The way of generalization and the skill of generals

Many people can catch the big dark horse and long bull stock, but after a few years of a bull-bear cycle, the account has not grown any more. where is the problem?

The transaction is not systematic!

Why did Han Xin listen to Liu Bang's orders when he was so good at fighting? Han Xin's own answer is: "I, Han Xin, is a general, and your Majesty is a general."

Although it is flattering, the truth is right: funds are your soldiers, individual stocks are your generals, a single transaction is a certain war, as long as you can use soldiers, but account profits and losses are the whole battlefield, you must be "generals".

And "will be the way", is the trading system.

"fundamental research, valuation and trading system" are the three major capabilities of investment. Among them, the trading system is a big problem, and this article starts with what I think is the most important trading principle: don't over-aggregate the rise and fall of individual stocks, and pursue the growth of the entire account.

Account profit and loss and individual stock profit and loss

First of all, let's judge a question, An and B buy a stock with the same capital and position, of which:

A: buy at an average cost of 5 yuan, hold it all the way, and sell it all at an average price of 20 yuan three years later.

B: buy the position at an average cost of 5 yuan, cut the position by more than half halfway, add the position back at the same price (excluding handling fee) a year and a half later, and finally sell it all at the average price of 20 yuan.

Whose approach do you think is more reasonable?

Perhaps most people think that A's approach is better, because in the end, the profits are all the same, but B has turned around. This is why many people understand value investment as "buy and hold for a long time".

But in fact, there are two correct angles of analysis, both of which are more reasonable.

The first point of view, from the perspective of return on investmentIn these three years, B has only half of its position in a year and a half, that is, B earns the same profit with a position level equivalent to 75% of A, and B's return on this stock is 33% higher than that of A.

This difference can not be seen by stock speculation software.

The second point of view, from the perspective of the whole account,Although the return is the same, B's reduction in position, whether used to buy other stocks or hold cash, reduces the risk of the entire account.

Some people may not agree with this point, why buy other stocks to reduce the risk? What if you buy a falling stock?

The risk here is the risk of fluctuations in the market value of the account-the higher the cash position, the lower the risk of account volatility, and the more shares you hold, the lower the risk of account volatility.

For example, Liu Bang gave Han Xin 100000 troops to fight South Korea, halfway through the fight. Xiang Yu beat Liu Bang, and Liu Bang called back 50, 000 troops from Han Xin to rescue himself. After the fight, he gave it to Han Xin and captured South Korea in one fell swoop.

Militarily, it's called "mobility."The premise of our army's strategic thinking of "concentrating superior forces and smashing them one by one" is the mobility of the troops, and if an army of 10,000 men is transferred to five battlefields in ten days, it will become a "superior force" of 50,000 troops.

Repeat this important point: the way to deal with it is to consider profits and losses and risks from the perspective of the account as a whole, rather than the rise and fall of individual stocks.

Many people look at my simulation stock trading, they think that I am not optimistic, in fact, the fundamentals of individual stocks have not changed, just for some reasons, give up some varieties temporarily.

What are the specific reasons for buying and selling? This is the focus of this article, and that's why I wrote the valuation series before.

Relative value and absolute value

The valuation series being written is often questioned.Stock trading is an art of vagueness, and any effort to make an accurate valuation is futile.

I said, you're right. I never thought of calculating the exact value.

So what is the point of calculating valuations?

For example, if you want to buy one of two clothes, do you have to figure out the cost margin of each piece of clothing? Of course not, you just need to judge which of these two clothes is more cost-effective-the latter is less accurate, but much easier and much more efficient than the former.

This is the difference between absolute value and relative value. Height 180cm is an absolute valuation, and people with height over 55.5% are relative valuations.

Stock valuation is more about relative value.

For example, for two stocks with a current price of 10 yuan, I judge that A shares are valued at 15 yuan and B shares at 8 yuan, while you judge that A shares are valued at 13 yuan and B shares at 9 yuan. Is there any difference? It's all better than A than B.

Of course, investment requires higher accuracy than buying clothes, so we also need a unified quantitative standard, such as PE. But you must not think that PE calculates the true value of the company, it is only the relative value between stocks.

So PE belongs to relative valuation, "discounted cash flow method" is absolute valuation, the latter pursues to give enterprises an accurate value, the former is to use the unified standard of PE to compare the relative rationality of different stocks.

Why is it that relative valuation is more important in trading?

Because the important point is said three times:Consider the profit, loss and risk from the perspective of the whole account, do not pursue every stock you buy is absolutely good, but you must pursue that the valuation of the variety you buy is more reasonable than that sold.

