As we all know, Duan Yongping got a list of "three noes" from Buffett: don't short, don't use margin, don't do things you don't understand. Many investors nod and say yes, but they will improve it later. A common reaction is "yes, so be careful with leverage." God, you are told not to jaywalk, but you understand it as being careful to run a red light?

The leverage referred to in this paper is typical of margin, which mainly has two attributes: 1, leverage has capital cost; 2, there are mandatory repayment clauses (such as Qiang Ping), or based on net assets or depending on time. All kinds of literary and rhetorical "levers" are not discussed. )

Below I will seriously nag about why you should not be leveraged.

1. In mathematics, this is a troublesome game: the higher the leverage, the lower the leverage, and the lower the leverage, the higher the leverage.

The following is a mathematical simulation:

1, suppose you have 1 million principal, financing 1 million, total assets of 2 million yuan, full position of a stock, at this time the principal: financing ratio is 1:1.

2. If you make the right investment decision, the stock doubles, the account assets become 4 million yuan, and the principal: financing scale is 3 million: 1 million-at this time, the ratio of principal to financing changes from 1:1 to 3:1, and the "accelerating" effect of leverage on the account is obviously weakened.

3. If your investment decision fails, the stock falls by 25%, the account assets become 1.5 million yuan, and the principal: financing scale is 500000: 1 million (the financing scale will not change)-- at this time, the ratio of principal to financing changes from 1:1 to 1:2. The "acceleration" effect of leverage on the account is significantly enhanced, and the harm of another fall is increased.

In the above mathematical simulation, there is a strange phenomenon that "the higher the leverage is, the lower the leverage is, and the lower the leverage is, the higher the leverage is." reflected in the trading practice, that is, how do investors feel that they do not rise so fast when they rise so fast? when it falls, it suddenly flies fast (black question mark face). Interested friends can draw a graph to have a look.

If we take a closer look at the reasons, there are probably the following explanations:

1. The money borrowed is repaid, and the amount of financing is fixed and will not change with the size of your net worth, but your net worth will fluctuate.

2. In theory, you can adjust the leverage up and down according to the latest net assets, and it lags behind 0, but in practice, this is impossible. The risk control of the brokerage will not let you do this, and you cannot adjust your position with 0 delay.

3. Considering that the interest on financing is fixed, this will make the situation worse.

Therefore, from a mathematical point of view, leverage games naturally put investors at a disadvantage of probability.

2. Leverage will only magnify the fluctuation, not increase the winning rate

Why do people love leverage so much? Because it feels easier to make money with leverage, but we have to admit the fact: leverage will not increase the winning rate, it will only magnify fluctuations. When you say that financing is easy to make money, you only look at upward fluctuations.

What do you mean by magnifying fluctuations? It magnifies the upward fluctuation as well as the downward fluctuation.

Note, however, that the meaning of upward and downward volatility is not equal. When you introduce a financing position, there is a death line down. As soon as you touch game over, you will be knocked out of Qiang Ping. But what about up? There is no line called the winning line that declares you win the game and you don't have to play anymore.

Up, there is no finish line that declares you a permanent victory; down, there is a line that declares you out forever. After magnifying the volatility, this unequal probability disadvantage becomes worse, and the greater the leverage, the worse.

3. Leverage introduces the risk of "out".

Investors can take all kinds of risks, but there is only one risk that can not be taken-out.

The compound interest curve determines that no matter how much you earn and how many home runs you hit, a drop of 50% is not half, and a drop of 100% is not all. Maybe you are rich enough to bear a loss of 10 million yuan for N times, but no one can afford to lose 100% at once.

This mathematical calculation does not take into account your past performance and investment years, and is fair to everyone. In Munger's words, no matter how big the number is, multiplying by 0 can only be 0.

When investors take the initiative to leverage and indulge in it, your portfolio introduces this "out" risk, no matter how small the probability you think, the risk is born. And, over time, you thought that the low risk might be underestimated because the risk is hard to predict.

I know an investor who made tens of millions of yuan by buying Leeco, thinking that he could be rich and free, but after a strong draw, everything went back to the same way-believe me, it was very painful. If you still don't think the risk is great, you might as well talk to someone who has experienced the average tide of the top 2015. You will never want to experience it.

As Howard Marks put it brilliantly, "the use of leverage does not make investments better, nor does it increase the probability of profit." It simply magnifies the gains or losses that may be realized. This approach also introduces the risk of total destruction.

I also appreciate Pablo's view that if you win well enough to find good companies and valuable stocks, even without leverage, you will make a lot of money in the long run. But if you don't win well and make the wrong decision, leverage will make you die faster.

Oh, life is hard enough, why face this kind of pain?

4. Leverage is addictive

Smokers smoke more and more, alcoholics drink more and more, and gamblers gamble more and more. Leverage is addictive, and once you are used to leverage magnifying the fluctuations several times, you are likely to be insensitive to the usual fluctuations. after all, a limit is only 10%.

