Source: Lonely Brain Author: Lao Yu

Smart people are easy to make two mistakes:

1. Underestimate the stupidity of others because they think that being smart is easy.

2. Because they have intelligence and have something to rely on, they tend to underestimate their own stupidity.

The consequences of the latter are more serious.‍‍

In other areas, smart people can compensate for their stupidity with their superior intelligence, and they often have an excess of it.

But in the investment field, this is not feasible.

In other areas, smart people may be tolerated for their intelligence;

Smart people are often punished for their intelligence when it comes to investments.

As far as investment is concerned, the first thing smart people need to do is to overcome their own stupidity and become rational people.

Then they can use their intelligence.

The framework of this article comes from the book "Principles of Behavioral Investment". The book is straightforward, and the author is smart, honest, and correct. It can be enlightening to read. More than half of the following content is the author's thoughts.

Principle 1: Control Your Own Behavior

The main problem and biggest enemy of an investor is himself.

-Benjamin Graham

Thoughts: Controlling behavior is often an empty phrase and perhaps only professional investors can do it (and maybe they can't).

Therefore, the best way may be to learn from Odyssey, set rules in advance, then plug your ears and let someone tie you to the mast.

RSP is suitable for index funds based on the value investment of the ability circle.

The mental account is also a good tool.

Divide your own money into several psychological accounts in advance, one of which is for long-term investment. Set up a long-term automatic process of transferring money to your investment account, and the amount will increase with the growth of your salary.

Principle 2: Do not reject advisors.

Thoughts: This is difficult because the butt decides the head, and most advisors are in a somewhat conflicting position with your butt. The book has an interesting viewpoint that I like:

The best way to use a financial advisor is as a behavioral coach rather than an asset manager.

Extracted as follows: The Vanguard Fund's 'Advisor Alpha' algorithm quantifies the value-added contribution of investment advisors to many daily activities (in basis points (bps)), and the results may surprise you. ·Asset Rebalancing: 35 bps·Asset Allocation: 0~75 bps·Behavioral Coaching: 150 bps Interestingly, the above data shows that behavioral coaching can provide more added value than the other two activities that are more related to money management.

About half of the additional 3% return should be attributed to behavioral coaching, or to its ability to prevent customers from making stupid decisions out of fear or greed! So, sometimes letting advisors manage your emotions is more valuable than managing your money. It reminds me of a realization I once had:

The designer of the house is mainly used to prevent the owner from doing stupid things.

Therefore, making money is a very difficult thing to be a hands-off boss.

Investing in stocks may be the best way to be a hands-off boss, but it also comes with corresponding costs.

It is difficult for someone who doesn't understand operation and business nature to invest in stocks through value investing.

Investing in funds, which appears to be outsourced to smart professionals, comes with a corresponding cost while enjoying the power of being a hands-off boss.

There is no such thing as a free lunch. The degree of being a hands-off boss corresponds to the degree of paying other costs.

Among them, independent thinking is always necessary.

If being a hands-off boss not only means being hands-off, but also means throwing away independent thinking, the result will be very embarrassing.

Principle 3: Trouble is an opportunity.

Buy in the most pessimistic times and sell in the most optimistic times.

-Sir John Templeton

So, do you think it's troublesome enough now? Is it an opportunity?

Ben Carlson found:

'The best period of market returns is often not from good to better, but from bad to not so bad'.

This passage is very clever, and there are at least two bright spots: a. Making money does not necessarily rely on a good market, but on good fluctuations; b. Good fluctuations may occur even in a "garbage time period". Speaking of how to stand firm in turbulent situations, during the spring break last year on Mao Yiyi Island, when I played paddle for the first time, I found that the secret of standing firm was not to stare at my feet, but to look at the waves a little farther away and feel them undulate. Investment and raising children also have similarities: "Investment is like raising teenagers. Experienced parents know that they need to focus on long-term growth rather than focus on daily trivial matters." The book offers a valuable suggestion: making a list of your favorite companies whose current stock prices are somewhat high, and buying them resolutely the next time the market fluctuates and their prices become more attractive. Principle 4: Avoid emotional influence. If you think investing is entertainment and it's fun, then you probably won't make money. Real investment is a boring thing." - George Soros. Financial writer Walter Bagehot wrote: "Everyone is credulous when they are happiest." It's the same when you are angry or afraid. The book offers ten suggestions for managing emotions: (1) engage in high-intensity exercises; (2) redefine the problem; (3) limit caffeine and alcohol intake; (4) talk with friends; (5) do not react immediately.

