has nothing to do with high quality. The value of bargains lies in their unreasonably low prices, so they have an unusual return-risk ratio, and they are the holy grail of investors.

Wait patiently for the opportunity

There are not always great things waiting for us to do, and sometimes we can maximize results through keen insight and relatively negative actions.

You will do better by waiting for investment opportunities instead of chasing them.One of the mottos of Oak Capital is: "We are not looking for investment, we are looking for investment." "

One of Japan's early most valuable cultures was "impermanence", which meant that cycles had ups and downs, things came and went, the environment was changing in ways beyond our control, and we had no choice but to accept it. It is not advisable to act in defiance of market conditions and believe that you can change the market.

One of the greatest advantages of investment is that you will only suffer losses when you really make a failed investment. And it is tolerable to miss the opportunity to win, even if there are adverse consequences.

Of course, if fund managers miss too many opportunities and earn too little in a bull market, they will bear the pressure from their clients and even lose them. To a large extent, this depends on the cultivation of customer habits. Oaktree insists that:The failure of investment is more important than the loss of a profit opportunity.As a result, our customers are psychologically prepared to put risk control before making a profit.

You can't create investment opportunities that don't exist, and it's foolish to insist on high returns.When the price is high, the expected return is low (high risk) is inevitable. Faced with a market that seems to offer only low returns, investors have the following options:

1. Deny and invest, but you won't get what you want. When the pushed up price indicates that it is impossible to get the usual return, there is no point in making the usual return expectation.

2. Invest directly and try to accept the relative return

3. Invest directly, ignore short-term risks and focus on long-term risks

4. It is difficult to hold cash, but it is difficult to watch others make money but not earn it yourself.

Obviously, there is no simple answer to this question. But I firmly believe that it is wrong to just grab the profits.

The best opportunity to buy comes when asset holders are forced to sell, and such "forced sellers" abound in the economic crisis.

In order to take advantage of "forced sellers" in a crisis, investors need to believe in value, with little or no leverage, long-term capital and strong willpower. Patiently wait for the opportunity, supported by a contrarian investment attitude and a strong balance sheet.

Recognize the limitations of prediction

We have two kinds of prophets: those who are ignorant and those who do not know they are ignorant. John Kenneth Galbraith

Recognizing the limitations of forecasting is an important part of my investment approach.

The more attention to detail, the more likely it is to gain knowledge advantage. But it's hard to do this in terms of the perception of the market and the economy as a whole. Therefore, I suggest that you should strive to be "knowable".

I will not try to prove the unpredictable point of view of the future. We can not prove the negative sentence, of course, including this conclusion.But I haven't met anyone who always knows the macro future.

First of all, the survey found that, except for the one that won, the winners usually predicted inaccurately. Second, half of the winners' mispredictions are worse than consensus predictions.

Unless you have been bullish or bearish, as long as it takes long enough, it will be right sooner or later. But that doesn't mean your predictions are always valuable.

In fact, we are faced with a dilemma: the outcome of the investment depends entirely on what happens in the future. However, although most of the time when everything is "normal", it is possible to infer what will happen in the future, butAt the critical juncture when we need to predict the most, we can hardly predict what will happen in the future.

Most of the time people predict the future based on the past. This is not necessarily wrong: the future is largely a repeat of the past.

But even if most of these forecasts are correct, they do not provide an opportunity to make a lot of money, because the market will also set prices based on past price continuity.

However, the future will be very different from the past from time to time. The accurate prediction at this time is of great value, but it is also the most difficult to be accurate. The same person is unlikely to continue to make accurate predictions.

All in all, the value of the prediction is very small.

Frankly, I have reservations about predictors and those who believe in predictions. These people belong to the "I know" school, and "self-confidence" is the key word to describe them.

On the contrary, the key word of the "I don't know" school is "caution". They generally believe that the future is unknowable and do not need to know, and that the correct goal is to put aside predictions for the future and do their best to invest.

Oh, yes, one more thing:The biggest problem often occurs when investors forget the difference between probability and outcome.

Perhaps Mark Twain said it best:"what gets you into trouble is not what you don't know, but what you think you know but are actually wrong. "

Correctly understand oneself

Faced with cycles, we may never know where we are going, but it is best to know where we are.In other words, even if we cannot predict the timing and magnitude of cyclical fluctuations, it is important to try to figure out where we are in the cycle and act accordingly:

First, when the market has reached its extreme, be vigilant.

Second, adjust our behavior accordingly.

Third, and most importantly, refuse to keep pace with the group behavior that leads to fatal mistakes.

