Source: Ideology Steel Stamp

1. Make sure to earn money

Find a stock that is likely to rise, which provides a basic winning rate, but just like when someone points you in the right direction while asking for directions, it does not guarantee you will get there, the latter is often referred to as 'trading ability.'

Many years ago, I once asked a trading expert how to improve trading skills, and he mentioned a training method:

"Randomly select three stocks from your watchlist, be sure to choose randomly, and then only operate on these three stocks, aiming to outperform the index within a month."

This is a specialized trading practice aimed at minimizing the factors of stock selection and large cap fluctuations. If you want to make the training more 'specific,' there is the 'Turtle Trading Method Training' and 'T+0 Training,' which focuses on using one method repeatedly to find the feel for trading.

All these trading method trainings require fixing various operational details and incorporating them into assessments. If violated, even if making a profit, it is not acceptable, leaving just a bit of room for proactive judgment and operation to create 'trading intuition' and muscle memory for the method.

Trading ability is often looked down upon by many value investors because value investing is about buying and holding, without the need for trading, but even value investing requires two steps:

Step one: Find stocks that can make money.

Step two: Get the money in hand.

The "second step" is not a joke; you can give it a try while telling two people about a stock you think is good. After a year, if it rises, check on their investment situations; the likelihood of a significant difference is high, and it is possible that one profits while the other loses.

Therefore, stepping away from the surface level of "whether trading ability is important", the essence lies in whether your investment system has enough consistency to invest in different types of symbols in different market environments while still being able to replicate your investment strategy over the long term.

This aligns with the eight words I proposed in the previous article "You only need a 55% win rate; you can also become Buffett": Accept the win rate, grasp the odds.

2. Turtle trading and odds thinking.

For any investment method, once stocks with specific characteristics are chosen, the win rate is basically fixed. After the stop loss point is predetermined, improving returns looks at two points:

Subjective effort relies on the choice of buy-in points (ensuring the plan succeeds),

The actual earnings depend on when the sell signal appears (success is determined by fate).

Taking the turtle method as an example, it defines the profit or loss from the buy point to the stop-loss point as 1R, looking for symbols with breakout patterns for purchase (reference can be made to 'Livermore's Breakout Strategy, and its inherent "bankruptcy gene"' and 'With only a 55% win rate, you too can become Buffett'), holding until the trend ends, with outcomes that can be categorized as -1R, 0~-1R, 0~1R, 1R, 2R, 3R, 4R...

Since a considerable portion of trades requires stop-loss, the win rate of the turtle method is relatively low, achieving 40% is good, and most of its profits come from a few trades over 4R, while each such trade might correspond to several small gains and losses with more losses than gains in ineffective trades.

This method seems simple, but it poses a huge challenge to human nature; imagine guiding a child with homework, and after countless repetitions, the child keeps making mistakes, isn’t there always a moment when you feel emotionally overwhelmed?

The turtle method is the same; when you consecutively face stop-loss after stop-loss, while the market and other investors around you are experiencing gains, an emotional person may curse and give up, while a rational person may think about improving the method.

In psychology, there is a "recency effect," which means that recent events usually have a greater impact on your current decisions; if consecutive failures caused by the same method happen yesterday, compared to several months ago, you are more easily influenced.

The influence of the "recency effect" in investing is significant; for example, whether or not to stop-loss, most investors are easily influenced by "recency"; if you have a series of failed stop-losses, you may abandon the stop-loss strategy, and when facing a larger loss, you recall the benefits of stop-loss and try it again... including whether to chase highs, whether to bottom fish, whether to concentrate or diversify positions, whether to rotate or persist, investors repeatedly yield to the "recency effect", unable to form a stable method.

Because of this, most people who try the turtle method give up, while a small number will seek to improve the method, summarizing some "rules" from "recency", such as under what circumstances it is acceptable not to stop-loss, and under what circumstances not to participate.

