Investors' returns are not only affected by valuation, market sentiment will also have a great impact on investors' returns. While it may seem like a clich é that markets are driven by fear and greed, it is very close to the truth.The market swings back and forth between irrational euphoria and deep despair like a pendulum.

Lesson one: the market is not efficient

As I've observed before.Efficient Market Theory (EMH) is like the Dead Parrot of the Python Troupe. No matter how many times you say that the parrot is dead, believers still insist that the parrot is just resting.

Lesson two: relative performance is a dangerous game.

Although practitioners generally do not believe in efficient market theory, they are still slightly inclined to advocate the derivative theory of efficient market theory-CAPM. This dubious theory is based on a large number of flawed assumptions (for example, investors can establish long or short positions of any size on any stock without affecting the price of the stock. All investors can study stocks by optimizing mean variance).

This also led directly to the separation of Alpha and Beta, and investors invested a lot of time in this approach. Unfortunately, these concepts are just out of the way. The late and great Sir John John Templeton put it well: "the real goal of investment is to maximize real after-tax returns."

The Alpha / Beta investment framework has fuelled the obsession with market benchmarks and spawned a new group of investors who only care about being in line with the mainstream. Their way of investing, as Keynes put it, "would rather fail because of the crowd than succeed because of being a maverick. "

Lesson 3: this time is the same as before

Knowing about historical bubbles can help you protect your capital.Ben Graham believes that investors should "have a proper understanding of the history of the stock market, especially the history of ups and downs."With such background knowledge, investors may be able to make some valuable judgments about the attractiveness and dangers of the market. "there is nothing more important to understand history than to understand bubbles.

Although the specific circumstances of the bubble are constantly changing, the basic patterns and ways of change are very similar. The framework for thinking about bubbles can be traced back to an 1876 paper written by John Stuart Muller. Stuart is a great man, erudite, multilingual, a philosopher, poet, economist, and a member of Congress. He played a great role in promoting social justice, writing many articles against slavery and advocating the expansion of voting rights. From our point of view, his understanding of the bubble model is the most useful.Stuart said, "the economic crisis has nothing to do with financial resources, it is caused by people's views." "

His model was later adopted many times, forming Hyman Minsky, Charlie Kindelberg and others.The framework of bubble theory.

This model divides the rise and bursting of bubbles into five stages:New investment hot spot-- > credit creation-- > extreme excitement-- > critical state / financial distress-- > capital escape.

New investment hot spot: the birth of prosperity. The new investment hot spot is generally an exogenous impact, which promotes the creation of new profit opportunities in some areas and the disappearance of profit opportunities in other areas. As long as the profits of new opportunities are greater than those that disappear, investment and production will increase, and investment will occur at both the financial level and the physical asset level. in fact, this is the birth of prosperity.Stuart said, "New confidence will be generated early in this stage, but the growth of confidence is slow." "

Credit creation: the growth period of bubbles. Just as fire cannot spread without oxygen, prosperity needs to be fed by credit. Minsky believes that monetary expansion and credit creation are to a large extent endogenous factors. That is to say, not only existing banks can issue money, but also the formation of new banks, the development of new credit instruments and the expansion of personal credit outside the banking system can also play the function of issuing money. Steat notes that at this stage, "interest rates are almost always low, credit growth is getting stronger, companies continue to grow and profits continue to grow." "

Extreme excitement: everyone starts to buy new investment hotspots. It is believed that prices can only rise but not fall, traditional valuation criteria have been left behind, and new measures have been introduced to prove that the current price is reasonable. There has been a wave of over-optimism and overconfidence in the market, causing people to overestimate returns, underestimate risks and generally think they can control the situation.Everyone is talking about a new era, and Sir John Templeton's most dangerous words in the investment world, "this is not the same as before" can be heard everywhere in the market.

Stuart wrote: "there is morbid overconfidence in the market, healthy self-confidence degenerates into a morbid belief that is too shallow, and the excited investing public no longer thinks about whether capital can generate a quick return." whether the investment is beyond its reach.Unfortunately, in the absence of appropriate foresight and self-control, the trend is that speculation grows most rapidly when it is at its most precarious. "

Critical state / financial distress: this leads to a critical state, which is often characterized by the realization of insiders, followed by financial distress, and the huge leverage established during the boom begins to become a serious problem. Fraud often occurs at this stage.