We can make smart investment decisions on the basis of observing the status quo without having to guess the future.

It is very important to listen to the market. You must be vigilant about what is happening now and try to understand the meaning of what is happening around you. When others are blindly confident and actively buy, we should be more careful; when others are at a loss or panic selling, we should be more active.

The key is to pay attention to similar events, especially in extreme market situations, and let them tell you what to do.

Many people try to adjust their portfolios based on their forecasts for the future. But most people must admit that visibility will not be very high in the future. That is why I emphasize the need to adapt to the current reality and its impact, rather than pinning hopes on a clear future.

There is a simple exercise that can help you measure the temperature of the future market. I have listed some market features, and you need to choose the one that is most close to the status quo from any pair of words. If most of your markings are in the left sidebar, you should, like me, keep an eye on your wallet.

Attach importance to luck

Investment is largely dictated by luck. Some people like to call it "chance" or "randomness", but in the final analysis it all shows that the success of investors is deeply influenced by accidental factors.

Therefore, when judging whether the investment results are repeatable or not, we must consider the influence of randomness and refer to other possible results. (it is obvious that the way I judge things is essentially probability.)

Sometimes every once in a while, there is a person who makes a high-risk bet on an impossible or uncertain outcome, and he looks like a genius. But we should realize that his success depends on luck and courage, not on skill.

At any point in the market, the traders who make the most profits are often the ones best suited to the latest cycle.People who take the highest risks in a bull market tend to get the highest returns, but that doesn't mean they are the best investors. Years of observational data are needed to judge the ability of investment managers.

Few people are fully aware of the contribution (or destruction) of randomness to investment performance. therefore,The dangers behind all successful strategies so far have often been underestimated.

One of the first things I learned when I entered Wharton in 1963 wasThe quality of decisions does not depend on the outcome.Subsequent events lead to successful or unsuccessful decisions, which are often unexpected.

But even in hindsight, it is difficult to determine who made a good decision through reliable analysis but failed in a rare event, and who benefited from taking risks. So it's hard to tell who made the best decision.

On the other hand, past gains are easy to assess, so it's easy to know who made the best decisions. It is easy to confuse the two, but smart investors must be aware of the difference.

In the long run, good decisions are bound to bring returns on investment. In the short term, however, when good decisions do not yield a return on investment, we must be patient.

Surprisingly good returns are often the flip side of surprisingly bad returns.A good return in a given year may exaggerate the ability of an investment manager and mask the risks he is taking. When a bad year comes on the heels of a good one, there are surprising results.

In my opinion, the world is uncertain, and the corresponding behavior is to respect risk moderately, know that the future is unpredictable, understand that the future is probability distribution and invest accordingly, adhere to defensive investment, and emphasize the importance of avoiding mistakes.

In my opinion, this is all about smart investment.

Diversified investment

Every investor must strike a balance between making money and avoiding losses.

Oaktree favors defensive investment, which keeps up with market performance during booms and surpasses market performance during recessions, enabling us to achieve above-average performance with below-average fluctuations throughout the market cycle. our customers will also be happy when others are in pain.

It should be added that there is no right or wrong choice between attack and defense. Your decisions must be based on your character and knowledge, your trust in your abilities, your market, and the characteristics of your customers.

The "attack" in investment refers to the adoption of aggressive strategy and high risk in order to pursue high returns. Centralized holding and leverage are the manifestations of attack. AndDefensive investors focus not on doing the right thing, but on avoiding doing wrong.

There are two main elements of defensive investment: one is to eliminate failure factors in the portfolio; the other is to avoid recession, especially to avoid exposure to a collapse crisis; the key element is what Warren Buffett calls the "margin of safety".

If you buy what you think will be worth $100 for $90, you will get a good chance to make a profit, although there will be a certain probability of loss. But if you buy for $70 instead of $90, your chances of losing will be reduced. The cheap $20 provides extra room for mistakes. Low prices are the source of the margin of safety.

Of the two investment methods of obtaining high returns and avoiding losses, I think the latter is more reliable. Profit usually depends on the correct judgment of future events, while losses can be minimized as long as the value of tangible assets is known, public expectations are sound, and asset prices are low. Experience tells me that the latter may be more sustainable.

The focus of the pursuit of excellence is to dare to be great. There is no doubt that one of the most important and basic decisions for investors is to determine how much risk the portfolio should take. Almost everything in investment is a double-edged sword. Choosing to take higher risks, replacing diversification with centralization, and using leverage to magnify returns all have their own advantages and disadvantages.

However, thoughtful investors believe that offense often carries too many dreams that can not be realized, and defense can achieve better stable returns, as far as I am concerned, I choose defense.