Trying to improve the win rate by reducing trading frequency often results in worse outcomes. The profits from the turtle method in a month may come from just one successful trade, which is why it is advised not to actively predict the market and not to miss any signals. The frustration of missing out on significant market moves is harder to bear than losing money.

You want to optimize the stop-loss method, but the result is the same; before waiting for more large profits, you're defeated by the repeated frustration of missing predefined stop-loss points. Fortune, good or bad, never appears evenly.

Most people actually cannot truly accept the low win rate of 'turtle trading.' After all, judging win rates aligns more with the intuition of ordinary people, which leads to an inability to effectively use odds thinking for decision making.

In turtle method training, stop-loss is predetermined, and sell signals mainly depend on luck. The only test of trading ability lies in determining the specific buy-in point: buying a little earlier increases the odds but lowers the win rate; buying a little later increases the win rate but lowers the odds.

Trading ability is a hereditary talent. Our ancestors in the primitive jungle needed to effectively hunt every day, or they would starve, yet there are risks in hunting:

Blindly attacking consumes too much energy, resulting in defeat.

Not giving up when attacking but getting injured, leading to defeat.

Being too conservative in attacking, leading to a decline in hunting ability due to hunger, resulting in defeat.

The timing of the hunt is based on the assessment of odds rather than the win rate.

The surviving ancestors all possessed 'odds thinking', but the ability to inherit it is very rare. Most ordinary people either think too highly of themselves, always looking to improve methods, leading to failure; or they are too mediocre, with overly common returns, leading to failure.

T+0 is similar, focusing more on the judgment of volume, with shorter operation times and higher requirements for speed. Before the rise of quantitative strategies, it was a successful trading method based on the elimination mechanism of a wide selection, but only a few exceptionally talented individuals can continuously obtain excess returns through precise judgment of buy points and speed. However, why would such people be content with 'T+0'?

Stop-loss is also a form of odds thinking. Many investment articles simplify the judgment of stop-loss, talking about 'preserving strength' or 'giving up is also a form of wisdom', which fails to address human weaknesses. In fact, the biggest problem with not having a stop-loss is that you cannot judge the odds at all.

So, if you have other methods to judge odds and can ensure you won't 'lose it all in one go', then you can avoid stop-loss, such as the basic methods of value investing.

The odds of value investing are assessed through other methods.

3. Constraints of high odds in long-term investment.

If the process of trend investing can be divided into:

Step one: Plan your trade.

Step two: Trade your plan.

So, value investing is also divided into two steps:

Step one: Look for excellent companies with long-term growth opportunities.

Step two: Buy at a reasonable price.

Buffett's methodology on the first step:

You should choose to invest in businesses that even a fool could operate, because one day these businesses will end up in a fool's hands.

When a once-glorious management team encounters a gradually declining sunset industry, the latter often prevails.

The so-called business with special rights refers to those enterprises that can easily raise prices and can increase sales volume and market share with just a little extra investment.

......

Buffett's methodology for the second step:

We don't want to buy the worst furniture at the cheapest price; we want to buy the best furniture at a reasonable price.

When Charles and I buy a stock, we neither consider the timing of the sale nor the selling price.

Multiplying the probability of a loss by the amount of potential loss, then multiplying the probability of a gain by the amount of potential gain, and finally subtracting the former from the latter, this is the method we have always tried to follow.

......

The first step is to determine the win rate of an investment, which depends on the industry, the competitive landscape, and the management team, but don't forget, these factors are beyond the control of investors (some of whom may not even be management).

• Originally invincible technology was suddenly eliminated;

• Companies that were thriving in niche industries suddenly faced price wars with the entry of giants;

• Assets abroad were seized by military coup warlords;

• A single A4 sheet dismantled a trillion-dollar industry;

• Companies with good operational momentum had their chairman captured by distant ocean fishing……

In 1982, two management scholars in the usa responded to the competition from japanese companies by writing a book called "In Search of Excellence", meticulously selecting 43 outstanding american companies and summarizing eight criteria for achieving excellence. However, just a few years later, one-third of these companies no longer met the authors' criteria for excellence.