Capital flight: the last stage of the bubble life cycle is capital flight. Investors are frightened by various events and do not want to stay in the market, which leads to the trough of asset prices. Stuart said:"generally speaking, it is not panic that destroys capital, but simply exposes the scale of capital previously destroyed by hopeless and unrewarding investments. The failure of big banks and commercial institutions is only a symptom of the disease, not the disease itself. "

Stuart found that the recovery after the bubble was long. "the economic downturn, business closures and investment impairment have reduced the purchasing power of many people. Profits have been hovering at low levels for a long time because demand has been hampered. Only time can stabilize the broken courage and heal the deep wound. "

Since bubbles happen again and again in the same way, this raises the question-why can't you see the coming consequences? Unfortunately,We must overcome at least five behavioural barriers to avoid bubbles.

• First, excessive optimism.

Everyone thinks that they are not addicted to alcohol, divorce or unemployment like ordinary people, and this habit of only looking on the bright side leads us to fail to see the dangers that could have been predicted.

• Second, in addition to our excessive optimism, we have the illusion that we are in control of the situation, and we believe that we can influence the outcome of events beyond our control.

There are many delusions in many financial pseudosciences. For example, value at risk (VaR) is one of the biggest fallacies in modern finance that we can control risk as long as we can quantify it. VaR only tells us what the expected loss is under a given probability, for example, what is the maximum loss per day given a 95% probability. Such risk management techniques are equivalent to buying a car, and the airbag on the car is sure to work as long as it doesn't crash. This kind of security is an illusion.

• The third obstacle to finding predictable unexpected events is selfish bias.

We naturally like to interpret information and act on our own self-interest. "never ask a barber if you need a haircut," Warren Buffett said. If you were a risk manager in 2006 and thought there might be something wrong with some of your bank's secured debt obligations (CDO), you would definitely be fired and replaced by a risk management manager who approved the transaction. Whenever a lot of people are making a lot of money, it is impossible to point out obvious flaws in their actions and expect them to stop.

• Fourth, lack of foresight and excessive attention to short-term interests.

We often make choices without considering the future consequences, which can be summed up as "if you get drunk today, you will go to heaven tomorrow." "This ignores the fact that at any time, the possibility that we live to tomorrow and not live to tomorrow is actually 260pm 000Rank 1.

St. Augustine prayed: "God, let me be chaste, but not now" or a complete lack of foresight. Those people of China Finance Online Co Ltd all want to have another year of bull market and some bonuses. I guarantee that they will retire from China Finance Online Co Ltd next year and enjoy life.

Blindness caused by negligence prevents us from discovering foreseeable emergencies, and frankly speaking, there are some things we deliberately ignore.There is a classic experiment in which there is a short film of two teams playing basketball, one team wearing white jerseys and the other wearing black jerseys, asking viewers to count the number of passes by the white team. In the middle of the broadcast, a man dressed as a gorilla walked into the stadium, hit himself on the chest, and then walked out. Finally, ask the viewer how many times the white team passes the ball.

The normal answer should be 14 to 17 times. Then ask the viewer if he saw anything strange, and nearly 60% of the viewers didn't notice the gorilla! After telling the viewer that there is a gorilla, replay the short film, most viewers think that this short film is not the one they just watched, they think that there is no gorilla in the short film they saw for the first time! People are just too attentive when counting the passes.I suspect China Finance Online Co Ltd has a similar thing-investors pay too much attention to details and noise and forget to look at the big picture.

Lesson 4: value is important

To sum up in the simplest terms, value investing is buying when assets are cheap and avoiding expensive assets. This simple truth does not seem to need to be explained at all, but I still want to be wordy. I have seen many investors prefer to distort their psychology rather than open their eyes to see the truth of value.

Lesson 5: no rabbit, no eagle

Stocks listed on the New York Stock Exchange have been held by investors for an average of six months, according to data provided by the New York Stock Exchange. It seems that investors are like ADHD sufferers. In other words, ordinary investors seem to focus only on the next quarter or two, forgetting that stocks are a long-term asset. This shortsightedness brings opportunities for investors who are willing to invest in the long term.

Warren Buffett often reminds you of the importance of not casting an eagle without a rabbit, and your patience will be rewarded when a good opportunity comes.However, most investors seem to lack the patience to wait, taking action on every opportunity they can find and swinging at every ball.

Lesson 6: market sentiment is important

Investors' returns are not only affected by valuation, market sentiment will also have a great impact on investors' returns. While it may seem like a clich é that markets are driven by fear and greed, it is very close to the truth.The market swings back and forth between irrational euphoria and deep despair like a pendulum.

