First, you need to be able to judge your mistakes

Soros has this view:

It doesn't matter if you read it right or wrong; the important thing is to see how much you can earn right and how much you lose if you misread it.

There is a premise of this opinion. You must first be able to judge whether you are right or wrong, but many people can't do it; their original investment reason itself cannot be falsified.

Soros's investment philosophy was largely influenced by his teacher Karl Popper (Karl Popper), a representative figure of “falsifiable philosophy,” who believes that the core of the scientific method is the “principle of falsification” rather than “being proven.”

Science can be falsified; anything that cannot be falsified is not science.

Faith is the quintessential “unfalsifiable” thing, including religious beliefs, literature, art, values, and moral codes, all of which cannot be falsified.

Personal experiences and feelings are also unfalsifiable. If your male (female) friend tells you that she dreamed of you yesterday, this is an example of “unfalsifiable”. Believe it or not.

In investing, many of the reasons that sound very self-justifiable are “unfalsifiable”, such as:

All the stocks that can rise are in good standing; it's just that they are so well hidden that no one else can see them;

The rise and fall of the stock market is controlled by the government. Whenever it wants you to rise, you go up.

If you believe in unfalsifiable things in life, the problem isn't too big. Unverifiable falsification in investing is the difference between losing money and making money.

A good reason to invest should not only be proof; it should also clearly indicate what data, phenomena, and indicators will be in the future to reverse this judgment and allow you to stop mistakes in time. If you can't do it, then it is probably just a belief or feeling.

Falsifiable and unfalsifiable

When you see a bunch of recommended reasons, the reasons themselves are wrong; the next question is that they should be falsifiable in the first place.

Reason 1: After the new product enters the supermarket channel, future sales will increase month by month — falsification is possible. In the future, sales only need to be tracked month by month. If month-on-month growth cannot be achieved, it means that the reason is being falsified.

Reason 2: Key projects are progressing at an accelerated pace, and the second half of the year will usher in a production release period — it can also be falsified. In the future, it is possible to track whether new production capacity will be launched as scheduled according to the pace provided by the company.

Being able to falsify does not mean that this is a correct reason to invest, let alone guarantee that the results will make money. It only gives you an opportunity to determine whether your investment reason is wrong and to correct your own mistakes.

Reason 3: The inflection point of the industry is imminent. Valuation has a margin of safety — it cannot be falsified. Whether the valuation has a margin of safety is a very subjective judgment. No matter how low the valuation is, it may be “too expensive”, so you cannot find a counterexample to reverse this judgment, so it is “unfalsifiable.”

Reason 4: A new round of state-owned enterprise reform has begun, and PB repair can be expected — it is also unverifiable. On the surface, it provides an investment experience. State-owned enterprises have an obligation to preserve and add value to state-owned assets. When the net market ratio is too low, the valuation can be raised above 1 through procedures such as asset injection and acceleration of new business.

But this experience cannot be used as a reason to invest, because you also cannot give a counterexample. For companies with a PB of less than 1 times, the management is also working hard, and they also hope that the stock price will rise; you cannot prove that this is not a “state-owned enterprise reform.”

From these examples, it is easy to see the importance of “verifiability” in investing:

If it is a falsifiable reason, you won't be moved by the stock price drop until it is falsified; on the contrary, if there are certain signs that it is being proven, you should go back to the bottom;

If it is a falsifiable reason, after the falsification is proven, you should resolutely abandon this investment. No matter how many times you get caught, no matter how cheap it looks, you have no reason to continue investing.

On the other hand, if you only invest for reasons that cannot be falsified, such as “low valuation” or “state-owned enterprises are demanding PB repair,” then, if you are in an information vacuum, regardless of whether the stock price rises or falls, you will be anxious, and as a result, you will not be able to withstand the pressure to sell — probably in the midst of a decline.

The research and analysis report is a scientific structure. The first one is an investment reason that can be falsified. The final risk hint is actually when this reason will be falsified. If the reason is “future sales will increase month by month,” then the risk must include “sales climbing below expectations.”

However, many of the reports themselves are unqualified; for example, “valuation has a margin of safety”, it is difficult to respond to corresponding risks; what are the risks corresponding to “the beginning of a new round of state-owned enterprise reform”? Can't you just say “reforms fall short of expectations”? How do you verify it? Therefore, we can only say that “falling orders” and “increased competition” are risks unrelated to investment reasons.

Investment reason 5: Differentiated management can maintain high gross profit

“Maintaining a high gross profit” can be falsified, but “differentiated management” is a relatively vague statement. There are varying degrees of differentiation between products produced by most manufacturers. There are no indicators to determine the size of the differentiation, and it is impossible to determine whether differentiation is positively correlated with gross margin in all ranges. The result is that if gross margin declines, it is difficult for us to determine whether it is due to a decrease in the degree of differentiation.

