Source: Kigaku Club

1. The primary consideration for smart investors is never how to make money, but how to never lose money.

2. Although financial analysis is often complicated and annoying, its thought process isn't much different from when you go to the grocery store to buy something.

3. Focusing on value rather than price must become an instinctive thinking strategy for investors, and this must become an investment discipline.

4. Fear causes sane people to ignore the financial reality that determines stock prices. When fear takes the place of rational analysis as a key factor in defining stocks, it often triggers action, and most people want to sell.

5. Buy when you are afraid and sell when you are confident. Good traders and investors do just that.

6. Those who lost the most, at least those who lost money in the stock market, are usually the ones most anxious to recover their losses.

The above views are summarized by Steven Sears, senior financial director of “Barron's” in the book “Indomitable Investors” in the book “The Indomitable Investor.” As one of the keen observers of Wall Street, Sears has put forward some wonderful opinions on how ordinary investors can defend themselves, avoid capital market pitfalls, and increase the probability of successful investment.

First, he reminded a few common misconceptions about investor failure. For example, they confuse price and value, always sell out of panic, and overly believe in the legends of stock gods that have been packaged by the media. He admits that those who have lost the most are usually the ones most anxious to recover their losses.

Second, he believes that there is a huge difference in ideas between bad investors and successful investors: one idea can lead investors to finally return all of their profits and all or part of their original capital to the stock market, while the other idea allows investors to leave most of their profits.

Finally, he used John Paulson (John Paulson)'s reverse investment case,Emphasize that “reverse thinking” is the correct logic for investment thinking: “Reverse thinking is like the sonar of a submarine. It helps you overcome your fears and reminds you not to be greedy”.

I. Misconceptions of Failed Investors

1. Can't tell the difference between price and value

In the financial world, price and value are synonymous terms. When you examine the market from the perspective of price and value, you will gradually discover a “safety gap.”

The important concept of poor safety was proposed by Buffett's teacher Benjamin Graham.

The difference in safety is the difference between the intrinsic value of a stock and its market price. Intrinsic value is the value obtained by a company based on financial analysis. It differs from the stock market price.

Although financial analysis can be complicated and annoying, its thought process isn't that different from going to the grocery store.

If you could buy a can of beans for $1, then you'd never pay $50. But this simple distinction is often blurred when it comes to stock markets.

In the stock market, analysts at several major banks will give a strong recommendation to buy $50 beans and suggest selling cheap beans.

They will publish a research report saying that $50 beans are the best beans in the world. The management of this company is extremely talented, consumer demand is huge, and the gap is constantly growing.

Soon, the price of a $50 can of beans will rise. As people's interest in the amazing beans on Wall Street increases, the price will gradually reach its peak.

And the company that only sells a can of beans for $1 seems rather boring. Few analysts will write reports about this company, and people all want to invest in Wonder Bean.

This example may sound outrageous, but it does show that market prices are determined by multiple forces, and that some forces make no sense; this is nonsense.

Market prices are influenced by emotions and can rise due to fear, joy, or even simply irrational behavior and thoughts.

But the value of an asset is not equal to its price. It is very important for investors to clearly grasp the difference between the two.

The price is easy to understand, while the value is not. Analyzing value requires some thought and some math knowledge. The easiest way to measure value is to look at the price-earnings ratio. The price-earnings ratio can quickly tell you whether the price of a stock has a premium or a discount.

For many investors, it is difficult to justify buying a stock at a price greater than 20 times the profit. The higher the price-earnings ratio, the higher the investor's expectations.

This type of stock only needs to experience a bad earnings report or a problematic product once, which will cause the price to drop. Fast-growing stocks usually have higher price-earnings ratios, so it's necessary to compare such stocks with similar stocks, or look at industry indices or trade funds.

If a stock outperforms similar stocks in the same industry, you must find out why. This reason will determine whether this stock's earnings are temporary or sustainable, or is a sign that other problems are about to occur.

Focusing on value rather than price must become an instinctive thinking strategy for investors; this must become an investment discipline.

2. Always sell because of panic

Bad news can scare inexperienced investors.