Finally, I can simplify defensive investment to:Awe of investment! Worry about the possibility of loss.Awe of investing can avoid arrogance, keep you alert and mentally active, maintain an adequate margin of safety, and improve the ability of your portfolio to cope with adverse situations. If you don't make mistakes, the winning investment will come naturally.

Avoid mistakes

I think the main causes of errors are (1) analytical / thinking, and (2) psychological / emotional. The former means that too little information is collected, inaccurate, or the wrong analysis process is used.

An analytical error worth exploring is "imaginative incompetence", which means that you can neither imagine all the possible outcomes nor fully understand the results of extreme events.

It will make you miserable to assume that what is going to happen will not happen. Even if you correctly understand the basic probability distribution, the short-term results may deviate from the long-term probability. Therefore, successful investment should not rely too much on the normal results of aggregate distribution, but must take into account the existence of outliers.

It is worth noting thatThe assumption that something is impossible has the potential to promote the event.Because people who think that something is impossible will take high-risk action, which will lead to a change in the environment.

This reminds me of a difficult question: how much time and capital should investors invest to avoid unlikely disasters? The cost of guarding against each extreme outcome is too high, so the general principle is that it is important to avoid mistakes, but there must be limits (limits vary from person to person).

There is another important aspect of imaginative incompetence: the relevance of assets.Failure to correctly predict the collaborative movement within the portfolio is often the key to investment failure.

As for the psychological / emotional factors that lead to errors (which I attach more importance to), I have talked a lot about greed, fear, jealousy, conceit, ending doubt, blind obedience, compromise, misunderstanding of the market cycle and choosing the wrong direction.

Under the influence of these psychological factorsInvestors often make these wrong investments.：

1. Succumb, greed and buy.

2. unwittingly join a market that has been distorted by the obedience of others, that is, negligence.

3. Failure to take advantage of the distortion of the market, that is, the error of "inaction".

It is not easy to find and avoid mistakes, because errors are constantly changing.

Sometimes the price is too high, sometimes the price is too low. The deviation between price and value sometimes affects individual securities and sometimes the market as a whole; sometimes you make mistakes when you do one thing, and sometimes you make mistakes if you don't do it; sometimes you make mistakes when you are bullish, and sometimes you make mistakes when you are bearish.

Of course, most people make mistakes, because if it were not for their consistency, mistakes would not exist. Taking the opposite action requires a reverse investment attitude, while long-term reverse investment will bring a sense of loneliness and error.

Finally, it is important to remember that in addition to actions (such as buying) and inaction (such as not buying), there are times when mistakes are not obvious. When asset prices are likely to be fair relative to value, urgent action may not be needed, and being smart can lead to potential mistakes.

The meaning of added value

It is not difficult to achieve performance in line with the market, but better than the market: value-added.

In order to clarify the significance of value-added, I would like to introduce two investment terms: one is the β coefficient, which measures the sensitivity of the investment portfolio to the market trend. When the β coefficient is greater than 1, the volatility of the portfolio is higher than that of the reference market. Less than 1 means lower volatility; the other is the α coefficient, which measures personal investment technology that has nothing to do with market trends.

Market returns are easy to achieve, and passive index funds that hold all the securities in the market index proportionally can do so. It is the epitome of investment, but it will not add value.

If investors are aggressive, they can increase their holdings of stocks with higher volatility in the index, or use leverage to improve the market sensitivity of the portfolio. This increases the "systemic" risk of the portfolio, that is, its beta coefficient. (however, the theory is that this does not improve the risk-adjusted return of the portfolio. )

Second, investors can buy more stocks in the index, buy less or not buy other stocks, and then add some stocks outside the index. In this way, they can reduce the exposure of their portfolios to specific events of individual companies and avoid price changes that affect only certain stocks rather than the entire index.

Due to "non-systematic" reasons, their portfolio composition is separated from the index composition, so their returns are also biased. In the long run, however, unless investors are visionary, these biases will eventually be offset, and their risk-adjusted returns will tend to be in line with index returns.

According to the theory, the increase of income is caused by the increase of β coefficient or systemic risk, while non-systemic risk can be eliminated through diversification, so undertaking this kind of risk should not be compensated by additional income. The formula for calculating portfolio performance (y) is as follows:

Y = α + β x, x is the market income, and α represents the technology-related income.

The theory holds that the alpha coefficient does not exist, but I don't think so. Investment technology exists, and only by examining the risk-adjusted returns can we determine whether investors have investment technology or not.

