The “100-20” rule

Investors who regularly review their trading records over a period of time must have had an experience.Account profit and loss are made up of the most earned or most lost transactions or transactionsSome details are related to the degree of diversification of positions and the shareholding cycle.

This is more cruel than the 28 principle“100-20”Rules:

100% of the excess profit (loss) comes from 20% of the transaction volume, and most of the rest of the transactions are about the same as profit and loss equal to the indexUnless it's an ultra-short-term transaction or a quantitative fund, this is basically the case for everyone.

The deals that make you reach your annual profit target are just one or two, making you unable to achieve your goal, and it's also because of that loss or two. These two investments are just what I usually talk about“Winners and losers”.

Although most investments reach a certain point in time, you realize that they are not “winners or losers,” but you don't know beforehand,Therefore, most of your investment decisions should be carefully made with a “winner and loser” mentality.

By understanding the relationship between winners and losers and final profit, you can establish the most basic stock selection criteria:

Assuming your annual profit target is 15%, and if the general market rises 5% this year, then the winner and loser will have to bear 10% of the profit of the entire account.

Assuming that your maximum position on a single stock is an average of 40% per year, and assuming that each position is held for one year, then there are the following criteria for selecting stocks that meet the profit target:

1. You dare to only dare to stock with an average position of 20% last year, but the expected yield for one year is 50%;

2. Stocks that dared you averaged 30% of the previous year's positions have an expected annual yield of 33%;

3. Stocks that dared you averaged 40% of the previous year's positions have an expected annual yield of 25%

If the account's excess earnings were determined by the two most profitable stocks, then this expected yield requirement would be cut in half, and so on.

This basic stock selection standard includes the two most simple constraints:A good investment either dares you to open a position (Buffett's Apple) or anticipates a high yield (the reversal of the blog dilemma).

First, we need to solve a problem, what is the “expected yield”?

How to calculate the expected rate of return

Many people have studied the company, calculated the growth rate of performance, and the rationality of the valuation. They feel that the company has twice the target price, so they think this is a stock that “can increase 100% in a year.”

This statement is wrong. I just calculated the ideal situation for this stock. The upward space is 100%, and the downward space has not yet been considered, that is:

If the favorable logic envisioned at the time of purchase is not realized, then where will the stock price fall?

In addition, it is also necessary to consider upward and downward probabilities before it can be calculatedExpected yield:

(Upward space* Profit Probability - Downward Space* Loss Probability) /Investment Principal

Assuming that the stock price is 10 yuan, the ultimate profit and extreme loss are 10 yuan and -4 yuan, and the probability is 50% each, then the expected return on this investment is:

(10* 50% -4* 50%) /10= 30%

Of course, this is just a simplified formula. In actual investment, within the limit value, there are various possibilities for investment results, corresponding to different probabilities, but as a standard for individual investors to select stocks, only calculate the room up and down the limit, and think that the win rate is 50%, which is enough.

You need to look at it when calculating the expected yieldThe upward space and the downward space are actually judging the odds.

The odds are a limit

The concept of odds originates from betting. The reason betting odds can be calculated is because:

1. There are only a few results;

2. Each outcome is a clear probability.

But stocks aren't like that --

As analyzed above, the odds of investing in stocks are not a clear outcome, but rather the limit of the outcome. They consider small probability events, that is,In the best case, how much can you go up; in the worst case, how much can you drop?

The ultimate upward space means that in an optimistic situation,All the benefits are realized in terms of performance, and the target price corresponding to the highest optimistic valuation range that the market may giveMany brokerage research reports will be published. Many people feel that the target price is too high, but this is just an optimistic upper limit of space.

There is room for the limit down. It is necessary to judge if the favorable logic you think has not been fulfilled, costs have been spent again, and there is a problem with the current product. Under such circumstances, the performance level is probably at. In the history of the past three years, what kind of valuation level the market has given the worst in this situation.

As can be seen from this point,Odds are an extreme concept and a relatively certain calculable valueIn contrast, the win rate is a probability and is vague, so calculating odds is the most critical part of the overall investment process. You need to understand the following points about the investment target:

1. Core growth logic and main risk points

2. Understand the overall history and trends of the industry and the company's operations over the past few years

3. Specific business data for the best and worst periods in the past

4. Market views at different stages, and extreme valuations given

The more important function of calculating odds is to determine the purchase cost. If the target you are optimistic about is not enough — this is a situation that is likely to happen to a good company, then you can do the math. If you want to drop to what price, the odds are appropriate.

