The two ends of investment are analysis and trading, with waiting as the link between them. The core of investment analysis is business understanding and probabilistic thinking, while the core of investment trading is odds and contrarian thinking. The essence of waiting lies in strictly adhering to one's circle of competence and respecting common sense. In the long run, excellent trading cannot save poor analysis, but excellent analysis may be ruined by poor trading. However, the most challenging aspect is learning to wait.
Investment performance is retrospective, but the medium and long-term probabilities and odds of each investment can be determined in advance. Excellent performance is just the result, and the reasons behind it are the essence. Effort, talent, and luck may be the three most important factors: working hard in the right direction will give you a minimum threshold for success, talent determines the efficiency and time cost of growth, and luck always brings unexpected surprises to those who persist in doing the right thing.
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Successful investors are not so much skilled in calculation and selection as they are in knowing when to give up and when to persevere; they are not so much able to listen to all sides and observe everything around as they are in maintaining unwavering focus; they are not so much endowed with extraordinary insights as they are in deeply understanding their own limitations and clearly knowing what can and cannot be done in the market. So-called investment masters are not those who have received mysterious revelations, but those who are loyal to compound interest and always practice it.
Those who understand compound interest know that the sustainability of compound interest is contradictory to profitability (similar to ROE). High compound interest and long cycles cannot be obtained at the same time, with Buffett's 50 years of nearly 25% being the current limit for humanity (those who only look at high compound interest without considering time and claim to have defeated Buffett have not yet touched the essence of investment). After high compound interest, regression to the mean is inevitable, with both objective and subjective factors involved. The best scenario in an investment career is to have high compound interest in the early stage, followed by stable but extremely sustainable growth.
At a certain stage of investment, it is particularly easy to indulge in the "construction of a perfect system," but this is not much different from a lifelong commitment to building a perpetual motion machine. The more complex the system and the more the thinking is immersed in details, the further it is from the essence of investment. The longer one invests, the more they realize that the most reliable is the simple and straightforward methodology that hits the essence, and the most important is to focus on success in the overall situation and strategy.For an investor, a rather dangerous situation is to have the feeling of "holding the truth" early on. If at the same time they are a bit bored or competitive, and they verbally attack those who are slightly different, it basically indicates that there is no room for improvement. Of course, there are unshakable basic principles in investing, but there is no "sacred model" for the weight of different elements of investment. Of course, this does not mean being fickle, but maintaining an open mind, which is actually a kind of ability.
Is it better to be concentrated or diversified? If considered from a specific stage, it depends on which is more important to you, the fish (flexibility) or the bear's paw (safety). If considered from a long-term perspective, concentration seems to represent a high degree of confidence in the company's exploration and analysis. But on second thought, if you are really so confident, you should be able to find more excellent targets and diversify appropriately. Of course, this is essentially a matter of degree, and ultimately it is about the match between research depth and position benefits, and the appropriate balance between investment flexibility and risk diversification.
There are many elements involved in the investment decision-making process, but if refined and summarized, there may be three key points: 1. Overall perspective. It is to be clear about where you are in the entire market cycle, whether it is time to be afraid, greedy, or numb; 2. Value judgment. Betting should aim at objects with future advantages and make friends with time; 3. Expectation gap. Clarify the assumptions of value judgment and the expectations contained in the valuation, and maintain sensitivity when there is a high expectation gap.
Investment myths are all about stories of winning a hundred battles, but the reality is actually very thin. Even Buffett admits to making mistakes continuously. However, why do some people make mistakes that are fatal, while others make mistakes that do not lead to serious losses? The difference lies in: 1. Subjectively, whether they admit that they are mortals who will make mistakes? 2. Objectively, whether they are good at protecting themselves with a margin of safety? 3. Whether they have diversified risks and compensated with good odds? Therefore, losses depend on the pre-treatment of mistakes.From the formula PB=PE*ROE, it can be seen that when ROE is 8%, even if the PE is 35 times, the PB is only 2.8 times. If the company can continue to grow and the ROE increases to 25%, then when the PE is 25, the PB will increase to 6.25 times. This shows that PE reflects the expected premium, while PB reflects the asset premium. Generally, the reflection of expectations is far earlier than the actual change in ROE, and PB is relatively synchronized or lagging behind the change in ROE.
From this, it can also be understood that the trend of ROE itself is the core element of valuation. The greatest mystery of valuation is not the simple addition, subtraction, multiplication, and division of indicators, but the forward-looking judgment of the company's future profitability, and the accurate qualitative judgment of the company's operating stage. The so-called "vague correctness" is actually that specific PE and PB can be relatively vague (or can be analyzed specifically), but the trend judgment of ROE must be correct.
A high ROE is a manifestation of the company's profitability, and a high and sustainable ROE is a manifestation of the company's strong competitive advantage. So for such a good company, the market will inevitably give a capital premium in most cases, that is, a higher PB. If a high ROE company has a very low PB, you have to think about why? Possible: 1. The market is foolish; 2. The essence of the company is a strong cycle and is currently at the turning point of the profit peak. This contradiction may occasionally occur, but in the case of frequent scenarios, high ROE and low PB are essentially contradictory.
In the field of investment, "dancing with shackles" may not be a restriction but a protective mechanism. The most typical example is what Lao Ba said, "only punch twenty holes in a lifetime," and the most common is the fixed investment in index funds. It seems that these behaviors are highly restricted, but over time, it is often found that the "shackles" have actually turned into gold bracelets. This is actually the reason why the "free action" of most people always cannot surpass their virtual disk.Companies that can continuously bring new expectations are often favored by the market. However, there are two types of situations here: one is that new expectations are centered on the enhancement of the main business or the upgrading of the industrial chain, and the main expectations are "said and done" and continuously confirmed, which is a good seedling for excellent or even great companies; the other is that the new expectations are large and like to follow the trend, and they always use new expectations to cover up the unmet old expectations, which is a seedling for unreliable or even swindling companies.
