Is investment the realization of cognition?

Investment is the realization of cognition. This is a widely circulated saying, but in reality, there are many counter-examples. There are a lot of people in this market who are very knowledgeable but always lose money. There are also some people who do not have a deep understanding of the macro, the enterprise, and the product, but after many years, they can still make money, and some even make a lot of money.

I once knew an investor who held Kweichow Moutai for 13 years and gained a lot. But instead of communicating about Maotai’s products and operations, he knew almost nothing. He didn’t know the production process of Moutai, the annual output of base wine, or even the ex-factory price of Moutai at that time. He only knew that Moutai was in short supply, and he often drank Moutai, and then he kept holding this stock.

Think of some people who are famous for Maotai, but got out of the car when the share price of Maotai in Guizhou was only a few hundred yuan, and then scolded Maotai all day long. The gap between the two is indeed too big. In terms of analytical ability, the latter can turn the former into slag; in terms of actual benefits, the former has already left the latter in the dust.

We also know that Newton, a physicist and mathematician with an IQ of 190, lost a lot of money in stocks. He sighed: “I can calculate the trajectory of celestial bodies, but it is difficult to predict the madness of human beings.” If in Newton’s time, the capital market was not developed enough, and Newton was not a financial giant, and it was excusable to lose money, we have a more representative example.

In the 1990s, a world-renowned management team created a hedge fund company, known as Long Term Capital Management.

The core figures of the company, including Nobel Laureate in Economics Robert Merton, the famous “Merton Model” proposed by him is widely used in the pricing of various risk assets and financial derivatives; Nobel Laureate in Economics Myron Scholes, creator of the famous BS formula for option pricing equations. David Mullins, former vice chairman of the Federal Reserve, was seen as Greenspan’s successor.

Such a fantastic lineup made great progress after entering the market in 1994, but in 1998, in less than half a year, the long-term capital experienced a huge net worth decline of up to 90%, and finally had to ask the Federal Reserve for assistance and transfer 90% of the equity to 14 Wall Street banks. In 5 years, the net loss was 70%.

The reason for its failure was the impact of the financial crisis, but more importantly, the early success made the management team more confident, ignoring market risks, continuously increasing leverage, and pursuing higher rates of return. 4 years of glory, in 150 days will be vanished.

Their cognitive ability can be said to be the ceiling of the investment world at that time, and the success of the previous years has also proved this. But seemingly matching cognition, once encounter a small probability event, unpredictable problems will come.

The key lies in the word “surplus”. It is very important for investors to leave room between their own perceptions and their own investments. In investment, knowledge alone is not enough. The income is essentially the realization of the cognitive premium. The larger the premium, the stronger the certainty of investment.

Some people lose money, and there are many reasons that can be found, but there is always one factor that cannot be avoided, that is, the profit goal set for oneself is too high. The return is always proportional to the risk, and the goal of return is too high. Investors will have to choose riskier stocks, or adopt a riskier trading model.

A person with an IQ of 120 does something with an IQ of 100, and a person with an IQ of 150 does something with an IQ of 180. Which has a higher probability of success? The core concept of value investing is “don’t know, don’t do it”, and the word “understand” reflects the cognitive premium. What an investor can do is not the same as what an investor can do well.

It’s not easy to improve your own cognition, it’s an addition. However, it is not so difficult for us to increase our own cognitive premium sometimes, which can be subtracted. While increasing your investment premium, constantly improving your awareness is the best way to improve your liquidity. The question is: are you willing to do something simpler? It’s not easy. @Today’s topic

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