Introduction:"the most important thing to invest" was praised by Buffett as "this is a rare good book". I think it is mainly in three aspects:

1. This is an investment concept written by an investment master himself.The author's way of thinking is to make decisions beforehand rather than to explain afterwards, which is of great value in actual combat.

2. The introduction of investment concept in this book is relatively complete.The content of this book is very rich, involving many dimensions of investment, and the investment system is relatively complete.

3. the content of this book is more approachable.The completion of this book is relatively recent, in addition to the exposition of the concept of investment, there are many discussions about the real difficulties faced in investment, as well as comments from other investment masters, which makes the content of the book more exciting.

At first, this book is based on the investment memo, so the chapters are relatively independent. With my own understanding, I re-sort out the expression logic of "the most important thing in investment", as shown in the figure below. follow-up reading notes are also gradually carried out on this basis. It is precisely because of this that some of the contents are suspected of being taken out of context. I hope you will understand.

The practical problems of active investment

The biggest problem of active investment is how to surpass the market, there are three questions involved here: 1, whether it is futile to defeat the market (02 to understand the effectiveness and limitations of the market); 2, how to beat the market (01 learn the second layer of thinking); 3, the performance of ideal active investment (the meaning of 19 value-added).

The issue of market efficiency is a clich é in the investment community, but the author gives a practical conclusion: "No market is completely efficient, it is only a matter of degree." Effectiveness is not so widespread that we should give up good performance. At the same time, validity is what lawyers call a "refutable presumption"-first of all, an inference should be assumed to be correct until it is proved to be untenable. Therefore, I will assume that effectiveness will prevent us from achieving good performance until we have good reason to believe that it will not.

The practical significance is that we should look for more opportunities to beat the market in the inefficient market, and when we think we can beat the market, there is a good reason why the market is wrong.

Back to the first chapter of this book, learning the second level of thinking, the logic itself is based on game and competition. To beat the market is to beat the average, which is a zero-sum game in itself. if you consider the high management fee and the after-fee return over the market is a negative sum game, you have to do better than the market.

Therefore, the author proposes that the second tier of thinking is itself a way of thinking, that is, to find the consensus of the market and think independently whether there is a mistake in the consensus, because there are risks or opportunities. In fact, in the domestic investment market, on the contrary, I feel that there are many investors who are too smart and abuse the second tier of thinking, thinking that the market is fully anticipated and missing out on the simple investment opportunities on the table. Should we adopt the third level of thinking?.

As for the ideal performance of active investment, the author thinks that it should be the asymmetry of portfolio returns. In comparison, the author prefers the performance of "bear market with less losses and bull market keeping up with the market".

Basic investment logic

The oldest and simplest investment principle is "buy low, sell high". Value investment defines it as "buy at a price below its intrinsic value and sell at a higher price". Since the price is public information, it is critical to accurately estimate the intrinsic value.

The author discusses the relationship between classical value investment and growth investment, and holds that there is no clear boundary between them. Growth investment pays attention to the future, while value investment emphasizes the present, but inevitably faces the future. "

The author chooses the classical value investment method because he believes it is more sustainable. Value investment is not easy to implement, because the estimation of intrinsic value must be accurate, otherwise the effect will be even worse. in fact, the success rate of "excellent investors is much lower than 100%", and investment opportunities with correct valuation need to be adhered to.

The relationship between intrinsic value and price is the embodiment of the second layer of thinking: the market price represents the market consensus, and the intrinsic value is the result of investors' independent thinking and evaluation, and the difference between them provides investors with the opportunity to beat the market.

In this book, the author does not give a specific method of calculating intrinsic value, but instead discusses the factors that affect the price: fundamental value, technology (forced trading), psychology. And the author discusses the ways to make use of these factors in the following chapters.

Practical application

Deal with the risk

The discussion on risk in this book is long and wonderful, which fully reflects the author's attention to risk and the ability to cope with it. "Investment is only about one thing: dealing with the future. No one can predict the future for sure, so the risk is inevitable. "

There are three steps to deal with the risk: the first step is to understand the risk, the second step is to identify the risk, and the most important thing is to control the risk.

The understanding of risk is subjective, but what real investors should worry about is the probability of permanent loss. "risk means the uncertainty of the upcoming outcome, as well as the uncertainty of the probability of loss when an unfavorable outcome occurs. "

In essence, the future return of assets is a probability distribution, when adverse results occur, the return may be negative, but it is difficult to accurately estimate at the present time. The so-called high risk and high return means that because the potential loss is large, the expected return is higher than the low-risk assets as risk compensation, otherwise investors bear the possibility of loss, the long-term return is relatively general, such assets have no value.