To avoid this embarrassment, later Jim Collins, when writing "Built to Last", first lowered the standards and told everyone through the book that excellence isn't important; what's important is surviving. Thus, when selecting benchmarks, he compared one excellent company and one mediocre company from each of 18 industries. Although it felt somewhat like heavyweight contenders versus lightweight contenders, years later, several companies still lost to the 'control group.'

SoftBank accurately sold nvidia on the eve of the AI explosion, and Jensen Huang regretted not making a bold choice for privatization when he had the opportunity; who could understand nvidia better than these two?

In the highly competitive business world, the win rate naturally regresses to the mean of 50%. Concepts like everlasting enterprises and the pursuit of excellence are primarily aimed at selling books and courses. Relying on the win rate to achieve high returns is essentially a luxury—of course, "excellent management" has another role, which will be introduced in the final part of this article.

Don't expect research to significantly improve the win rate, meaning moving from less than 50% to 55% effectiveness; not even blue-chip stocks can achieve this. Therefore, when researching listed companies, it's sufficient to clarify a few key questions; getting lost in trivial details is meaningless.

Choosing dark horses cannot improve your win rate either, as dark horses inherently have a lower win rate. The industry insiders' judgments only slightly increase the odds; investing in dark horses relies on the odds, as it offers a high profit margin once a dark horse turns into a blue-chip.

It’s not that value investing cannot earn money through win rates; for example, creating combinations with blue-chip varieties, engaging in grid trading, volatility trading, and cyclical investments are all typical win-rate trades that can yield decent returns. However, when engaging in such win-rate trades, it is crucial to understand that win-rate investing is a system that can lead to "small gains with big losses". When the win rate unexpectedly flips, the penalty from the odds will double. If the danger is unclear and a loss occurs, it may turn into a significant loss.

There are two methods to increase the odds in value investing: one is to wait until prices are cheaper to buy, and the other is to hold for a longer time. For a detailed analysis, refer to the previous article "You Only Need a 55% Win Rate to Become Buffett."

Additionally, this system presents a challenge to human nature; one needs great patience to await better and cheaper opportunities. The risk is missing this opportunity. While holding, immense patience is required during long periods of stagnant stock prices, and the risk is missing other opportunities.

It's not just a challenge of human nature; seeking odds also has a constraint—frequency of action. When the frequency of action decreases, since the win rate remains unchanged, you need to earn higher profits on each investment to maintain your target return.

There are some differences between Buffett's early and later methods. In his later years, the requirement for odds decreased, not because Buffett improved his methods, but due to changing constraints. His funds increased, and the number of viable opportunities (symbols need to have a certain size) decreased. To maintain a certain frequency of action (since the win rate remains unchanged), he had to lower the requirements for odds. Additionally, during the holding phase, reducing the odds equates to raising the tolerance for valuation, allowing him to hold onto apple, a relatively overvalued company.

This point differs from trend trading methods like the turtle method, as the latter forms a pair of constraints with win rate and odds. By setting stop-loss positions, it adjusts the odds and the win rate levels, while the trading frequency needs to be ensured, making sure not to miss any opportunity.

4. Happiness relies on win rate, success relies on odds.

I have said many times that you can publish my trading rules in a newspaper, but no one will follow them. The key is unity and discipline. Almost everyone can list a series of rules that are not much worse than ours. However, they cannot instill confidence in others, and only by being filled with confidence in the rules can you adhere to them, even in the face of adversity.

—— Richard Denny's (founder of the turtle method)

First, let's answer a question left earlier. What role do excellent management teams play?

In the short term, excellent management teams can respond to more competitive challenges and seize some normal markets compared to ordinary managers. However, in the long term, the role of management is not as significant as many imagine, as individuals have weaknesses and organizations also have weaknesses.

