Source: Ideological Steel Seal. I. Hunting and running genes. A friend who had been trading stocks for several months told me, "Actually, your job is very simple. I found that the strongest stocks are the least likely to fall, so stock trading is very simple. Just pick the strongest stocks to buy, and once they weaken, sell them immediately. Basically, you can make money." Because he is a friend, I jokingly said, "You already have the most basic ability of stock investors-pattern recognition. But the pattern recognition you just established is too simple and completely wrong." Sure enough, in May, when the market went down, he repeatedly lost in battle and no longer felt that stock trading was simple. Pattern recognition is the basic way for human beings to understand the world. Apples have red, green, yellow, large, small, round, and pointed shapes. People should first establish the pattern of apples in their brains and then look at apples. No matter what kind of apple, whether it is whole, half, a piece, or even an apple core, they know it is an apple. However, patterns can be simple or complex, and can be innate or established through long-term learning. When a person just starts to invest, identifying opportunities is to use the most primitive pattern-hunting prey and avoiding natural enemies. The instinctive reaction to hunting prey is excitement, and the driven action is attack; the instinctive reaction to avoiding natural enemies is fear, and the driven action is escape. This is left in our genes by human ancestors and is based on emotional reactions of the hypothalamus, not cognitive reactions of the brain. Both instinctive reactions have the highest priority because opportunities are fleeting and require a quick response. Therefore, this pattern of new investors will be called first. When the stock price plummets rapidly, the fear reaction is the first to be stimulated to sell, and when the stock price surges rapidly, the excited reaction similar to hunting is the first to be stimulated to buy. However, the higher the level of evolution of animals, the more complex the environment they face, and the enemies and prey are not so clear-cut. If a misjudgment occurs, blind attacks may result in death, and random evasions may result in exhaustion rather than starvation. Similarly, there are very few real trend markets in the stock market, and the vast majority of them are shock markets. If you adopt a simple strategy of chasing gains and cutting losses, you are likely to lose everything. Therefore, investors need to establish a more complex "opportunity-risk recognition model" in their brains through learning. A person's investment ability is strong or weak based on their pattern recognition ability, which has two different directions: 1. Same recognition speed, but a more complex model established through long-term learning outperforms; 2. Same complex model, but faster recognition speed wins.

Humans always prefer shallow patterns that are visible at a glance. To appease themselves, they even call it "simplicity is the ultimate sophistication." The comments section of public articles often has people coming over to tell me that you are too complicated, and it's just a one-sentence thing. Simple patterns are not only useful, but also fast. Can your brain be faster than a computer? Quantitative strategies are not dropped from the sky. Some people say that quantitative companies analyze the experiences of various stock trading competition winners and turn them into quantitative strategies. This statement is a bit exaggerated. It is not that easy, but it is almost turning various effective methods in the stock market into strategies that computers can understand and execute. Then, find opportunities in the entire market with more powerful processing power, and complete transactions with faster reaction speed to defeat the master.

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Because we're friends, I jokingly said, "You already have the most basic ability of investors - pattern recognition. But the pattern you just established is too simple and completely wrong."

Sure enough, in May, when the market went down, he repeatedly lost in battle and no longer felt that stock trading was simple.

Pattern recognition is the basic way for human beings to understand the world. Apples have red, green, yellow, large, small, round, and pointed shapes. People should first establish the pattern of apples in their brains and then look at apples. No matter what kind of apple, whether it is whole, half, a piece, or even an apple core, they know it is an apple.

However, patterns can be simple or complex, and can be innate or established through long-term learning.

When a person just starts to invest, identifying opportunities is to use the most primitive pattern-hunting prey and avoiding natural enemies. The instinctive reaction to hunting prey is excitement, and the driven action is attack; the instinctive reaction to avoiding natural enemies is fear, and the driven action is escape.

This is left in our genes by human ancestors and is based on emotional reactions of the hypothalamus, not cognitive reactions of the brain. Both instinctive reactions have the highest priority because opportunities are fleeting and require a quick response.

Therefore, this pattern of new investors will be called first. When the stock price plummets rapidly, the fear reaction is the first to be stimulated to sell, and when the stock price surges rapidly, the excited reaction similar to hunting is the first to be stimulated to buy.