Keynes wrote in February 1931: "now the market is full of fear, and prices reflect very little ultimate value." Various indescribable anxieties determine the price. In times of prosperity, many people are very willing to buy. It is believed that profits can continue to increase geometrically. "

Lesson 7: leverage doesn't make bad investments better.But it will make a good investment worse.

Leverage is a dangerous beast-leverage doesn't make bad investments better, but it makes good investments worse. Using a lot of leverage on an investment project with little return does not turn it into a good project. From a value point of view, leverage also has a dark side-it can turn a good investment into a bad investment!

Leverage can limit your endurance and turn temporary losses (that is, price fluctuations) into permanent losses.Stuart is aware of the risks posed by leverage, which can easily cause assets to be forced to sell at jump prices. "beyond their affordability, traders using borrowed capital found that their good fortune disappeared completely during the crisis and were forced to sell their products at very low prices in order to repay maturing debt. "

Keynes agreed: "investors who ignore recent market fluctuations need more resources to keep them safe and cannot use borrowed money to invest on a large scale." "

Lesson 8: excessive quantitative thinking masks the real risk

Finance has turned the art of complicating simple things into an industry, and nowhere else (at least outside academia) welcomes overly complex structures and elegant (but not solid) mathematics.As for why you are so obsessed with unnecessary complexity, it is clear that it is much easier to charge high fees.

My two investment heroes are well aware of the dangers of difficult mathematics. Ben Graham wrote: "it is generally believed that mathematics can produce accurate and reliable results, but in the stock market, the more complex and esoteric mathematics is." the more uncertain and speculative the results are.Whenever calculus or advanced algebra is used, you can take it as a warning that the trader is trying to replace experience with theory, which fraudulently disguises speculation as an investment. "

Keynes was also wary of the shortcomings of overquantification: "you can freely choose the coefficient, coupled with the time lag, anyone can concoct a very good formula for limited historical data."... I think this is deceiving with a bunch of inexplicable figures, but it can really deceive a lot of people. "

What needs to be doubted most is the judgment of risk. Along with overquantification, the definition of risk is very narrow, and the risk management industry seems to believe that "if you manage risk, this method of risk management must be useful" and "build houses without people to live in. "the way of thinking is the same. In the investment community, it is unreasonable to equate risk with volatility.

Risk is not volatility, risk is the possibility of permanent loss of capital. Volatility brings opportunities, Keynes said. "volatility brings bargains and uncertainty, because the uncertainty caused by volatility makes it impossible for many people to take advantage of the opportunities brought by volatility." "

It will benefit a lot if we give up our obsession with quantitative risk measurement to understand the trinity of risk.From an investment point of view, there are three main ways of permanent loss of capital-value risk (buying overvalued assets), business risk (fundamental problems) and financing risk (leverage).Only by fully understanding these three elements can we have a deeper understanding of the true nature of risk.

Lesson 9: the macro aspect is not unimportant

Martin Whitman said in his value investment book: "Graham and Dode believe that macro factors."... It is a key factor in the analysis of corporate securities, but value investors believe that such macro factors are irrelevant. "if that's the case, I'm happy to say that I'm a Graham and Dodd investor.

Ignoring top-down macro analysis can be costly.The credit crunch is an excellent example of why it is good to have a top-down overall vision to benefit bottom-up stock selection. The past 12 months have been unusual for value investors, with two factions emerging from the otherwise unified camp of value investors.

Seth Karaman also has a view that top-down and bottom-up can complement each other.In Klarman's insightful book, the margin of Safety (Margin of Safety), Klarman points out that the inflationary environment has a big impact on value investors. Whether it is from the top down or from the bottom up, it has its unique insight.

Lesson 10: looking for cheap insurance

We should avoid buying expensive insurance at any time. The general public always think of buying insurance after the event. For example, when I live in Japan, the price of earthquake insurance will always rise after the earthquake! So, as usual, reverse action can pay off handsomely when it comes to buying insurance.

Insurance can play a big role in the portfolio.If we admit that our ability to predict the future is limited, we can use cheap insurance to protect us from unknowable events.At present, we are faced with many incalculable things, such as the possibility of a resurgence of inflation, the moral hazard of a long period of loose monetary policy, and whether and when the government will decide to end quantitative easing.It is worthwhile to find cheap insurance to protect investors from these complicated and confusing things.

Will we learn our lesson?

Unfortunately, both historical and psychological evidence suggests that we are unlikely to learn from our mistakes. There are many errors in our behavior, which make it difficult for us to learn from our mistakes.