So, how is the winning rate of stock investment determined?

Win rate is a standard

As analyzed above, the odds of investing in stocks are the limit of results, so they can be calculated, but the winning rate of stock investment is too subjective.

The current price of a certain stock is 10 yuan. There is really too much possibility that the stock price will be one year from now.The win rate describes the probability that the stock price will appear at every price point. This is obviously impossible to calculate.

What's more, investors can stop at any time. Even if it loses money after a year, it's not ruled out that you will sell when you make a profit in the middle, that is,You can use strategies to lock in your winning rate.

So the win rate here is an approximate probability, that is, the probability that after one year, profit may exceed the general market increase.

How can this be judged?

The winning rate after investing in a certain stock for one year is a conditional probability; itsStandard expressionsYes:

If I've bought countless stocks like this, what percentage of them will rise after a year?

So strictly speaking, there's no way to calculate the probability of this stock because every stock is unique.

But you can change your mind,Stocks are not the same, but stock selection criteria can be the same.

Therefore, the actual win rate is determined in this way:

1. From past profitable transaction records, draw up a stock selection standard with a high win rate and purchase time criteria. The more specific the requirements, the better;

2. The more companies that meet this standard, the higher the win rate. Considering judgment errors and biases, it can be assumed that the win rate is 50%.

Stock selection criteria include:

1. Fixed industry characteristics, such as high-boom industries, consumer industries, cycle industries, etc.

2. Company development stage or market value characteristics

3. Other constraints such as competitive landscape and industry space may not be used, but usually the more specific the better

4. Growth logic, such as capacity investment, category expansion, price increase, etc.

5. Growth requirements

6. Other personal preferences and requirements

The selection timing criteria include:

1. The location of the inflection point of operation, left or right

2. Historical valuation location requirements

3. Catalysts such as financial reports and the impact of negative market events

4. Other personal preferences and requirements

Anyway,If you change the specific win rate data to “meet a certain win rate standard,” if it meets a certain established standard, you can think of it as a 50% win rate.

Once we have the win rate (which is actually the standard for stock selection) and odds, we calculate according to the method at the beginning to determine the lowest position that meets the expected yield criteria.

So, is there still a maximum position requirement?

Yes, that's the Kelly formula.

Position requirements of the Kelly formula

Many retail investors have the following two bad habits when it comes to position control:

Habit 1. Hold more than 50% of positions in investments with high win rates or high odds

Habit 2. Scatter positions, every position is very average

The problem with habit 2 is obvious. Through the relationship between “yield, expected value, and position” analyzed earlier, it can be seen that different opportunities should be given different positions. Once you see it, you need to increase your positions. You can't see it accurately, but only if you have imagination can it be suitable for testing small positions.

After “good company, good price”, we need to add another “good position”Otherwise, your earnings will still be mediocre.

However, habit 1 is also in line with the previous formula. Theoretically speaking, as long as 15% of the expected value is enough, you can trade a full stock.

However,The Kelly formula tells you that under no circumstances can you fully trade a single stock.

If a company on the verge of delisting were to be restructured, its stock price could double fivefold if it succeeds, and if it fails, the delisting is worth nothing. If you get insider information, there is a 99% chance that it will be successful. How much capital should you bet?

Obviously, under such superior conditions, you shouldn't bet all of your capital. Once you step on 1% of the thunder, it will be irretrievable.

There is an optimal ratio between position and odds and win rate itself, which is the following Kelly formula (simplified version for stocks):

I'm not going to introduce the specific principles; many articles have introduced them; I'll just talk about its conclusion:

If a stock has 2:1 odds for the next year, a 50% win rate, the best ratio for your average position cap is 25%——The reason for the upper limit is to take into account that most people are too optimistic about the odds and win rate.

If the minimum reasonable position limit calculated earlier is 33%, then this investment opportunity should be temporarily abandoned, or positions should be opened in batches, wait until it falls to a reasonable price, and then add positions, so that the average purchase cost meets the odds and yield requirements.

soInvestment opportunities with less than 2:1 odds, which are difficult to simultaneously meet the expected returns and the requirements of the Kelly formula, should be abandoned.

Continue to see the results of the Kelly formula:If it's a 3:1 odds, that's a 33% position, and if it's a 4:1 odds, it's 37.5%.

Generally speaking, odds of more than 4:1 are usually blog restructuring, major innovation, cycle reversal, or dilemma reversal. It is difficult to guarantee a win rate of 50% or more (unless there is insider information), and positions cannot be raised.Therefore, in the vast majority of opportunities, it is inappropriate to use more than 40% of positions.