a. Making money does not necessarily rely on a good market, but on good fluctuations; b. Good fluctuations may occur even in a "garbage time period".

a. Making money does not necessarily rely on a good market, but on good fluctuations; b. Good fluctuations may occur even in a "garbage time period".

Speaking of how to stand firm in turbulent situations, during the spring break last year on Mao Yiyi Island, when I played paddle for the first time, I found that the secret of standing firm was not to stare at my feet, but to look at the waves a little farther away and feel them undulate.

Investment and raising children also have similarities: "Investment is like raising teenagers. Experienced parents know that they need to focus on long-term growth rather than focus on daily trivial matters."

"Investment is like raising teenagers. Experienced parents know that they need to focus on long-term growth rather than focus on daily trivial matters."

The book offers a valuable suggestion: making a list of your favorite companies whose current stock prices are somewhat high, and buying them resolutely the next time the market fluctuates and their prices become more attractive.

The book offers a valuable suggestion: making a list of your favorite companies whose current stock prices are somewhat high, and buying them resolutely the next time the market fluctuates and their prices become more attractive.

Principle 4: Avoid emotional influence.

If you think investing is entertainment and it's fun, then you probably won't make money.

Real investment is a boring thing." - George Soros.

Financial writer Walter Bagehot wrote: "Everyone is credulous when they are happiest." It's the same when you are angry or afraid.

All people are credulous when they're happiest. - Walter Bagehot

All people are credulous when they're angry or afraid. - Walter Bagehot

The book offers ten suggestions for managing emotions: (1) engage in high-intensity exercises; (2) redefine the problem; (3) limit caffeine and alcohol intake; (4) talk with friends; (5) do not react immediately.

Engage in high-intensity exercises.
Redefine the problem.
Limit caffeine and alcohol intake.
Talk with friends.
Do not react immediately.
Shift your attention.
Label your emotions.
Write down your thoughts and feelings.
Challenge catastrophic thoughts.
Control all possible aspects.

Because of emotional bias, sometimes we need to adjust our behavior, one specific suggestion is:

Establish a small investment account (about 3% of your total wealth) for various experiments, be sure to separate this account from your long-term investments.

Principle 5: You are just an ordinary person.

You are nothing special. You are not a beautiful and unique snowflake,

You are just a collection of organic matter that is just as perishable as everyone else.

- Chuck Palahniuk, Fight Club

Uh, do you think you're ordinary?

All kinds motivational articles are reminding us that each of us is unique, right?

All kinds of masters' bragging articles make us feel that they are gods and we are losers.

Who isn't an ordinary person?

Being a happy ordinary person may be the happiest thing in the world.

Cook College conducted a study asking people to rate the likelihood of positive events (such as winning the lottery, finding a lifelong partner, etc.) and negative events (such as dying of cancer, divorce, etc.) happening to them.

As expected, participants overestimated the likelihood of positive events occurring by 15% and underestimated the likelihood of negative events occurring by 20%.

Principle 6: Focus on your own needs.

So-called wealthy people,

Referring to those who hold assets that are $100 more than their brother-in-law's.

- H.L. Mencken

Do not compare.

Comparison is the root of all evil.

Keep your own accounts, don't worry about how much others make.

As Jason Zweig said,

"Investing isn't about beating others at their game. It's about controlling yourself at your own game."

It's too difficult to achieve.

Even geniuses are not exceptions.

When people speculated on the stock price of the South Sea Company, Newton became richer as a result and then withdrew from the market with his principal and profits.

But when Newton left early, many of his friends (who were not as smart) saw the stock continue to soar and chose to hold on.

Although Newton was already safe, he couldn't stand the fact that his friends and neighbors were wealthier than him, so he re-bought the stock at the top of the bubble until the stock price started to plummet.

