Source: Passing the Light in the Vastness by Yao Bin. In order to achieve great success, concentrate on solving a few important problems that can be accomplished with 20% of your time. This is the concept of important few and trivial many. To truly succeed, one must focus and be fully concentrated. In terms of product structure, the operating incomes of 100-300 billion yuan products are 401/1288/60 million yuan, respectively.

The author of "The Number One Rule of Investment" is Christopher Brown. Brown's father founded Tweedy, Browne Company LLC. This company helped Buffett acquire Berkshire Hathaway. In fact, as early as the late 1950s, Benjamin Graham almost bought this company, but in the end, he passed by it. Therefore, the Brown family has a close connection with Graham and a deep relationship with Buffett.

Christopher Brown has managed Tweedy Browne Company LLC for many years, accumulating rich investment experience and providing a lot of wonderful cases for his value investment courses. In "The Number One Rule of Investment", Brown proves that the value investment method is the best way to maximize investment profits, using the greatest value investment masters in history as examples. The value investment theory was very effective in the past, and it is still effective today, which has been verified by time.

Based on two simple principles.

As early as the early 1930s, value investing was proposed as an investment concept. Value investing is not a rigid and strict set of rules, but a series of principles that make up the investment concept. It points out which stocks have investment value for us, and equally important, it also tells us which stocks we should stay away from. A large amount of evidence incontrovertibly shows that value investing can create an investment return that can consistently exceed the market benchmark rate of return.

The beauty of value investing lies in its logical simplicity. It is based on two simple principles: the amount of value (intrinsic value) and never losing money (margin of safety). Graham defines intrinsic value as the price a rational buyer would pay for a company in a fair negotiation with a rational seller who has fully mastered the information.

But few people pay attention to intrinsic value, and its importance is beyond doubt for two reasons: first, it can let investors know whether the current market value of the stock is cheap compared to the price paid by the buyer to buy the entire company; second, it can let investors know whether the value of their shares is overestimated. If you want to avoid losing money, this overestimated part is particularly important.

The price of a stock deviates from its intrinsic value most of the time. The importance of intrinsic value is that it allows investors to fully utilize the temporary deviation in stock pricing. If the market price of a stock is lower than its intrinsic value, the market will eventually recognize the existence of this deviation and will promote the market price to rise to the level that reflects its intrinsic value.

In this case, the company can choose to sell based on its intrinsic value, and the company's raiders may also take the opportunity to buy the stock at a price that basically reflects the company's intrinsic value. Once the stock price deviates from its intrinsic value, it may fall into the "emperor's new clothes" situation and turn a blind eye to the crisis at hand. For example, the market bubble of Internet stocks in 2000. At that time, these new-generation network stocks could not evolve into a real industry, let alone create real profits, but they carried such high stock prices.

For an ordinary company, if its stock is currently in a routine decline, you can rest assured that the stock value can still match your investment, and the price will definitely rebound someday. But if the value of a stock has always been overestimated by the market, when its stock price collapses, history tells us that it is almost impossible to return to the previously overestimated price. This will cause irreparable "permanent capital loss."

For rational investors, their task is to identify such overestimated or underestimated situations in a timely manner and to fully utilize the psychological characteristics of the market to control the market. They need to have sufficient patience to perceive every move in the market. Once there are stocks in the market that are undervalued compared to their intrinsic value, they will seize the opportunity to buy these stocks that are so much more valuable than what they cost. True value investors will not let themselves fall into the stock market bubble. The net assets and intrinsic value of most companies will increase over time. If intrinsic value is the investment benchmark, then there are two ways to make profits: first, the value of the held stock will continue to grow during the holding period; second, if the value of a stock growth from below the level of intrinsic value to the intrinsic value, it will be a win-win situation.

When buying stocks based on their intrinsic value, future returns can only be limited to the company's internal revenue and dividends that the company may pay. According to the long-term view of the S&P 500 index, its annualized growth rate is around 6%, 3% of which comes from GDP growth and the other 3% comes from inflation. Therefore, if the S&P 500 index is regarded as an independent company, its annualized growth rate of intrinsic value is 6%. But investing in stocks is different from a savings account with an annual interest rate of 10%. For stock investments, the returns between years are often fluctuating, and sometimes there are obvious deviations. Therefore, the 10% annual growth rate is the average of prosperous and gloomy years over the years.