They stopped thinking and began to react, so their personal sanity was gone. The whole group acted together. All stocks were viewed as bad, and no one thought about the advantages of each stock.

During the adjustment period, everyone rushed to the same door. The sharp decline changed the basic structure of the market. People sold stocks based on their emotional reactions to market news, and people's emotional reactions were intensified by popular behavior.

Fear causes sane people to ignore the financial reality that determines stock prices. When fear takes the place of rational analysis as a key factor in defining stocks, it often triggers action, and most people want to sell.

The right thing to do is just the opposite; this is when they should buy it.

Here's a market truth: buy when you're afraid, sell when you're confident. Good traders and investors do just that.

This seemingly strange rule creates profits for the bold and at the same time causes losses to those who panic and sell. This rule can also help keep losses to a minimum.

The natural trend is to sell when the stock market falls sharply, but if you buy stocks for a specific reason, such as dividends, increased sales volume, good financial conditions, etc., then there is no need to panic when others panic about selling. Selling is like selling something you bought at a high price at a low price.

Who is profiting? Wall Street! Who is losing money? yourself!

3. I believe in the legends that the media has packaged up: Buffett never said that!

The market always teaches ordinary investors to buy and hold, and whenever anyone doubts that the investment method of buying and holding might be wrong, Warren Buffett is used as a shield.

This great stock investor made it easy and natural to buy and hold investments. Of course, if you choose the right stock, then of course you have to buy and hold it.

However, the truth is that even this “stock god” has to sell stocks, adjust investment positions, and even change his mind.

One of his most frequently quoted quotes is “My favorite investment period is eternal”, a famous quote that brightens the aura in his head and obscures other facts.

Buffett rarely talks about selling stocks or making wrong investment decisions. He only writes these into corporate documents. Berkshire Hathaway, which he is in charge of, has to submit these documents to the Securities and Exchange Commission.

These reports are generally boring and difficult to understand, and are not as popular in the financial media as his letter to shareholders.

The harsh truth is — it's not as easy to buy and hold as it seems, many people misunderstand the concept, and it works very poorly.

2. Smart investors always think about how not to lose money

Successful investors are different from everyone else in the market. Their thoughts and actions are counterintuitive, and may be summed up in a simple sentence: Bad investors want how to make money, while successful investors think how not to lose money.

This is a principle every investor should know. Only by reading this sentence can you achieve real success in the stock market.

Bad investors and successful investors have very different ideas: one idea can lead investors to finally return all of their profits and all or part of their original capital to the stock market, while another allows investors to leave most of their profits.

Although good investment principles seem like common sense, people outside of the stock market don't know it.

That's one reason so many people fail in the marketplace: they lack a simple, appropriate, and disciplined investment decision-making framework.

Most people only want how to get rich, and get rich quickly. They try various methods again and again, take greater risks to reap profits and recover losses, usually with little success.

They continue to climb the risk ladder of the stock market and pursue higher returns from higher risk investments, yet they don't really understand the risks they face and the reasons for their failure.

The problem isn't necessarily that people are too greedy or stupid and don't know how to avoid the risks of the stock market, but rather that savers are increasingly entering the stock market, even though they were and are still financially “illiterate.”

These new investors are still only thinking from the perspective of civilians, not from the perspective of the investment market. This fault is fatal.

We cannot simply expect economic improvements or another bull market to eliminate people's financial problems. Instead, we must focus on the facts and ideas of the investment market that have been proven to be correct over time. For a long time, when other investors are in trouble, this can guarantee the safety of those outstanding investors.

If you think people can learn from losing money, you're wrong. Those who have lost the most, at least in the stock market, are usually the ones most anxious to recoup their losses.

The rationale is very interesting, and it is also the key to understanding why investors fall into a cycle of ups and downs.

Mark Taborksy (Mark Taborksy), a former chief strategist at Pacific Investment Management (PIMCO) and now employed at BlackRock, said:

“If someone invests a lot of money in the market and then loses money, their reaction is to jump back into the market right away, because the risk of not making money is greater than the risk of losing the remaining money.”