Newton may have thought at the time: How can I allow those fools to make more money than me?

Also, money earned through speculation is really difficult to truly get into one's pocket.

Few people are willing to leave the party voluntarily.

Principle 7: Do not trust predictions easily.

"A wise man doesn't bet, and a bettor isn't wise."

- Lao Tzu

The stock market is unpredictable.

According to the book, contrarian investor David Dreman found that most (59%) of Wall Street's "consensus" predictions were worthless due to significant differences — up to 15% from actual results.

Dreman further analyzed nearly 80,000 forecast data from 1973 to 1993 and found that only 1/170 of the forecasts had an error within 5% of the actual results.

Therefore, investment based on forecasts is also dangerous.

Think: "This person certainly does not have foresight. This person certainly does not have foresight. This person certainly does not have foresight."

Question: "Is this forecast based on probability, measurable, and thoroughly researched? How accurate have the person's previous forecasts been?"

Principle 8: Everything will pass.

Many of the now declining will rise again;

Many of the now glorious will decline.

- Horace (Ancient Roman Poet)

Lincoln once said:

It is said that an Eastern king asked his wise men for a phrase that would apply to every situation. Their answer was, 'And this, too, shall pass.'

How impressive this sentence is! It makes people vigilant in moments of pride and comforting in moments of sadness!

Mean reversion, like gravity, cannot be avoided.

For example, even great fund managers typically can't hold out for very long. (There are rare exceptions, which take a long time and who knows whether it's survivorship bias.)

But how do we distinguish between mean reversion and the Matthew effect?

For example, in recent years, those technology companies seem to be getting larger.

Therefore, for ordinary people, buying low-commission index funds of well-performing markets in an appropriate way may be suitable.

Principle 9: Diversification requires tradeoffs.

I think my formula may be: Dream, diversify, and never be rigid.

- Walt Disney

- Walter Disney

Many successful people like to emphasize their concentration. For example, Munger and Buffett both emphasize focusing on a few big opportunities.

But they are not ordinary people.

It is said that the early tradition of the Jews was to use one third for business operations, one third for cash reserves, and the remaining one third for fixed assets.

In fact, diversification and rebalancing have been proven to help improve performance by an average of half a percentage point per year. This number may look small at first, but you need to realize that it will have a compounding effect in your lifetime investment plan.

The return on investment in European, Pacific and American stocks from 1970 to 2014, at an annual rate, is as follows:

- European stock market: 10.5%

- Pacific regional stock market: 9.5%

- U.S. stock market: 10.4%

The return rate seems to be about the same, but what happens if all stock markets are merged, weighted and rebalanced at the end of each year-the average return rate of the investment portfolio during this period is 10.8% per year, which is higher than the return rate of any single stock market!

This can only be called the miracle of diversified investment! Each market has good or bad years, and automatic rebalancing allows you to sell profitable stocks and buy declining stocks.

The book mentions a concept: “Variance Drain”:

When investing in a highly volatile way, the harmful effects of the low value of the trough will be doubled. Even if the arithmetic average is the same, variance drain may have a huge impact on accumulated wealth.

What is referred to here is actually the difference between the arithmetic mean and the geometric mean. The latter determines the overall appreciation of wealth.

I like the book “Harbor of safety”, which is basically about this concept.

For example, two investments that look like arithmetic averages of 10%, but the real results are different:

1. You invested $100,000 in “Product A” for two years, with a 10% increase each year, and the final total value is $121,000;

2. You invested $100,000 in “Product B”. The return rates for two years were -20% and 40% respectively, and the same arithmetic mean return rate of 10% per year was achieved. The investment is only worth $112,000, which is $9,000 less than the less volatile investment.

But in reality, maybe the person who invested in Product B will appear more powerful, after all, he achieved a stunning annual return rate of 40%.

Actually, Product A is the winner.

Action: To achieve diversification of asset categories, the investment portfolio should include at least domestic stocks, foreign stocks, fixed-income assets, and real estate. (The author is in the United States, please learn critically.)

Principle 10: Risks can be regulated.

October is a particularly dangerous month for stock speculation.

