Why do top performers in various industries repeatedly fail in the financial market? The reason is that they fail on the word 'Trade'. They possess high education and excellent professional quality but fail to grasp the core principle that 'behind the Stocks are companies'; they lose to price fluctuations and human nature.

A senior financial officer from a well-known foreign automobile company invested in an electrical utility company he did not understand; a medical doctor bought stocks of an automobile company... Many such examples reflect the saying: 'Human nature lowers intelligence.' Straying from one's expertise and capability circle to gamble on 'the uncertain' and 'possibly' is simply betting.

After being hurt many times in the stock market, I realized that the variables in the stock market are multidimensional and complex. Just like humans can use computers to defeat the world's strongest chess masters, yet we still cannot achieve ideal results in the stock market with computers, highlighting its complexity.

Making mistakes in the stock market is usually not because of a lack of understanding of the Industry or the companies, but rather because our research and thinking are not comprehensive; we see the trees but not the forest, and we have not developed a complete Trade system and thinking framework.

Common elements such as Fundamental Analysis, Technical Analysis, capital, and sentiment are components of this system and framework, collectively forming the fundamental pattern of probability thinking in the stock market, and also our ticket to participate in this game of chance.

1. The Basic Elements for Success in the Stock Market

Dr. Van K. Tharp in his book 'The Road to Financial Freedom' believes that trading has three components: psychological state (emotional control), money management, and system development (trading methods). The psychological state is the most important (about 60%), followed by money management/position sizing (about 30%), while system development is the least important (only about 10%).

A complete stock market cognition system includes at least five aspects: large trend analysis, industry recognition, company analysis, fund management, and emotion control—these are the 'five carriages' of a trading system.

These five aspects are key to participating in the stock market game: constructing our strategy links, which are interlocked; any issue with one link cannot happen; all five elements must be polished and matured to achieve good results in the stock market.

In Dr. Fan's understanding, if the psychological state (emotion control) aspect is well managed, removing the thoughts of getting rich overnight and making quick profits, overcoming the weaknesses of fear and greed, we can enhance the probability of winning to over fifty percent, which is also the 'Tao' of the strategic level.

In fact, other fields are no different. Even when a career reaches its peak, if one loses oneself and the inner balance is lost, it marks the rapid decline of that career or even the start of a steep fall. For stock traders, a bull market marked by high leverage and high financing leads to rapid asset appreciation. When a bear market arrives, if one cannot maintain inner stability, everything returns to dust.

II. Probability Thinking.

Nothing in the stock market is one hundred percent certain; everything is optimized based on 'probability' and 'possibility' to improve one’s winning rate. Whether it is Fundamental Analysis, Technical Analysis, fund management, or mental control, it all revolves around assessing the winning probability of a particular action, much like a general plans and deploys strategies for a war or battle without anything being a certainty. It’s all about comprehensively evaluating various situations to devise the most advantageous battle plan for victory.

The certainty in the stock market is based on probability, stemming from the most fundamental principle of the stock market: the ultimate decisive factor of stock prices is the company, and the company's development determines the dynamics of stock prices. This simple truth has caused many people to lose their direction amid the fog of market speculation.

So what are high-probability and low-probability events? As the name suggests, things that most people can achieve are high-probability events, and vice versa. Most people getting married in their twenties is a high-probability event; most people living an ordinary and unremarkable life is a high-probability event; the likelihood of a plane rarely crashing is a high-probability event; and the majority of regular individuals losing money in stock trading is also a high-probability event.

With a probabilistic way of thinking, it becomes clear that in the game of the stock market, elements such as fundamentals, technical aspects, psychological factors, and capital are among the factors that help measure the odds of success. The stock market is a melting pot where various ideas and methods merge together; value investing, trend investing, technical analysis, chart analysis, and Fundamental Analysis can all stand independently, and if done well, can thrive in the market.