However, the higher the level of evolution of animals, the more complex the environment they face, and the enemies and prey are not so clear-cut. If a misjudgment occurs, blind attacks may result in death, and random evasions may result in exhaustion rather than starvation. Similarly, there are very few real trend markets in the stock market, and the vast majority of them are shock markets. If you adopt a simple strategy of chasing gains and cutting losses, you are likely to lose everything.

Therefore, investors need to establish a more complex "opportunity-risk recognition model" in their brains through learning. A person's investment ability is strong or weak based on their pattern recognition ability, which has two different directions: 1. Same recognition speed, but a more complex model established through long-term learning outperforms; 2. Same complex model, but faster recognition speed wins.

II. Defects of human pattern recognition.

Humans always prefer shallow patterns that are visible at a glance. To appease themselves, they even call it "simplicity is the ultimate sophistication." The comments section of public articles often has people coming over to tell me that you are too complicated, and it's just a one-sentence thing.

Simple patterns are not only useful, but also fast. Can your brain be faster than a computer?

Quantitative strategies are not dropped from the sky. Some people say that quantitative companies analyze the experiences of various stock trading competition winners and turn them into quantitative strategies. This statement is a bit exaggerated. It is not that easy, but it is almost turning various effective methods in the stock market into strategies that computers can understand and execute. Then, find opportunities in the entire market with more powerful processing power, and complete transactions with faster reaction speed to defeat the master.

Contains Chinese characters that cannot be translated.

Contains Chinese characters that cannot be translated.

Contains Chinese characters that cannot be translated.

Because corporate operations are a slow variable, even with computer efficiency, stock analysis based on fundamental analysis does not work.

Therefore, the road of "martial arts in the world, only fast and not broken" has been blocked by algo trading, and the only direction for subjective investment of human beings is to develop towards more complex direction, which is a "black box recognition mode" that even oneself can't explain clearly.

Another threat of algo trading strategy is its mechanism of correcting brain defects, which can identify "false causes, false laws, true randomness".

Human beings are creatures who pursue meaning. The human brain has been pursuing the causal relationship between phenomena and events in order to satisfy our need to control the world. However, the real world is full of randomness, and most phenomena do not have obvious reasons. Therefore, the human brain has developed a mechanism of "avoiding randomness", does not believe in coincidences, and distorts and forcibly explains the observed random phenomena to form a causal relationship.

When the stock market falls, the intuition is related to shorting mechanism. Then it is the fault of margin brokers that must be blamed, then it is restricted short selling; but after the limitation, the stock market still falls, then algo trading should be blamed, and the trading speed should be restricted; it still falls, then it is because the valuation of the new stock is too high, and "margin brokers" should be opened up...

When the stock market falls, it must be due to too many IPOs and too loose regulation, so the IPOs should be stopped; but after being stopped, the stock market still falls, then it is because there are too many ST stocks and the regulation is too strict, so it is suggested to suspend the ST stocks; after being suspended, the stock market still falls, then it is because the listed companies are aging, and IPO should be opened up to allow excellent companies to go public...

Most people like to look for reasons from things that can be understood intuitively. In the mass media, only the reasons that can be understood intuitively will be widely spread. Those deep-seated reasons are not understood and do not want to be understood. Anyway, I can't make money, so there must be bad people. If you can't find the bad people, it means that the system has problems...

Another characteristic of the human brain is that it prefers to accept rules that seem intuitive:

Because of the two previous small ticket crashes, we copied small tickets and made money when the management came to pacify, so we played like this this time. However, people who can understand and act on such overly simple rules must be more and more each time. This leads to three possibilities:

1. Not deep enough to catch it: Someone will buy ahead of time when it doesn't fall to a very low level, which limits the rebound height;

2. Caught in the middle: If you can catch the bottom again, it must be that the selling volume is larger than the first two times, which probably hides behind the crisis that you have not discovered. The market only stays at this position for a while and then continues to fall;

3. Wrong catching: You caught the bottom, and the market also rebounded, but the rising sectors did not fall, and those who can catch the bottom continued to fall.

This conclusion is not necessarily correct, but if you try it repeatedly, you will eventually lose all the money you earned before.

To make the right decisions, you cannot think like most people. This is not to deliberately "think in reverse", which is still a lazy way, but to make your model as complex as possible to the limit that you can handle.

Three, how investors improve:

"Danger-food" recognition model is innate, and other recognition models need to be practiced repeatedly and pay tuition.

Take the company value analysis of value investment as an example:

Relying on the experience of good companies in life, when you first enter the stock market, you may easily establish such a preliminary model: good companies = good demand + high product market share + high gross margin.