Other equally dangerous months are July, January, September and April.

November, May, March, June, December, August and February.

- Mark Twain, "The Adventures of Wilson"

As mentioned earlier, volatility can harm the geometric mean. In this section, the author writes:

The advantage of using volatility to measure risk is that it is very simple and easy to measure, can be incorporated into reports, and can be described by elegant (mostly useless) mathematical models.

However, the danger of using volatility as an indicator of risk is greater: it actually has no way to measure what it should measure.

Howard Marks gives an explanation:

Scholars use volatility as a synonym for risk just for convenience. They need to find an answer for their calculation formulas, which can be traced back to history and can be inferred from the future. Volatility meets this requirement, and other forms of synonyms do not meet it.

However, the problem is that I don't think volatility is what most investors are concerned about. I think the reason why people refuse to invest is mainly because they are worried about capital loss or unacceptable ROI, not volatility.

For me, "I need more gain because I am afraid I may lose money" is more convincing than "I need more gain because I am afraid of volatility." Yes, I believe that the so-called "risk" (which is the primary and most important) has a high probability of losing money.

So what is risk? --

Risk definition: the possibility of permanent capital loss and the possibility that we cannot realize the life we ​​want.

Well, this definition looks clear and smart.

Simply put, don't gamble with money you can't afford to lose.

Speaking of risk, I have to mention stocks again. Of course, all the discussions in the book are based on the US market, and we need to reference critically:

Jeremy J. Siegel in "The Stock Market Long-Term Treasure" said that from the late 1880s to 1992, if each cycle was 30 years, the performance of stocks was always better than bonds and cash;

If the cycle is ten years, stocks perform better than cash in 80% of cases;

If the cycle is 20 years, stocks have never lost money. Bonds and cash, as measured by volatility, are generally considered safe. But in fact, they have never been able to beat inflation.

Another description of volatility that Taleb mentioned is related to probability, which is interesting.

If you check your account every day, there is a 41% chance that you will see losses. And we know that the pain brought by losses is twice the pleasure brought by gains, which will make you feel very uncomfortable!

If you check once every 5 years, the likelihood of seeing losses is only 12%.

And if you check every 12 years, you will never see losses.

12 years seems like a long time, but to be honest, it goes by in the blink of an eye...

I wish everyone a long life, and learn from Warren Buffett and Yang Zhenning.

Howard Marks said:

Throughout my career, I have seen that most investors' performance depends more on how much they lose, how serious they are, rather than how profitable they are.

Proficient risk control is the hallmark of a seasoned investor.

Bernstein (author of 'Against the Gods') believes that:

The essence of risk management is to maximize our control over the areas where we have control over the results and minimize the areas where we have no control over the results, but we cannot know the causal relationship between them.

There is an example in it originally about volatility, but I think it can be a good 'life lesson' -

Nassim Taleb said: If a person leaves work at exactly 6 o'clock every day and returns home, after a period of time, even if he is only 5 minutes late one day, his family will worry about his safety.

Let's imagine another person who comes home around 6 o'clock every day, sometimes at 5:30, sometimes at 6:30. The uncertainty of his arrival time makes his family less worried. Unless one day he deviates from his normal arrival time by a significant amount.

This example reminds me that you can be appropriately inconsistent in your behavior as a person. Otherwise, if you always act like a good person, people will still have opinions when you are slightly less than perfect.

Going deeper, it's probably Franklin's wisdom:

Never let others know what you are really thinking.

Of course, there are exceptions for best friends.

Finally,

In summary, the above 10 points are about how to turn yourself into a rational decision-making machine, but you also need to accept the inherent imperfections of this machine, such as being too emotional, impulsive, obsessed with stories, and dominated by desires.

Furthermore, based on acknowledging these unavoidable flaws, how can we design an Odyssey-style epic journey and know when to tie ourselves to the mast.

In the past few decades, smart people have been thinking about how to become winners and how to win more.

In the coming decades, smart people may need to rethink:

How to avoid becoming a loser and lose less when you have to lose.

Then, in good or bad times, rely on reason to still make money and hold onto the money that cannot be lost.

Editor/Lambor