With regard to leverage, I heard an old investor say three words that made me shudder.

One is that in 2015, I advised him to take off the leverage and not to take too much risk. He replied, "if you can't repay the financing, you can't borrow it back."

One is that after the stock market crash, he advised him not to use leverage any more. He replied to me, "No, it's too slow to make money without leverage."

One is that recently I nagged him not to use financing. The interest rate is very high. He said no. The financing interest rate of securities firms does not seem to be high.

(to quote Howard again: "(8%-11%) few people realize what an extraordinary achievement it is to steadily achieve this level of return-- it's too good to be true"-- however, brokerages can steadily collect 8% of your income from here, as long as you keep using leverage.

These three sentences reflect a lot of problems, but in the mentality, they are highly dependent on and addicted to leverage. maybe some investors think I have no problem with a little leverage, but I remember that's what many gamblers said at the beginning.

It's okay. Don't challenge yourself.

5. you will confuse the betting company with the betting market

I recently wrote Fuyao Glass Industry Group's analysis, and a netizen left a message saying that he was confident that he would like to raise money to do it. I object to this. Because when you raise money to buy a stock, you are no longer betting on the company, but more on the market: you are betting that the stock price will not fall faster than expected within your expected period of time.

There are scientific methods to analyze and discuss whether a company is good or not, and it can also be proved to be false and true, but there is probably no way to be sure whether the share price of a stock will fall more than expected. and undoubtedly deviated from the scope of thinking of value investment.

If we are going to forcibly combine the two, there is no doubt that we are playing a more difficult game: you have to bet on the way you look at the company, and hope that the stock price will not fluctuate sharply in the short term, if the short-term stock price movement is really predictable.

If the company's performance is not good, maybe you can scold Cao Dewang; the sharp fall in stock prices leads to Qiang Ping, which probably has nothing to do with Cao Dewang.

6. Leverage is equivalent to giving up the margin of safety

Let's seriously consider the stock market proverb that has been very popular in the past two years: "three times a year can be found everywhere" and "twice as much in three years". Why is there such a strange contradiction? If three times a year is established, then there should be 27 times in three years, if not 27 times, there should be 3-6 times, right?

The fact is that after a long period of time, the return on investment of most investors is even lower, not even doubling in three years, or even without capital preservation for three years.

There is only one possibility, that is, most investors have earned and made a lot of money, but lost money back. I have met some 20 years + old investors, talking about their profitable stocks are like a few treasures, but can not be a general ledger, a calculation is a loss of money and youth.

If so, what demon stocks have you caught and which cattle stocks have you made N times? what's the point? We are looking for long-term satisfactory returns, not "once", "thinking about the past" or "almost". The non-linear nature of the compound interest curve determines that if you annualize long-term returns, it is not because of time, but because you have made some failed cases.

This fully shows that investors are bound to make mistakes, and it is your performance when you make mistakes that determines your level of return. This is the marvelous thing about the margin of safety, which requires investors to presuppose that they are likely to make mistakes, give them room for fault tolerance in advance, and strive to escape even if they are wrong.

Howard Marks illustrates the problem well: "it is risk control, not recklessness, that runs through the success of long-term investment." Throughout the investment career, the results achieved by most investors will depend more on the number and extent of failed investments than on the greatness of winning investments. Good risk control is the hallmark of good investors. "

However, the trouble with introducing leverage is here, even if you set aside a 30% margin of safety, once you double the leverage, it is tantamount to giving up any protection of the margin of safety, and if you are wrong, don't expect any valuation advantage to save you.

I think Pablo's predatory investor is a good note on the margin of safety-heads I win, tails I don't lose much.

However, once leverage is introduced, the investment game becomes: I earn 100% more on the front and lose 100% on the back-but this 100% is completely different from the other 100%.

7. Leverage will make you pay more attention to the stock price

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8. Leverage will make it easier for you to give up long-term thinking

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After writing the article, I found an interesting thing: advising others not to jaywalk is very similar to advising others not to get into leverage-the same nagging, the same platitudes, the same annoying.

There are also many interesting similarities.

For example, in terms of motive. Why do people jaywalk? Because I don't have the patience to wait for the traffic lights and take the zebra crossing, I want to cross the road quickly. Why would investors want to leverage? Because I don't think it's fast enough to make money, I want to be financially free.

For example, both behaviors seem safe, because every year there are a lot of people jaywalking but nothing, and a lot of people who use leverage but don't. Then why does the granny nag you not to do it? Because almost no one can bear the consequences in the event of an accident.

The last thing in common is that no matter how much grandma tells you not to jaywalk, you still have the spirit to say that you are as light as a swallow, that you can walk as fast as you can, and that traffic lights and zebra crossings are reserved for primary school students.

Similarly, no matter how explicitly Buffett says not to use margin (which is almost the most unambiguous word in Buffett's quotation), there will still be Buffett followers who say I can, mature and professional investors can handle leverage, and zero leverage is for beginners and nerds.