Similar to stock and bond assets, it fits perfectly with the relationship described in the chart below. Therefore, I understand that high-risk assets need the possibility of high return, perhaps this possibility is extremely low, resulting in the expected return is not high, but because of the irrationality of human nature also has the rationality of existence.

Correspondingly, why classical value investors think that their investment is "low risk and high return", in fact, it is more accurate to say "low risk and high expected return", but if you seek the possibility of getting rich overnight, the probability of value investment is very low.

Of course, the risk-return relationship is dynamic, and the time when the risk-return curve is distorted may be when the investment opportunity (risk) appears.

Because of this, "the risk judgment of trained investors is mainly based on the stability and reliability of value, as well as the relationship between price and value." "

Because of the concealment, immeasurability and subjectivity of risk, investment risk-the possibility of loss-cannot be measured by retrospective methods and performing arts reasoning.

Excessive prices (based on estimates of intrinsic value) and optimism are good indicators of risk identification. Risk is abnormal, and when most investors are not worried about risk, it often gives birth to huge risk, which is consistent with the underlying logic of the second level of thinking.

"the job of investors is to take risks intelligently for the purpose of profit. Being able to do this well is the difference between the best investors and other investors. "risk aversion may also avoid returns, such as bank deposits, which are not pursued by good investors, so the key to controlling risk is the price of risk-taking.

Value investment emphasizes the margin of safety, which is the risk-bearing "premium" that investors charge to the market. If the premium is high enough, then even inferior assets may be high-quality investment opportunities.

The understanding and Application value of cycle

In this book, 8-11 and 14-15, in my opinion, the core is still discussing the changes in the fundamental cycle and psychological cycle, as well as coping strategies. To put it simply: "most things are cyclical, and when others forget the cycle, some of the biggest profit and loss opportunities will come."

The fundamental cycle (mainly refers to the macro cycle) is long-term and will bring changes in investors' psychological expectations. when economic fundamentals gradually strengthen, investors are optimistic, and it is likely that optimism goes beyond the real fundamentals. when the economy weakens, things go the other way.

The author describes the volatility of market sentiment as a pendulum movement, moving from one extreme to the other. When market sentiment is in an extreme position, market pricing is often reflected in inefficiency, and "using inefficiency is the only way to maintain excellence".

To make use of the inefficiency of the market, we must first overcome the negative impact of market sentiment. The powerful weapon is"have a firm understanding of internal value."。

When you take action, it often appears as a "reverse investment". An excellent investment is almost certainly a reverse investment, because if an investment is accepted by the public, it is not necessarily an excellent investment in the long term, because it is impossible for most people to beat the market for a long time.

But it should be noted that "reverse investment is not a way to make sure you never lose money." In most cases, there is no excessive market worth betting on.

There are at least three more prerequisites for turning reverse investment into excellent investment-if Volkswagen makes a mistake, you know what Volkswagen is wrong and stick to your correct judgment to bet. The pressure of persistence comes not only from the psychological level, but also from the objective environment.

The market cycle is a common opportunity for reverse investment to play a role. The mistake of the market is to overestimate the accuracy and value of macro forecasts, and the most serious problem is when "investors forget the difference between probabilities and results-that is, when they forget the limits of forecasts".

In other words, investment decisions are highly dependent on future macro forecasts, leaving no leeway, as if the most likely thing is bound to happen, similar to consistent expectations, when the opportunity for reverse investment may come.

Identifying market mistakes about cycles requires a correct understanding of yourself-knowing where you are. Through some observation means, measure the market temperature, reasonably infer the position of the pendulum (market sentiment), in order to guide our action.

The excellent investment opportunities that take advantage of cyclical fluctuations discussed in these chapters are not entirely applicable to growth investments based on future predictions. Ideas may have something in common, but how to judge the common errors of market perception in growth investments may be more difficult.

The description of intrinsic value is a general practice, but the problem is how to reasonably estimate the intrinsic value of growth investment.

Combination construction

When we define the basic concept of investment, we need to build a portfolio. First of all, make a list of potential investments, some restrictions are based on objective reality, while others are risk choices for product positioning.

