Suppose you are going to put out 300,000 and invest in 6 value stocks carefully selected by yourself.
6, is an appropriate number, which can moderately diversify to reduce the overall risk, and will not lead to mediocre returns due to excessive diversification. It is better to buy an index ETF to save trouble.
There is a basic assumption here that you are a person who has confidence in your ability to pick stocks.
How accurate is your stock selection? Most people will say a number that is well above their actual level, and well above average. It’s okay to be embarrassed, it’s human nature. Just like 70% of people think they look good and 90% of male drivers think their driving skills are above average, it’s illogical, but completely understandable.
But in this logical deduction, I can only give you a 50% success rate in stock selection. Believe me, this is already very optimistic.
Continue to count down. Half of the 6 stocks are 3 right, and each earns an annualized return of 20% on average (this is also very optimistic, the annualized return of the S&P 500 is less than 13%), then these three stocks are in one year. It earned 50,000*20%*3=30,000 for you, divided by the principal of 300,000, and the rate of return is 10%. Pretty mediocre, right? But if you look at the urine of Big A for many years, you can’t expect more, after all, you are still making money.
The key to success or failure now lies in the 3 wrong stocks you picked. If not, how much do you think they would lose on average? If you add that you haven’t timed your purchase, how much will you lose?
By the way, raise your hand for those students who have always insisted on value investing, but have never cut their holdings in half?
In my own judgment, a wrongly selected stock, an average drop of 20% to 40% in a year is a very neutral situation, and some of these stocks will halve or even drop by 70% or more. Even if you only lose 30% on average, you will face a very troublesome point, which is that you do not know which of the losing value stocks you are holding will keep falling in half.
After all, Tencent has fallen by up to 74% from its peak, Moutai has fallen 48%, Vanke 60%, Yili 50%, Gree 47%, Haitian 61%, Arowana 74%, Aier 65%, Hengrui 72%, Mindray 50%…
And these are still recognized as excellent companies. You have been holding them. Maybe after 3 or 5 years, there is still hope of returning to the high point (the annualized rate of return should not be expected). Bull stocks, but now they have been kicked out of the bidding camp, is it still possible to break even? There are too many examples like this, it hurts people.
Therefore, our income becomes a total of 30,000 for the 3 winners, a total of 45,000 for the 3 losers, a total loss of 15,000, and a rate of return of -5%. Trust me, this yield is already stronger than at least half of retail investors.
By this less rigorous derivation, what I want to say is:
Fundamentally speaking, investment is a game that pursues positive EV. If the average upper limit of individual stock returns is 20%, but because the loss does not stop, the lower limit of individual stock losses can easily break down by 50% or even 90% (look at this year’s Hong Kong and US stocks). Zhongjian), how to achieve the positive EV of this game? Rely on you to increase the success rate of stock selection to 80%?
Of all the investing factions, price investing is the most worrying when it comes to facing the risk of wrong stock selection. Because every price investment believer believes that “if you don’t want to hold for ten years, don’t buy for a day”, “buying a stock is buying a part of a company”, and “the easiest way to invest is to buy a good company and hold it for a long time. Never sell these quotations by heart, but they don’t know the huge risks hidden behind them.
First, how do you judge that the company you bought is a good company to hold for the long term? Also, won’t a good company now become a mediocre company or even go bankrupt in the future? There are too many such examples, Kodak, GE, GM, AIG, Nokia, Lehman Brothers, Yahoo… And the data analysis of Wall Street shows that there are no more than 10% of fund managers who really have the ability to actively choose stocks. Where do you get your confidence? ?
Second, I always thought that the worst thing about all value investing books is that no one ever seriously taught investors how to stop losses if they were wrong. So that a large number of novice investors mistakenly believe that price investment is one-stop and never-ending.
Is that so? If you look carefully at Buffett’s shareholder letters over the years, you will find out how many times he has made stop losses, from the initial textile company Waumbec, to the repeated buying and selling of airline stocks, from very optimistic shoes Dexter, an industrial company, to Salomon, which has almost become Waterloo, from British supermarket Tesco, Energy Future, to ConocoPhillips, which is within the absolute capability circle of Laoba but still has a huge loss of 2.6 billion US dollars, and until the IBM, which has been advocating for a few years but eventually withdrew…Is there still less stop loss done by the Saints of Omaha?
A stock god is also a human being, and he can also make mistakes. The reason why he can be called a “god” is not only because of his wisdom and vision, but also because of his ability to correct mistakes and evolve.
And why do we, individual investors who want nothing, think that we should insist on holding and never selling?
At this point, it is much easier for trend investors who have always been regarded by price investing as a sidekick, because they are scumbags who have no feelings for all stocks. In many cases, the stop-loss price cannot be waited for, and the trend is broken and resolute to go. Of course, it will not bear the risk of losing the slightest limit or even infinitely magnifying.
And the basis for the ultimate victory in this game is that you have been alive at the table, my friends. (Laoba also said that the first is not to lose money, and the second is to not lose money, but he does not tell you how to not lose money.)
If through the above not very rigorous derivation and examples (after all, the code is on the mobile phone, please bear with me, please bear with me), everyone can agree that the price investment should also stop the loss, then the same can also be demonstrated, the price investment should also be Choose the time (I prefer to call it the time).
Finally, I quote a passage from my favorite Dutch marketing professor when I was in business school:
Some things are ethical, some things are immoral, and marketing is unethical.
I would like to apply this sentence pattern and say: it is not moral to make money in stocks.
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