Over the years, there has been more than one cycle: first focusing on chart analysis for trading stocks, realizing it wasn't effective, then switching to fundamentals, only to discover that many stocks with good fundamentals often don't rise during bull markets; they rise when the Large Cap is not doing well, making it hard to hold onto stocks, then switching to trend investing, finding it ineffective, and finally trying value investing... then going through another cycle.

The core consideration point for a strike is the overall probability score, for instance, regarding the current trend, whether aiming to enter for a rebound or to build positions for the medium term, what is the probability of winning within your timeframe? Just looking at the overall trend and macro Exchange Rates, the odds of winning are significantly reduced. Even if other Industries or specific Stocks are performing well, what does that matter? In the absence of a nest, there are no perfect eggs.

Three, focus on the circle of competence.

Human abilities and knowledge structures are limited, and human energy is also limited. Concentrating finite energy within one's circle of competence and gradually expanding that circle over time is a shortcut to growth. Slow is fast; although it seems slow, in the long investment career, this steady and solid approach, with deep accumulation leading to a thin outbreak, is wise for ultimately succeeding.

For ordinary people, lacking the advantage of "special resources," belonging to a group without trump cards, there are essentially two paths for choosing directions in the stock market: one is to focus on corporate value and trade in segments or major segments without much concern for market timing; the other is to focus on market price games, believing that all factors of fundamentals have already been reflected in price movements, thus following the market.

Two paths, two types of operating methods, "value game" vs "price game," either path can lead to success in the stock market. Do not tell me that if one can master both, the outcome will be different; if so, one wouldn't look at my writings. Without over a decade of struggles and training through several bull and bear cycles, such words should be spoken with caution.

Most investors make the mistake of "swinging"—wavering between the camps of "value game" and "price game," failing to excel at one and instead cycling back and forth without knowing where to start. The core of the two game modes lies in "focus," with the core of value game being the concentration on familiar industries and familiar stocks, engaging in long-term or major segment operations repeatedly; when the market is good, one holding period may be two years, while during poor market conditions, the holding period can be compressed to a few weeks.

The core of price game lies in "executing discipline"; everything should be operated according to the trading system, discarding all subjective emotional factors. Do not believe anyone's views blindly; they can be referenced, but must not be taken at face value.

Choose one of these two models that suits your personality and practice it long-term. The key lies in not hesitating or wavering after making a choice. Avoid switching back and forth, as constantly changing paths does not solve the problem. The issue lies in the mechanics of your swing; changing paths won't resolve that.

Ultimately, everything boils down to the stock market being a matter of probability—what is the overall trend? How is the industry performing? What are the exchange rates and macroeconomic factors like? How are the performance and expectations of the stocks you bought? What are the market trends? How is the liquidity situation? These factors are all critical; assessing each aspect gives a score for the "winning probability".

In light of the five drivers, ask yourself:

1. "How well have we achieved in terms of market analysis, industry recognition, company analysis, fund management, and emotion control?"

2. Do you have your own analytical criteria for the short, medium, and long-term direction of the market?

3. Are you sufficiently knowledgeable about a particular industry? Or do you have confidence in the patterns of market and industry style transitions?

4. Do you have your own tested system for researching individual stocks?

5. Is there a mechanism for fund management and risk control in place?

6. Is there a deep enough self-awareness? Can personal demons be controlled?

Pursuing high probabilities and confidence in engaging in certain actions can only be achieved after reflections on "great enlightenment" and "self-awareness". It requires focus, patience, and reflection to continue on this path.

As Spolandi said in "The Principles of Professional Speculation", emotional discipline is the first hurdle to success. Only on the foundation of self-awareness and understanding others can one set emotional discipline, strictly enforce it, and constantly remind oneself of their weaknesses, which will help in maturing their mindset and surviving longer in the market. Clear up one's survival strategy, gradually incorporate fund management techniques, and summarize lessons after each battle failure to deepen the understanding of personal weaknesses, so that we can gradually level up in our investment endeavors.

In the game of competition, only probability thinking can lead to victory!

Editor/lambor