Graham's starting point is to buy stocks at 2/3 or even lower prices of intrinsic value, which is his safety margin. For value investors, the secret to creating wealth and outperforming the market is to use 50 cents to buy $1. There are three principles of safety margin: avoiding high leverage, diversified portfolio, and unique opportunities. According to the basic principles of value investing, as long as the stock is cheap enough, it should be bought, ignoring the various noises and hustle and bustle around, and fully seizing the discount opportunity of the stock. Conversely.

Undoubtedly, it is the first rule.

The golden time for value investors is when the market is falling. When the stock price falls, it is the time for investors to concentrate and open their eyes, and they can find stocks that can be bought at a low price. But the fact is, they often panic and join the army of fleeing the stock market to seek inexplicable security. In their view, only holding cash is the safest. In fact, the risk is more reflected in the price paid than in the stock itself.

The rapid decline in stock prices is a rare opportunity: investors can buy stocks much cheaper than before the crash. When others sell off after hearing news reports, it is the time for investors to find value investing opportunities for themselves, and the subsequent rebound of the stock market will definitely profit them. But it is important to recognize that if a company has a sound balance sheet and considerable earnings, its stock will eventually recover. According to Brown's experience, after the stock market falls, as long as the company has a strong fundamental, most of their stocks will rebound, the only difference is the early or late rebound. Studies from 1932 to present have confirmed that when quality companies encounter difficulties, their stocks will rebound sooner or later, and the rebound time is extremely regular.

Wall Street often warns investors that trying to grab a falling knife is very dangerous. However, when the stock price falls 60% in one day or bankruptcy and the failure rate of operation increases four times, there may be countless investment opportunities brewing. The purpose of value investing is to maintain a reasonable safety margin on a regular basis, and by adhering to the principle of safety margin, it is more likely to increase the value of the investment portfolio and reduce the chance of failure. But remember, don't try to grab those expensive and shoddy "knives".

Buffett is very excited about the bargains brought by the stock market crash. In an interview with Forbes magazine on November 1, 1974, he actually used the phrase "in the midst of indulging among beautiful women" to describe his current mood. American Express is a very convincing example. It tells us that even the falling knife, as long as the timing is grasped, and high-quality stocks are bought at low prices, it is still possible to double profits. Buying undervalued stocks that provide a safety margin can bring successful investments, which has almost become a consensus. As long as those inexpensive goods are acquired, we will find that it is precisely in those stocks that are heavily sold and repeatedly hit new lows that we can find real bargains, rather than the popular stocks that are high and not falling.

In fact, 80% to 90% of stock returns only occur in 2% to 7% of the time of the entire investment period. A study shows that during the most profitable 60 months (or 7% of the total time) from 1926 to 1993, the average return rate was 11%, while the average return rate of the remaining months (or 93% of the total time) was only about 0.1 . As a long-term investor, the real danger and what can really jeopardize the nest egg is that you are out of the market when something big happens.

So, all we can do is accept such a seemingly cruel reality: we must endure some temporary market declines. Long-term value investing is like a long-distance journey, as long as the plane is in good condition, it will eventually arrive safely at the destination. Investment is the same, if the investment portfolio structure is reasonable, market fluctuations are not worth worrying about, nor can they be called disasters. Achieving investment goals is only a matter of time.

Since the main part of investment returns only occurs in a small period of time during the entire investment period, but identifying this period and adjusting the timing of buying is an almost impossible task. There are two equally important issues: short-term actual investment strategies are impractical; only invest as much as possible throughout the period to achieve the highest investment return. This means that only by participating in the competition can you have a chance to become a winner. This is also what Charles Ellis said, "'When lightning strikes,' you must wait there."

William Sharp found that in order to earn money by timing the market in the short term, market timers must achieve an accuracy rate of 82% when judging the timing. But this is clearly not an easy task. Peter Lynch also pointed out that according to his calculations, more than half of the investors in his fund are losing money. For its reason, he found that after two good quarters of performance, investors often think that the good times have just begun, so they enter the market in large numbers. But after several quarters of mediocre performance, the original enthusiasm disappears, and investors leave the market one after another.