Therefore, for long-term investors, the greatest role of excellent management teams is to provide confidence. Value investing, like any investment strategy, will experience fluctuations in returns. Most people will lose confidence in the trough of high odds, whereas this is when investment should be increased — excellent management will help us do the right thing at the right time.

The most dangerous time in investing is when you start to doubt your own judgment, leading you to hesitate to act on opportunities and unwilling to stop when seeing danger.

Therefore, the hallmark of a mature investor is trust in their investment system, which should minimize subjective judgment as much as possible, either through a substantial amount of mystical belief elements or through a significant amount of machinery execution steps.

A trustworthy investment system consists of two parts:

1. Trustworthy underlying principles

If one can firmly believe that their system can make money long-term based on its principles, even with short-term losses, they can more consistently make decisions based on investment signals.

The underlying principle of the turtle trading method and other trend trading is the investor's instinctual reliance on resistance and support levels, which creates price stagnation phenomena.

In the article 'What the Hold Positions Data Tells You: Why Retail Investors Always Make Small Gains and Big Losses?', I analyzed the data to demonstrate retail investors' obsession with range trading of buying low and selling high, and their instinctual belief in resistance and support levels, which makes these levels initially very effective, creating effects of 'self-reinforcement' and 'self-fulfilling' prophecies.

However, when changes arise from real-world scenarios, such as continuous imbalances in commodity supply and demand or changes in company performance, they will eventually break through resistance and support levels. The obsession with range trading of buying low and selling high delays the trend that should occur, while also providing trend trading with future upward potential, which serves as the source of odds.

This is the effective theoretical principle of the turtle trading method, and also the reason for its low win rate; one cannot determine whether the current breakout is a true trend or if the volatility of trading is just a bit greater.

The same goes for T+0; volume is a signal that can attract more investors' attention and participation. Due to the time lag from investors paying attention, making judgments, placing orders, to transactions, a trend acceleration of several seconds to a few minutes occurs (related to market heat and selling pressure), allowing those with quick hands to make a T+0 profit.

Most trading methods utilize various psychological effects of humans and earn money from other investors, which is no different from setting a trap to capture prey.

Value investing methods are容易被人接受， because their underlying principles are more widely understood; it involves excellent companies that periodically outperform the industry and the economic large cap.

Each individual's specific investment method is a specific application of the two larger underlying principles mentioned above in a certain aspect; for example, the leading strategy is a system of investment summarized based on trend trading where strong varieties remain strong and self-trend reinforcement phenomena.

2. Consistency of strategy

Winning rate, odds, and frequency of actions form a mutually influencing 'impossible triangle' system (for a detailed introduction to the impossible triangle method, please refer to 'How to Solve All Life's Problems with the "Impossible Triangle"'), any investment system should solidify certain judgment indicators and operational details, only incorporating subjective judgments at some core stages, where subjective judgment only affects the level of profit, not the profitability of the method itself.

This is the consistency of the strategy, ensuring that you can stick to the established method in different market environments. Most successful investors use trading systems that have considerable 'mechanical' nature, reducing the proportion of subjective thinking, avoiding being conservative when aggressive is required, and being aggressive when conservatism is necessary, as well as missing the best buying and selling opportunities due to continuous calculations of gains and losses.

The consistency of trend trading methods is reflected in trend judgment, buy and sell signals, position management, stop-loss management, and mindset management; while the consistency of value investment systems is reflected in company quality judgment, valuation judgment, trading signals, position management, and holding period tracking management.

The opportunities in life follow the "80/20 rule"; immense success often arises from just one or two high-stakes chances. A normal person, without any preparation, cannot possibly seize this sudden "overwhelming wealth"—but a good system can achieve that.

Happiness relies on win rates, and success depends on odds; this applies to investment as well as life.

Editor/Jadyen