To ensure that "what you buy is valued more reasonably than what you sell", you must have a set of criteria that apply to all stocks. As an individual investor, there are two core and simplified criteria: odds and certainty.

This is also the output of the research and valuation phase.

Odds and certainty

What are odds and certainty?

Odds are the ratio of upside to downside.

If we go through previous research, the current price and reasonable valuation of a stock are both 10 yuan, and as the performance increases, it may rise by 25% after a year, but if the performance forecast cannot be achieved and there is no performance increment, according to the historical valuation, it is likely to fall by 25%, then its odds are 1, in a state that is neither good nor bad.

If such a stock falls to 9 yuan and the fundamentals remain unchanged, the room for rising and falling is 3.5 yuan and 1.5 yuan respectively, and the odds are raised to 2.33, which is a good opportunity.

On the contrary, if it rises to 11 yuan and the fundamentals remain unchanged, the odds will be less than 1.

Odds are an important indicator of your buying and selling and holding decisions. First, the odds must be higher than a certain point, such as 1.5, to be worth opening, and below a certain point, such as 0.7, before you can sell; second, if the odds are high, the position can be higher, the odds are lower, and the position is lower.

If you have 26 stocks in your stock selection, then we need to establish a unified valuation system, and then value them separately to determine the current odds order of these 26 stocks.

Is it true that if the odds are good, there must be a chance?

Not necessarily, but also depends on another indicator-"certainty".

Certainty is the ratio of the probability of rising to falling.

The difference between certainty and odds is easy to be ignored. although many stocks have a lot of room to rise, the probability of rising is not high, that is, the odds are good, but the certainty is poor. The most typical is stocks that have a short-term continuous collapse because their performance is lower than expected.

Certainty I talked a lot about valuation before, and the previous "seven premium discount factors make the PEG valuation method more accurate and easier to use" can be summarized into the following seven factors:

Although certainty is already reflected in the valuation, it has to be taken into account separately when deciding on a transaction. Therefore, "certainty" in the transaction, mainly reflected in the position limit and valuation tolerance.

We want to divide the stocks we track into four grades: stocks with poor certainty at present, not as buying targets, that is, "only study tracking, not trading", and three grades of stocks with "general certainty, good certainty, and high certainty". The upper limit of the total position of individual stocks will be raised in turn.

Note that this refers to the upper limit of the position, and your current position is determined by the odds. For example, if you set the maximum position of a stock with good certainty at 20%, then even if the odds are good and the stock is oversold, you can buy 20% at most.

Why is the position ceiling so important? Because this indicator determines your maximum loss on a single stock.

Stocks with high certainty usually refer to some big white horses, which are generally small in volatility and are not prone to instant losses, so they can increase their positions. Moreover, stocks with high certainty generally do not rise much, and only by increasing their positions can they gain better returns.

On the contrary, stocks with low certainty are highly volatile and do not rule out the possibility of exploding thunder. in order to prevent permanent losses, positions must be controlled. moreover, stocks with low certainty, if the odds are also low, are what we usually call highly elastic varieties. it also rises a lot, and small positions also have high returns.

Why are there so many people who buy big bull stocks and few people who really make money? Because the position of the profitable stock is too light, because the position is on the loss-making stock. Why is this? Because you don't have a scientific trading system.

On the other hand, the shareholdings of large institutions generally have both high-certainty varieties, and even "Zhenkang treasures" that have not been sold for many years, and flexible varieties with high odds to win excess returns. So next time, do not think that there is a chance because a star fund manager has bought a certain low stock, and it is very likely that the institution will hold it for a short time out of the need for balanced allocation.

So, the important point is to be said for the fourth time:Consider profits and losses and risks from the perspective of the whole account, do not care about the gains and losses of individual stocks, dare to step into the void and hold up on individual stocks.

Three core principles of transaction

It can be said that almost all the principles of trading stem from the relationship between odds and certainty.

"uncertainty is often accompanied by low prices," says Seth Karaman in his book the margin of Safety. But when the uncertainty fades away, prices may have gone up, too. "

That is to say,Odds and certainty often have to choose between the two. This inherent check and balance adds great difficulty to investment, but it is also a source of excess returns.

Therefore, the "general way" of the transaction is to gain insight into the changes in the "odds and certainty" of holding shares, and adjust the position at any time to make it in the most comfortable, comfortable and balanced state of risk and return.

Finally, let's review the three core principles of trading mentioned in this article:

• Principle 1: in the general market, odds and certainty can only be chosen.

• Principle 2: odds determine the buying and selling price and position level

• Principle 3: certainty determines the upper limit of positions.