Then make a relative choice: "We can't change the market, if we want to participate in it, our only choice is to choose the best from the existing possibilities. This is the relative choice."

What is the best, the author thinks is a bargain, that is, the price is lower than the intrinsic value. The core is to buy well, not to buy well, the author gives the characteristics of this kind of assets.

Of course, this is an ideal state, and we will encounter objective difficulties when entering the market: first, the water level of the market is on the high side and it is difficult to find bargains; second, when the market is falling rapidly. "when investors are faced with insufficient expected returns and risk premiums, there is no simple answer. "

But "grabbing returns"-making risky investments in order to get the gains that the market used to have before the rally is wrong.

Investors have several choices: 1, accept relative returns, even if absolute returns are not attractive; 2, ignore short-term risks and focus on long-term risks, especially when market timing is difficult to judge. 3. Hold cash and wait patiently for better opportunities.

If you are right, the third option may lead to excess returns, but it requires a contrarian mentality and strong balance sheet support.

Reasonable expectations are also a means to help solve the problem of entering the market. Investors should give up the pursuit of perfection and act in time when the market falls and there is a good opportunity, because "perfection is the enemy of excellence." At the same time, reasonable expectations help to improve risk awareness and dare to question the hidden risks contained in high return expectations.

Combination management

The first problem of portfolio management is not to change, but to know what to stick to. It's important to understand the chance (luck) of the outcome: it allows you to stick to good decisions that don't end well, because good decisions don't guarantee a return on investment in the short term, but they will in the long run, and it can keep you in awe of the future. stick to the defensive strategy and avoid the risk of going out in the event of adverse results.

To choose active investment is to choose to be enterprising, which is naturally related to attack, but the author reminds us that defensive strategy is essential. The goal of the defensive strategy is to avoid failure factors (to avoid the risk of being out) and to tide over the difficulties more calmly; whether the mode of thinking is qualitative thinking, avoiding mistakes, rather than pursuing to be right; the mode of operation is to leave a margin of safety or error-to ensure that it is acceptable even if the future development is not as good as expected.

Defensive investment emphasizes defensive strategy, but does not ignore offensive strategy, but the author believes that "to avoid defeating investment, winning investment will come back naturally", so more emphasis is placed on defense.

"in addition, in addition to expertise, aggressive investment also requires courage, patient clients and reliable capital. "the choice between attack and defense is not simple." there is no difference between right and wrong in attack and defense. "the key is balance.

If you look at the choice of investment masters, the combination of offensive and defensive balance is also different: Buffett chooses the margin of safety and high-quality assets as the defensive strategy, and the high concentration as the offensive strategy; Soros takes the position and leverage beyond the average person in the trend as the offense, and uses the strict error correction mechanism as the defense.

Since it is so important to avoid mistakes, how do you identify them? The author puts forward several common mistakes:

"imaginative incompetence-the inability to understand the diversity of results in advance, first of all, the failure to predict the possible future extreme events, and secondly, the failure to understand the knock-on consequences of extreme events. "

Making wrong investments under the influence of psychological factors: failing to discover market distortions; discovering but still succumbing to the market; failing to take advantage of market distortions. In my opinion, this is the most common mistake, and the difficulty of avoiding these three layers of mistakes is gradually increased.

"what is most confusing and challenging is that mistakes are constantly changing. Sometimes the price is too high, sometimes the price is too low. Sometimes you make mistakes when you do something, sometimes you make mistakes if you don't do it, sometimes you make mistakes when you are bullish, sometimes you make mistakes when you are bearish. "

"finally, it is important to remember that in addition to actions (such as buying) and inaction (such as not buying), there are also cases where mistakes are not obvious. "

Conclusion

This is a good book that is always new, but if you pursue a master key to investment, you will be disappointed.

The author emphasizes defense, but still thinks that it is a serious mistake not to attack when necessary; the author emphasizes reverse investment, but also points out that in most cases there is no opportunity for reverse investment; the author emphasizes the role of intrinsic value, but does not give a general estimation method.

This is investment, and you will never have a simple answer once and for all, and the author has given so many important things that he believes that excellent investment needs to take into account these aspects.

You have to keep fighting, stick to your system, and keep making choices. In my opinion, the ancient Chinese saying "one by one, the way of culture and martial arts" coincides with the discussion of balance in this book, maintaining the balance between attack and defense, and winning when the market is too pessimistic or optimistic.

In modern terms, it may be "awe of the future and optimism".