Therefore, this common reason, which seems very reasonable, is also “unfalsifiable,” and it is difficult to fully trust it.

Continue to read Investment Reasons 6 and 7.

Investment beliefs cannot be falsified

Reasons 6 and 7 are typical Buffett investment ideas, not investment reasons.

Reason 6: The company's business model is a franchise, a company that even a fool can manage well

This is a typical verifiable but unfalsifiable reason. We can cite that many businesses have been stable for a long time, but the management level is average and changes frequently, but this only proves that it is difficult to verify. If there is a problem with Maotai's operations in the future, we can't determine whether the “moat” has been falsified, or whether the “moat” is fine, but the company's management is not good enough.

Perhaps this is a useful investment idea, but the relationship between its opinions and evidence is fragile and is based on subjective value judgments.

Reason 7: Seeing such a good opportunity, you should concentrate your position investment as much as possible

Similarly, “concentrated investment” or “diversified investment” is related to investors' income expectations. It is an issue at the level of investment beliefs and values. It is not only unfalsifiable, or even unprovable.

Faith isn't unimportant; investing requires faith; it's just that it can't be a reason to invest.

Using belief as a reason to invest can also easily lead to the logical fallacy of “circular certification”, such as:

Reason 8: As long as the Federal Reserve sees inflation as the biggest threat, they won't stop raising interest rates

Circular certification is a mistake that investors often make in macro-analysis. “The Federal Reserve believes that inflation is the biggest threat” itself is unobservable. It tries to use the results of a variable to prove the accuracy of this variable itself, thus forming an infinite cycle of argumentation.

This type of opinion is always true, but it is of no use. This includes but is not limited to:

More buyers will rise, and more sellers will fall;

Take advantage of the upward trend; sell when the trend changes

Also, look at reasons 9 and 10. They themselves are also “falsifiable”, but they are very difficult and require corresponding investment methods.

Verifiability matches the investment period

Reason 9: This is a long slope and heavy snowy track

Reason 10: XX faucet, stable moat

Both of the above are typical long-term logics. They themselves can be falsified, but their falsification process is very long. The verification period is at least one investment cycle, and the starting price is five years.

If you usually invest for a year or two, then these two reasons don't support your investment, and you can easily lose confidence in a business's declining cycle.

For such companies, you also need more “falsifiable” reasons. For example, you need to quantify “heavy snow on long slopes” and “leading moat status” to a certain year. Its growth rate can slow down, but it needs to be higher than the industry average, so as to see an increase in market share within a declining cycle.

This seems like you think that a student is very smart and can be admitted to Tsinghua Peking University, but you also need to constantly verify whether they are lower than the top five in the school in different levels of difficulty and similar tests, and refine the long-term “falsifiable” logic into a “phased falsifiable” investment reason.

Compare these two investment methods:

Traditional deep value investment has a long “verifiable” cycle, so the requirements for logical strength are higher and the margin of safety is higher; boom investment based on phased performance delivery looks at “phased falsification,” which requires a higher degree of observability of performance delivery.

Reason for investment 11: This wave of AI is an artificial intelligence revolution comparable to the industrial revolution and the information revolution. It will be applied in depth to various fields, change people's lifestyles and social structures, and a number of new companies with a market capitalization of 100 billion dollars will emerge.

If you take this proposition as an investment belief, of course, there is no need for falsification, but if you use it as an investment reason, it can actually be falsified. Like the reason above, the verification period is very long, and it takes 5, 10, or even 15 years.

Therefore, many traditional value investors are a bit skeptical about how much of this wave of AI is. They mainly think that it is difficult to see substantial business in the short term; they are just saying that the falsification is too poor

Of course, from the perspective of subject hype, this reason can be falsified in the long term and unverifiable in the short to medium term is instead the best hype topic.

The principle of unfalsification of subject matter hype

The characteristic of the hype about the subject is that the first believers buy it, let the unbelievers take the lead, and then by emptying the market, they force these unbelievers to have to believe; if they can't beat it, they can only join.

Speculating on topics earns money from market sentiment. Rationality is the enemy, and the “unfalsification” based on faith has always kept the subject “invincible”. Many companies, looking at short essays in research reports, are all future Microsoft Nvidia. When they go to the field, they are all from LeTV Network in the past.

Therefore, “unfalsifiable” is the most important prerequisite for subject hype. Whether it's the new energy revolution three years ago or the current AI revolution, whether it's the digital economy or China Special Assessment, it is “phased unfalsification” to a certain extent. Look again---

Reason 12: “XXX will launch its own big model next month, and the stock price space is huge”

This is falsifiable, and it also has a very clear falsifiable time point — a certain day in April.