In terms of the relative relationship between the company and the price, buying the company at a relatively high price is not the best strategy, but it is not the most terrible. Especially if the company becomes cheaper in the future, it can still be a good investment. The most feared is that it is very cheap when buying, but it becomes more expensive as it is held, which indicates that the logic of buying is wrong from the root. In this case, the most important thing is the ability to correct mistakes quickly, otherwise, the time cost of waiting for the error to be confirmed is so high that it makes people want to cry.
Efficient management companies seem to have no obvious barriers at first glance, but this efficient management may change from quantity to quality, and then form a real high barrier based on scale or technology and customer stickiness, but when all this is confirmed, it is often close to the mature period. For such companies, the most important thing in the early and middle stages should be to grasp three points: 1. Long-term demand expansion; 2. A team that is focused and has a strong industrial ambition; 3. Continuous "said and done" execution.
The deterioration of the balance sheet is not a good thing in terms of quality, but the reasons for its deterioration need to be looked at in two ways. One is accompanied by a significant decline in revenue growth and anomalies in accounts receivable and inventory during the same period; the other is that revenue is growing rapidly, but it requires initial funding or insufficient scale benefits, leading to a sharp increase in the debt ratio and a deterioration of cash flow. The former often indicates that credit has been relaxed to the limit, and the revenue side will face even worse results later, while the latter is due to the demand explosion being too fast, exceeding the current capital's digestion capacity.Today, I came across a saying: "What is limitation? Limitation is the woodcutter thinking that the emperor carries a golden shoulder pole." It's so spot-on!
Continuing on the previous topic, if you want to learn about successful value investing, don't memorize Buffett's mantra every day; if you want to start a business, don't read various success theories every day. What you need most is to collect information on how people fail! A person who hasn't thoroughly studied various failure cases cannot succeed. Those who only tell you "someone is good, and if you do something, you will be refreshed and achieve great success" are either pedants or fraudsters.
In a bull market, everyone talks about high elasticity, but after several stock market disasters, they start to focus on "how to avoid net value fluctuations." In fact, net value drawdown is a byproduct of market fluctuations, and completely rejecting drawdown is equivalent to being an enemy of investment. However, the same fluctuations have completely different meanings in different contexts: the tendency in a bubble environment should be to reject fluctuations, while in an undervalued environment, it is necessary to embrace fluctuations, and in most unknown environments, you need to calmly endure fluctuations.
A book says: "An average general, when facing a complex environment, will list a bunch of problems and question marks for himself, and be overwhelmed and unable to find the right direction. A real general, however, can cut through the chaos with a sharp knife, see through the essence and key points from seemingly ordinary situations at a glance, and act decisively." This is also similar to investment decisions. Excellent investors are good at grasping the main contradictions of both the market and the company, and can see the whole from the details and ultimately form the "logical fulcrum" of decision-making.
From the perspective of valuation, my first fear is not the high price, but the difficulty in measuring value. The core of difficulty in measurement is either too many variables or too far from the boundary of ability; the second fear is not the high price, but the trap of being cheap. It seems that being cheap is easy to make people go all out, and once it is proven to be a trap, it will be a big loss. If other factors are relatively certain, then "expensive" is actually a very simple problem, at least easy to measure. However, it is very important if the important assumptions of valuation are unclear or overturned.In many things, as long as you work hard and pay, even if there is no credit, there is also hard work, and diligence will have a basic income guarantee. However, the cruel and simple characteristic of the investment industry is that it never asks how much you have paid, but only whether you are right or not. In this category of work, effort is second, and the first is the correct values and methodology. Otherwise, if the direction is wrong, the harder you work, the more bumpy it will be, and the more obsessed you are, the more crazy you will become.
The same is true for luck. Most novice investors seem to be right because of good luck, while veteran investors often obtain good luck through the correct approach. The former is random and passive, while the latter is highly probable and active. It is normal for a person's investment performance to be lucky once or twice. But if it always seems so lucky, there must be a factor that attracts good luck called "ability". And a sign of enlightenment in investment is to learn to distinguish the dividing line between ability and luck.
A few days ago, a friend on Fen Da asked how to work towards professional investment. In fact, professional investment is a high-risk choice, especially in the early stage, the elimination rate will be very high. Whether the investment is professional or not is not important, the key is whether it is professional or not. In addition, it is best to start professional investment in a bear market. In a cruel environment, people can more rationally evaluate themselves and experience the difficulties of investment. If you can't get through it, it means it is not suitable, and if you get through it, you can decide whether to continue or not.
To live a long and good life in the world of investment, one must rely on the sense of risk and the intuition of opportunity. Having a nose that can smell risk is the foundation of living a long life, and as long as there are green mountains, there is no need to worry about no firewood. If you happen to have a bit of intuition for great opportunities, it is difficult to live badly. In fact, both risks and opportunities are essentially about dealing with uncertainty, and learning to understand the complexity of the world and the limitations of individuals is the foundation for establishing this mechanism.
There are many similarities between life and investment: both are essentially full of uncertainty, but both have methods to improve the long-term winning rate; more important than knowing what to do is to understand what absolutely should not be done; what determines the fate of a lifetime is often just a few judgments and decisions; various short-term contingencies will be smoothed out by time, and the final result is basically fair; what you do determines the height, and who you are with determines the difficulty; the most painful thing is not to miss it, but to understand it when it is too late.
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