According to the Kelly formula,With a 50% chance of winning, no matter how big the odds are, the position cannot exceed 50%.

So what if you think your win rate is over 50%? Since the rise and fall of individual stocks largely depends on the index, and the index is an unexpected factor, even the best companies can be viewed as having a 50% win rate within the year.

The conclusion is that the maximum position is 20% to 40%, and the upward space is required to be at least 2 times the downward space.

Obviously, with most investments, we all realize at some point that it's not a “winner or loser,” so how should we handle it?

What if it's not a winner or loser?

Of course, most investments don't end up being “winners or losers,” usually for the following reasons:

Reason 1. The investment logic did not materialize as you expected

Reason 2. Your purchase cost is too high

Reason 3. Selling too early during the rise, or not seizing the opportunity to increase positions at a low price

Reason 4. There is a problem with the allocation of funds and insufficient positions

Reason 5. The market style is deviating in a direction that is not good for you

The first two reasons are that you made a mistake in your judgment,The first reason is a mistake in buying logic and upward space judgment, and the second reason is a mistake in judging the odds.

The third reason is the operational factor, and the “winner or loser” is to work wondersThere are companies that you have a lot of faith in. When they drop to ridiculous prices at special times, you have to dare to add to the maximum position; in the process of rising heavy positions, you also need to be able to hold on to them.

The fourth reason is a problem with the allocation of fundsWhen an opportunity arises, capital is wasted on “not a winner or loser” opportunity.

Winners and losses on mobile phones will be unevenly distributed, requiring patience and daring to make decisions. A typical victory or loss mobile conference in 2022 will focus on two stages:

1. Chance to fall out: Most growth stocks in late April, liquor and Hong Kong stocks in late October

2. Opportunity to rise: Coal stocks from January to April, new energy sector from May to August

As long as you have a certain position to seize any of these opportunities, and there are no major mistakes in taking over at a high level, you can clearly outperform the market last year.

Conversely, if you judge that the investment is determined not to be a “critical transaction,” the signs are:

1. The logic has changed

2. The stock price has increased greatly, and the time to open a position is missed

If these two signs appear, it is a “no winner or loser deal,” and the investment target will also change.The most important thing is to prevent it from becoming a “decisive loss” in the “winner and loser” again.

Well, the operation idea is very obvious.Profits must be promptly cashed out, and losses must be stopped in a timely manner.

The fifth reason for the only exception is that the expected benefits caused by the market style have not been realized, yet the fundamental logic of the enterprise remains unchanged.It not only means that the odds are getting higher, but it also means that it will take longer to achieve this profit, which is equivalent to moving the “winner or loser” chance to the next stage, that is, holding shares unchanged.

If the benefits of “winners and losers” have already been achieved, especially in the short term, usually the increase in stock prices is already too high, then it is necessary to treat it as a new investment, re-evaluate expected returns, odds, and win rates, and redistribute positions.

Every investment must meet the criteria of “winner or loser”

Most people's preference risk is habitually maintained at a fixed level, so it is impossible to dare to add positions significantly above normal levels when a decisive opportunity presents itself;

The remaining small group of people with a high risk appetite also often expose the risk of high positions to the chance of not winning or losing.

Most investments are likely to be “winners and losers” — either maximum profit or fatal loss, so any investment requires a thorough plan from the beginning, I'd rather miss it, make no mistake, not trade at will. Before buying, you should ask yourself a few questions:

1. Does it match your past high win rate company model? What is its maximum upside and downside during your holdings?

2. What kind of position does the expected yield you calculate match to meet the profit requirements of winners and losers?

3. What is the maximum position for the above odds and win rates calculated according to the Kelly formula?

4. To reach the maximum position, you will buy in several installments. How can you simultaneously meet the lower purchase cost and the right position?

5. Under what circumstances do you judge that it is not a “winner or loser” and converted into an ordinary investment?

6. If it falls halfway through, what channels do you have to verify your fundamental judgment? What would you do if you fell below the maximum downside you had envisioned?

Without Apple, Buffett's investment in his later years would be very mediocre. You can think of it as good luck, but you can also think of it as an inevitable part of the investment system. Without Apple, there would be bananas.

If big opportunities are a big fish, then the investment system is a network.The decisive opportunity may seem sudden; in fact, it's because every investment you make is carefully selected using the “winner or loser” criteria.

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