It is hard to say that one year's results alone do not reflect technology, that high-risk stakeholders earn high returns when the market rises, or that conservative investors minimise losses when the market falls.The key lies in their long-term performance and their performance in a market environment that is inconsistent with their own style.

The problem can be illustrated by a 2 × 2 matrix.

The key to this matrix is the symmetry or asymmetry of returns. The gains made by unskilled investors are only the result of market returns and their style. They perform well when their style is popular, and vice versa.

On the other hand, the performance of value-added investors is asymmetric. The market return they get is higher than the loss rate they suffer.

In investment, everything has its advantages and disadvantages and is symmetrical, with the exception of technological excellence. Only by relying on technology can we ensure that the benefit in the favorable environment is higher than the loss in the adverse environment. This is the investment asymmetry we are looking for.

The most important thing

1. You must build and stick to your values based on reliable facts and analysis. Only in this way can you maintain discipline when the market is frantically high, or buy cheaply in a crisis. Of course, your estimate of value must be accurate.

two。 High quality is obvious, but finding bargains requires keen insight. Investors often mistake objective advantages for investment opportunities. Good investors never forget that their goal is to buy well, not good ones.

3. The economic and market cycles fluctuate up and down. Similarly, the group psychology of investors also shows the existing regular pendulum fluctuations, which causes people to buy high and sell low. Being a member of a group is doomed to be a disaster, while extreme reverse investment may avoid losses and win in the end.

4. Never underestimate the power of psychological influence. Greed, fear, ending doubt, blind obedience, jealousy, conceit and subservience are all human nature, and their power to compel action is powerful, especially when they are extreme and shared by groups.

5. Most trends eventually go too far. People who realize this earlier will benefit from it, and those who participate later will be punished. This leads to my most important investment motto: "A wise man begins and a fool ends." "

6. Although we don't know where we are going, we should know where we are. We can infer which stage the market is in the cycle by the behavior of the people around us. When other investors are carefree, we should be careful; when investors panic, we should become more active.

7. Buying on the basis of price below value and general negative psychology is likely to get the best investment results. However, it may be against us for a long time before the situation develops as we expect. "underpricing" is by no means the same as "rising quickly". This is my second important motto:It is sometimes hard to tell the difference between being too ahead of time and making mistakes.Before we can prove our correctness, we need enough patience and perseverance to stick to our position for a long time.

8. Risk is not equal to fluctuation, risk is the risk of permanent loss. We have to realize thatImproving risk-taking is not a winning means of successful investment, high-risk investment will lead to a wider range of results and higher loss probability.

9. Understanding risk is as important as obtaining income, but the impact of correlation on the overall risk of the portfolio is often ignored. Most investors believe that diversification means holding many different things, but diversification is effective only if the holdings in the portfolio can differently reflect the development of a particular environment.

10. While the results of aggressive investments are encouraging when they are right, the returns they produce are not as reliable as defensive investments. Oak Capital's motto is "avoid unsuccessful investments, and winning investments will come naturally."A diversified portfolio with no significant losses on each investment is a good start for investment success.

11. Risk control is the core of defensive investment. It is contradictory to survive in adversity and maximize returns in prosperity. Investors must balance the two, and defensive investors pay more attention to the former.

twelve。 The margin of safety is a key element of defensive investment. When the future does not develop as expected, the margin of safety can ensure the acceptability of the results. The ways to achieve the margin of safety are: emphasize the current tangible and lasting value, buy only when the price is lower than the value, avoid the use of leverage, and diversify investment. My third favorite investment motto is: "Never forget that a man who is six feet tall may drown in a stream with an average depth of five feet.」

13. Risk control and safety margins must be reflected in your portfolio at all times. But keep in mind that they are "hidden assets" that highlight the value of defence only during a market recession. Therefore, during the boom, defensive investors must know that their returns have been properly protected against risk, even if such risk aversion turns out to be unnecessary.

14. One of the basic requirements for successful investment is to recognize that we cannot predict the macro future. Investors' time is best spent on obtaining "knowable" knowledge advantages: information about industries, companies and securities. The more you pay attention to the micro, the more likely you are to know more than others.

15. To judge whether investors have really achieved value-added, they must examine their performance in an environment that is inconsistent with their investment style. Can aggressive investors reduce losses when the market falls? Can conservative investors actively participate in a rising market? This asymmetry is the embodiment of real technology.

16. Only investors with extraordinary insight can stably and correctly predict the probability distribution that dominates future events and find the potential risk compensation benefits hidden under the adverse events at the left tail of the probability distribution. I entrust you with the task of successful investment, which will bring you a challenging, exciting and thought-provoking journey.