From 1985 to 2005, the annual compound return rate of the S&P 500 index was 11.9%. During these 20 years, investing $0.01 million in S&P 500 index funds will eventually appreciate to $0.0946 million. However, research shows that most ordinary investors' $0.01 million investment can only become $0.0214 million during this period. The reason is that most investors leave the market when the stock market falls because they believe the downward trend will continue. When the stock market rebounds, they re-enter the market, missing the most profitable period in the rebound process.

A study also shows that if investors can avoid all periods of stock price crashes from 1990 to 2005, a $0.01 million investment can increase in value to $0.0514 million. But if you miss the 10 best days with the highest return during these 15 years, the investment result will only be $0.032 million. If you miss the best 30 days, which is one month out of 180 months, the final value will become $0.016 million. If you miss the 50 days with the highest returns, the consequence will be losing money, and the initial $0.01 million will only remain at $9,030.

The most frustrating thing in long-term investment strategies is the variability of prices. But any expensive investment, like real estate, should be treated as a long-term asset. Rising and falling prices are the eternal main theme in the market. The key issue is that when the stock market continues to rise, you are holding the right company and the right stock in your hand. The biggest advantage of value investors is that they know that the stocks in their hands have several features that can win in the long term. More importantly, they always focus on their investments with a margin of safety.

In history, most legendary investors have adopted value investing strategies. Indeed, many investors who did not follow value investing strategies have achieved excellent performance during a certain period, even dominating the investment industry for a long time. But this is only an exception. Among those investors who have long-term success beating the market, the vast majority are truly value investors. Therefore, value investing becomes the well-deserved "number one rule".

Feasibility of value investment techniques

Many scholars have conducted in-depth research on successes and failures in the stock market. This has attracted Brown's great attention because it will verify the feasibility of many value investment techniques.

When discussing whether value investment or growth investment is right or wrong, one of Brown's favorite studies to mention is the study of "reverse investment, deduction, and risk." The study divided all stocks on the New York and American stock exchanges into ten groups by price-to-earnings ratio and assumed that all investment portfolios would be sold after holding for five years. They found that after holding for five years, the market value of low P/E ratio portfolios was almost twice as high as the return. They also divided these stocks into ten groups by the ratio of market value and assumed a holding period of five years. Based on this, they studied stock prices between 1969 and 1990, and the results were almost identical: after a holding period of five years, the yield of stocks with much lower market value than book value was almost three times of that of those blue-chip stocks. In the same study, they also found that the yield of low P/E ratio stocks was 73% higher than that of growth stocks in a one-year holding period, 95% higher in a three-year period, and 100% higher in a five-year period.

This is one of the most in-depth and sensational studies on value stocks. It comes from a paper published by Richard Seder and Warner Debert in 1985 in the Financial Weekly entitled "Does the Stock Market Overreact?". They examined stock prices over 46 years from December 1932 to 1977. They first studied the worst-performing 35 listed stocks and the best-performing 35 listed stocks over the previous five years of the New York Stock Exchange and compared the investment results of each index funds composed of all stocks owned by the New York Stock Exchange with the same weights. The results showed that the average return on investment of the 35 worst-performing stocks exceeded the index by 17% in the next 17 months. As time passed, the past 35 shining stars faded, with an average return rate of about 6% lower than the same period index fund. In addition, through the study of portfolio holdings for more than 3 years, they found that the market performance of the "worst" stocks has always exceeded the "winners" in the past. In 1987, they published another paper entitled "Further Study on Investment Overreaction and Seasonality in the Stock Market". After dividing the stock returns into five parts (20 groups), they found that the yield of stocks with market prices below book value is 40% higher than the average market return, which is nearly 9% higher each year.

There are many such studies in "The Number One Rule of Investment". Brown uses this to verify the feasibility of many value investment techniques, that is, stocks purchased according to a value investment strategy perform better than stocks with lower expected returns. The final conclusion is self-evident: For Wall Street's so-called "falling knife," wherever it is in the United States or globally, it has always demonstrated the ability to exceed the market.

Today, we still need to be cautious in examining these studies, because any study or strategy is a product of its time. Moreover, if the sample size is insufficient, fallacies will inevitably occur. However, Brown at that time still believed that if there is any winning formula in the stock market, it is value investment. Academic research has proven this, and investment practice has made him even more convinced.

Editor/Lambor