All good companies are like this, but it is not until you encounter a brand and product that is declining, which causes you significant losses.

If you don't give up because of this, but learn from mistakes and seek the problem of recognition model, you may find the answer in those books that talk about Buffett. Not only should the market share be high, but also a moat is needed, not only gross margin, but more important is to look at ROE and ROIC.

So you adjust your own model, add the features of good companies in Buffett's eyes, update your stock pool, but you lose money again in a company with too high valuation, and find that it can "improve performance and lower stock price".

Undaunted, you once again search various valuation methods books, trying to incorporate valuation indicators into your own model. However, you soon encounter the kind of 'valuation trap' company again, and suffer losses due to overly focusing on valuation. In the product structure, the operating income of 10-30 billion yuan products are 401/1288/60 million yuan respectively, and the overall sales volume of the company is 18,000 kiloliters, with a year-on-year growth rate of +28.10%, showing significant growth.

Of course, your experience now allows you to slowly find a balance between fundamentals and valuation, and you have made some money. But just when you thought your identification model was very mature, you once again encountered trouble: a company with absolute competitive advantage and very good industry outlook, with a reasonable valuation, which after repeated fundamental analysis, did not reveal any problems. You are certain that the market is wrong, so you buy more as the price drops, but it only keeps dropping more.

Through consulting industry analysts, you began to realize that your model was relatively weak in analyzing competitive dynamics, and that you should not only look at the company's absolute advantage, but also the industry's investment intensity, namely the capital cycle. Even the most outstanding companies cannot resist the long cycle downturn.

Although you lost money, your model has improved. Through this experience, it is now unlikely that you will lose large sums of money again. However, you are no longer as confident as before. You find that no matter how you progress, problems always seem to increase, such as:

1. Is macro really a waste of time to research again after your previous efforts?

2. Is the market really going to continue making mistakes as you used to think? Are those errors or warnings of future dangers?

3. Can you really be fearless of market fluctuations and wait for the time of a good investment opportunity? Is Buffet's success due to a successful method or merely a huge survivorship bias?

4. Were the profits you made really alpha profits? If the market no longer had beta, could you still make money?

......

Every time your model encounters consecutive losses, you try to add new indicators or methods of operation to the model, but most of the time, it either conflicts fundamentally with the model or the result is even worse, forcing you to go back to the original method.

This actually means that your model has basically stabilized and can only be polished, with little room for improvement. You can only accept periodic failures unless you are willing to start from scratch.

Therefore, the meaning of the model is not to avoid mistakes, but to establish a stable profit model. Different models are good at identifying different opportunities. Some have high win rates but low payout ratios; some have low win ratios but high payout ratios; some have low returns but low volatility, while others have the opposite. However, overall, the more complex the model, the more stable your excess returns will be.

Investors all have their own weaknesses.

The preceding discusses the process of creating a model for identifying investment value in companies, and also has the following two conclusions:

1. Truly effective identification models are always very complex and highly scalable.

2. Truly effective identification models periodically fail, motivating users to keep trying new methods.

Humans have long left the prehistoric era, but the design of the brain still lingers on the core functions of that era - efficient hunting and rapid fleeing. We instinctively use the fastest model to draw the simplest conclusions for complex games we face, using imagination that is self-serving to replace profound rational thought.

In fact, stock investment is very easy to amplify our weaknesses -

Those who think too shallowly need not be mentioned.

Those who always want to make things clear forget that investing is a decision made under incomplete information and easily miss the opportunity.

Those with too strong logic often lack the ability of self-correction. If they make a wrong start, their self-serving ability will deceive themselves.

People who rely too much on intuition lack the ability to upgrade their systems and cannot form stable investment strategies.

Those who are too sensitive to change often lack the willpower to hold on to opportunities.

Patient people tend to persist in small mistakes and turn them into big ones.

So the meaning of a model is not to make no mistakes, but to control one's weaknesses within an acceptable range to stabilize profits.

So how do you build your own recognition model? My public account mainly focuses on investment concepts and methodologies, while the interpretation of specific A-share investment opportunities is on my Knowledge Planet "Thoughts Steel Seal", where I give a periodic analysis of the logic behind sector rotation and provide the most worthwhile directions to invest. If you are interested, please subscribe to my Knowledge Planet. Specific instructions are provided in the following section.

Editor / jayden