Source: Qilehui, Changpoxue

Among the qualities needed for sustained success as an investor, patience and emotional stability are often mentioned by people, but there is one quality that is very important yet not widely appreciated, and that is the ability to control risk.

The art of war says: For a general, thinking about defeat before victory.

Changpoxue believes that the ability to control risks is an essential quality for investors to achieve continuous success. Most successful long-term investors do not think first about how to succeed, but how to avoid failure. They always prioritize risk control.

1. Buffett's requirements for successors

Buffett places great importance on risk control.

When choosing a successor for Berkshire, he values a person's investment performance and the methods used to achieve these results, but what he values more is the ability to identify and control risks.

Buffett once said at a shareholders' meeting: We need someone who can genetically identify and avoid serious risks, including those that have never been experienced.

(Thinking about risks that have not yet appeared) This is a rare quality. It is difficult for people to think about risks that have not yet appeared based on past models, but this could be fatal.

Charlie and I have spent a lot of time thinking about things that may suddenly strike us, which are not included in the thinking of others.

We may miss some opportunities because of this, but we believe it is essential when managing other people's money or managing our own money.

Buffett believes that the risk committees of certain institutions cannot truly eliminate risks.

Some financial institutions may have weekly meetings of their risk committees to discuss their models, with all statistics neatly listed in columns. However, they have no idea how much risk they have.

Munger, on the other hand, more sarcastically said: (Some people in risk control departments) all they do is crave systems and calculations, to the point where you torture reality to fit some mathematical model that doesn't actually match, especially under extreme conditions. However, due to the work you do and the calculations on daily trades, risks, etc., you confidently believe that you have thoroughly defeated risk, but you have not. You have only thoroughly defeated yourself.

Munger said: You call someone the Chief Risk Officer, but his job is often to make you feel good when you do stupid things.

2. Munger's Choices

In fact, aversion to risk and sticking to bottom-line thinking has permeated the lives of investment masters.

Munger said at the 2010 shareholders' meeting: In life, it's hard to reach the peak, and once you reach the peak, it's hard to stay there for long.

But Munger believes that Pete Kiewit from Omaha is likely to continue winning because he cares more about doing things right, also cares more about avoiding trouble, and they have more self-restraint.

Munger is not willing to bet on wealthier individuals, but he is willing to bet on Pete Kiewit.

Buffett said: If you follow Pete Kiewit for 10 years, you will never see him do anything foolish.

You don't really have to be very smart, but you must avoid the kind of mistakes that are almost obvious.

What factors lead to investment failure?

Chang Poxue also often ponders what factors in investing could lead to her own failure? What factors could lead to loss of control in risk?

Based on her own experience and extensive reading and observation, Chang Poxue has summarized a few key points:

First, borrowing money to invest.

Once an investor borrows money to invest, it is like handing over their fate to the stock market and others. When facing the risk of blowing up, talk of emotional stability and long-term investment is all empty words.

Second, buying into high stock prices.

In an optimistic atmosphere, investors often pay a high price. When something originally worth 10 yuan is bought by you for 100 yuan, how can the investment succeed?

To avoid buying at high prices, investors must adhere to contrarian investing. The right investments are often made in good companies or when others are making mistakes, just like the current good time to buy.

Thirdly, avoid buying companies that are not understood outside of your circle of competence.

When seeing stocks in a certain sector surge, it is very human to chase the uptrend outside of your circle of competence. People are subconsciously trend followers.

But always remember that pigs can fly when there's a tailwind, but the wind does not blow all day. Once the wind stops, pigs may fall and die.

At all times, investors must stick to their circle of competence, making money within their cognitive range.

Fourthly, avoid frequent trading.

In analyzing her own stock investment experience, Hershey Long discovered that the stocks she had chosen, as long as held for a sufficient period of time, would basically make money, some even several times over. However, due to lack of patience, or chasing after other stocks, she eventually missed out on those profits due to excessive trading.

To break the bad habit of frequent trading, you must truly realize from the bottom of your heart: short-term stock trading is speculation and gambling, speculation is not illegal, morally acceptable, but fundamentally unsustainable for making money.

Editor / jayden