But from another perspective, March was “absolutely unfalsifiable”, so it was also the best hype target.

However, by April, when the stock price reaches a high level, it will fall into a game. Once it falls short of expectations, where the stock price goes back and forth, smart capital will not choose this pure game event with a 50% win rate.

Therefore, “unfalsifiability” is one of the bases for judging the market style. When the market's views focus on the logic of being unfalsifiable, it indicates that the style is mainly speculative on the subject; when all the rising stocks in the market are falsifiable logic, it indicates that it has now entered a stage driven by prosperity or fundamentals.

Of course, I'm not saying that speculation is bad; it's just that everyone needs to know whether they are making emotional money, or money that is cashed out logically. To make emotional money, they should pay attention to “unfalsifiable” reasons. To earn money that can be realized logically, they should pay attention to “falsifiability.”

Strong can be falsified, defeat weak can be falsified

There is some investment logic that can be falsified, but you have no ability to falsify it, such as

Investment reason 13: XXX companies need to inject assets so that the Group's high-quality assets can be listed as a whole, and the market capitalization space is huge

Aside from being an insider information, the biggest problem with this reason for investing is that even though it can be falsified, you have no ability to falsify it. Even if it comes from a very reliable person, it can lead to an “insider information paradox”:

If an insider information is seriously leaked, then the existing restructuring may be forced to be suspended; if no insider information has been leaked, then how can you seek evidence from another path?

If there is a sharp drop after buying, then the only right thing you can do is stop loss. As soon as this investment began, you were in a very disadvantageous position.

Conversely, the best investment is when you can prove counterfeiting, but others don't have this ability.

For example, if you have an exclusive information research channel in a certain industry, you can verify business progress. As a result, when the market is good, most investment opportunities will be discovered, attracting a large number of investors who actually have no ability to falsify to buy. Once you encounter systemic risk, these investors can only panic and sell first because they are unable to verify the fundamentals, causing the stock price to drop over and over again, creating an excellent buying opportunity for you.

So falsification is not only a gold standard, but also a weapon:

You can prove falsification over others cannot prove falsification,

Strong falsifiability overcomes weak falsifiability,

Fast can be proven can defeat slow can be falsified.

The last classic case is Haidilao. As a pioneer in a restaurant chain, the number of stores opened like crazy in '20-21. There must be a limit, but no one, including the owner himself, knew where this limit was. They wanted to know the answer. They only kept opening the store until the turnover rate dropped and they couldn't recover, which was the limit.

Although Haidilao's valuation was outrageous at the time, it was still rising, because it was a falsifiable investment reason. The key is to keep an eye on the turnover rate and see who is the first to falsify it can escape the top as soon as possible. Currently, no one wants to get out of the car first until it is falsified.

At this point, the most disadvantageous are long-term retail investors who only read the logic of opening a store but have no ability to falsify it. From the top of the mountain to the foot of the mountain, followed by retail investors who only do grassroots research, they can only escape in the middle of the mountainside. Institutions with “strong authentication and falsification capabilities” are also ranked: the worst are seller agencies that conduct low-frequency research; the strongest ones are those that can find POS machines, but the number of stores is not representative; the smartest people go directly to power bank manufacturers that Haidilao cooperates with. Basically, they can see the previous day's data the next day, and they are global, and they are the first to escape the peak.

Similarly, Oriental Selection's peak was also due to its live streaming sales peaking too early, thereby falsifying the general logic of its e-commerce market space for high-quality agricultural products.

All of the biggest bullish stocks in history have seen their core logic “falsified”. Whoever has the ability to prove falsification first is more accurate.

Therefore, the shorter the investment period, the higher the valuation and increase of the purchase target, the higher the requirements for verifiability; if you don't have strong resources to prove falsification, you can either participate in emotional hype or find some long-term white horses with a very long verification cycle.

Investments do not pursue the right path

The pursuit of investment is not correct, but profit. There are many logically justified investment reasons, because “unfalsifiable,” often leading to investment losses.

George Soros used to be a student of Carl Pope, and they have many ideals in common. Both emphasized the finite nature of human understanding and the need to constantly revise our opinions and decisions, so falsification is more important than proof.

According to Carl Pope, a scientific theory has not been falsified through many experiments and observations; it is only temporarily accepted as truth. This does not mean that the theory is absolutely true; the theory may still be falsified.

Influenced by these views, Soros also thought:

“In financial markets, things are always unexpected. Even if you're the smartest person in the market, you make mistakes... and if you want to be successful in investing, you have to learn to recognize your mistakes before you make them.”

Editor/Jeffrey