3. Correct investment thinking logic: reverse thinking

So, what is the proper logic for thinking about investing? There are all kinds of so-called investment rules and treasures circulating on the market, but let's start at the bottom of everything.

First, as the cornerstone and anchor of the stock market's sentiment, reverse thinkers are a good place to start. As you learn more about the market, understand how to deal with pressure, and analyze opportunities, you'll eventually develop your own investment style.

Like the sonar of a submarine, reverse thinking helps you overcome your fears and reminds you not to be greedy.

In 2005, John Paulson (John Paulson) was still a not-so-famous fund manager. When he began to question that housing prices in the US were rising too fast, people thought he was a fool.

When he made $4 billion a year, people thought he was extremely smart. From being unknown to being the envy of Wall Street, his story perfectly illustrates the important principles of reverse thinking.

Paulson made the only and probably the biggest reverse investment in the history of the free market. He didn't believe in the mainstream opinion on Wall Street at the time that “US housing prices had never experienced a nationwide decline,” so he decided to verify it himself.

While looking at housing price data, he discovered that the data used by Wall Street to argue opinions generally only dates back to the World War II period.

“You have to go back to the Great Depression (note: 1929-1933) to find a period where housing prices fell across the US. They didn't take this factor into account in their analysis.”

He asked the bank about this. The bank replied that even if housing prices fall to 0, at most it would be a short-term aberration, and housing prices would soon resume their upward trend.

So, when Paulson re-examined the methods Wall Street used to analyze the real estate market, he found that this data was based on nominal prices, which would mislead people because it included inflation.

The nominal growth rate was high in the 1970s, because there was a high double-digit inflation rate at the time, but Paulson believed that the real growth rate was very low.

When he converted nominal prices into actual prices, over a time span of 25 years, he discovered that housing prices did not rise as fast as in 2000-2005 in his record time.

He said, “Our opinion is that housing prices are overestimated and will be adjusted. The quality of collateral to buy a home is very poor, and huge losses are likely to occur.”

He began building his complex investment portfolio to find products that would add value if the real estate market collapsed.

Paulson said, “This was the situation at the time. Even our friends thought we were wrong and felt sorry for us.”

The US Financial Crisis Commission investigator asked him, “Why does everyone think you're wrong?” Paulson replied:

“With the exception of mobile homes that appeared in California in the early 1990s, investment-grade mortgages have never defaulted.

Other than that small amount of data, there has never been a default on investment-grade mortgage bonds, and housing prices have never dropped nationwide, so they couldn't have imagined this at all.

At the same time, the loss rate of mortgaged bonds was extremely low at the time, so they couldn't find any problems in the entire industry.”

How did Paulson initially think of questioning mainstream views in the real estate market? To a large extent, this stems from a sense of history.

Born in 1954, he lived for a long time and experienced a cycle of ups and downs in financial history.

Paulson said, “After going through cycles and times of peace, I have accepted the view that both the credit market and the housing market are cyclical; both will peak in quality and pricing, and then fall.”

Of course, not everyone can bet that the market will fall; many people are more likely to bet that stock prices will rise. Betting during times of crisis often frightens most people, but wise people are always discerning and decisive.

At the end of September 2008, during the outbreak of the subprime mortgage crisis, when no one wanted to get involved with banks, Buffett invested 5 billion US dollars in Goldman Sachs.

At the time, Lehman Brothers, the world's fourth-largest investment bank, had just announced bankruptcy. The US government took over Freddie Mac and Fannie Mae and rescued American International Group.

Berkshire Hathaway, which is managed by Buffett, purchased permanent preferred shares with $5 billion in two installments, with a 10% dividend.

Buffett was also guaranteed to convert the contract into shares, which means he could buy $5 billion of Goldman Sachs common stock at $115 per share.

The Wall Street Journal said the investment “shows that confidence in the financial system has strengthened at the beginning of this month since the subprime mortgage crisis.” When Goldman Sachs repaid the loan in 2011, Buffett's profit was as high as 1.7 billion US dollars, which is equivalent to a daily income of 190 million US dollars.

It can be seen that thinking backwards is important, and the fear of buying is certainly very profitable!

edit/lambor