The Waxing and Waning of the Stock Market
Introduction
Since the world’s first modern stock was issued in 1602, stock trading has been around for more than 400 years. From 2015 to the present, stock trading has only been 4 years. In the long history, I have only participated in one percent. Looking at the longer future, the time that individuals can participate in stock trading is just a drop in the ocean. Individuals are always children in front of the market. Even with talents like Livermore, Buffett, and Soros, they only do their best to grasp the pulse of the market, strive to resonate with the market, and obtain some returns. Ordinary people should be more humble and eager to learn in front of the market, strive to understand the market, feel the market, and then obtain a little bit of return.
Investment Foundation
The current trading philosophy originates from Graham and was developed by Warren Buffett and Charlie Munger in value investing. Value investing believes that stocks are essentially partial ownership of a company, and the price of a stock is determined by the value of the stock, that is, the value of the company. The value of a company is determined by the company’s profitability and net assets. Although the up and down fluctuations of stock prices are difficult to predict in the short term, they are definitely determined by the value of the company in the long term. As long as smart investors buy when the stock price is far below the actual value of the company, and sell when the price is close to or higher than the value, they can make a lot of money with very little risk.
In actual trading, as an investor, you should not get entangled in whether it is investment or speculation. Trading in the secondary market is essentially speculation. The key is to look at the risk-reward ratio and the probability of winning. If the probability of winning is high, it is investment.
Trading Principles
The basic trading principles adhered to by XYZ are: select high-quality targets, wait for the right price to buy, and then sell at the right price. The entire trading system framework includes the following principles:
Establish clear and suitable investment goals
For a shrewd investor, simply setting an investment goal is far from enough. More importantly, this investment goal must be clear and feasible. The best way to achieve investment goals is to start with a clear definition, while keeping a cool head about how to achieve them, and then create a detailed and clear plan. The following is an example of a clear investment goal and its plan:
Some investors are easily influenced by the trend of the broader market, increasing stock investments in bull markets and immediately reducing holdings in bear markets. This behavior is an emotional reaction rather than rational thinking. A comprehensive investment goal and plan is to assist investors in avoiding this behavior and instead focus on how to better obtain long-term investment returns.
Investors should set measurable and achievable investment goals and formulate plans to achieve these goals. Investors with multiple goals should formulate different plans for each goal. Finally, investors should regularly and continuously evaluate the plans formulated.
If an investment plan is not formulated, investors often adopt a bottom-up approach to build investment portfolios, resulting in portfolios that do not match investment goals. Investors should spend more time formulating investment goals and plans, rather than getting entangled in considering various popular new investment concepts. This is a reasonable arrangement of time and will greatly help investors achieve their investment goals.
Build a broad and diversified asset allocation
When investors establish clear and feasible investment goals, the next question they face is how to reduce investment risks so as to avoid losses and obtain returns as much as possible. Not only put eggs in different baskets, but also choose suitable baskets for eggs. When the investment portfolio deviates from the original target allocation, investors also need to readjust to reduce their risks to the expected level.
The following are three common strategies to help investors decide the timing of portfolio restructuring:
Time-dominated: The portfolio is restructured according to a set time - daily, monthly, quarterly or annually, etc., regardless of how far the asset allocation ratio deviates from the target allocation.
Allocation weight-dominated: If only considering from allocation weight, investors do not need to consider the time factor when using this strategy. For example, when the investment portfolio allocation deviates from the target allocation by a certain amount (such as 1%, 5% or 10%), the investor restructures the portfolio. If only considering from allocation weight, it is necessary to check the changes in allocation weight every day.
Time and allocation weight-dominated: This strategy mixes the practice of only considering from time and only considering from allocation weight. Investors review the portfolio regularly, but only restructure the portfolio when the asset allocation weight deviates from its set level.
Investors should be as thoughtful as possible when making decisions, because once brokerage commissions, portfolio monitoring costs, taxes and other readjustment costs are taken into account, the differences between strategies will appear.
The time and allocation weight-dominated strategy can achieve an appropriate balance between risk control and cost reduction. For example, investors can consider readjusting the portfolio annually or semi-annually, but only when the deviation reaches a limit of 5%. In this way, investors can control investment risks within the expected range while making as few adjustments as possible.
Independent rational analysis
Trading in the market, for junior investors, is more of a game with themselves than a game with the market, because when the financial strength is not enough to disturb the market, what is earned by trading with a small amount of money is just the money of the market trend. The analysis and judgment of market trends is the foundation of profit, which requires rational analysis and following the market form, rather than fighting against the market. The most important thing is rational analysis of what the market will do next, not what I expect the market to do. Keynes’s “stock bridge beauty contest theory” is this principle. In the information age, the information everyone gets is basically the same, and the key is how to use this information.
People will take action in the face of crises - if a river breaks, people’s first reaction is to build dams to prevent floods, rather than sitting and watching and letting houses be flooded. However, although human instinct is to solve, correct, improve, and intervene in problems encountered, we must also realize that investment is different from other problems: in the vast majority of cases, when everyone around you is panicked about investment, your wise move is precisely to counter motion with stillness or even remain indifferent.
Emotional Stability
Livermore said that speculation (investment) is the most thoroughly magical game in the world. But this game cannot be played by people who are too lazy to use their brains, cannot be played by people who are mentally unhealthy, and cannot be played by adventurers who attempt to get rich overnight. Impulsiveness is the biggest enemy of investors. Only by being as calm as a mountain can you be as fast as the wind, as slow as a forest, and as aggressive as fire.
In this example, investors were affected by market sentiment and removed stocks from their portfolios at the end of December 2008, thereby avoiding the deeper market decline in January and February 2009 (the stock market fell another 17% in these two months), but at the same time missed the strong bull market rebound that began in March. Although this example is biased towards the extreme, it reflects the real situation of many investors: once withdrawing from an asset class (such as stocks), due to inertia, it is easy for investors to delay and postpone the decision to re-enter the market.
Insight into Human Nature
Livermore said that Wall Street never changes, pockets will change, speculators will change, stocks will change, but Wall Street never changes, because human nature never changes. Behind all transactions are people, and only by understanding human nature can you understand yourself. Everyone has blind spots, and even the best people are no exception. The only key to investment is to overcome one’s own shortcomings, and anti-human nature is anti-self. In addition, making anti-human operations in a way that knows human nature well, for example, firmly executing an investment plan means selling outperforming stocks and buying underperforming stocks to adjust the investment portfolio to the target asset allocation. This may be counterintuitive, but the worst time in the market may also be a good opportunity to enter the market. This point can be learned from Munger’s psychology of human misjudgment.
Follow the Trend, Do Not Fight Against the General Trend
Charles Dow pointed out in the triple movement principle that the market trend is divided into three movements: primary movement, secondary movement and daily fluctuation. The primary movement is predictable, the secondary movement is significantly deceptive and unpredictable, and the daily movement is a random walk and is unpredictable. Therefore, the main trend of the market can be predicted, and the time and position of each price fluctuation are inaccurate. The most important thing in stock investment is to follow the general trend. As Livermore said, the market has only one direction, neither long nor short, but the right direction. When the market is good, no matter what the fundamentals are, every ticket is rising; when the market is bad, no matter what the fundamentals are, every ticket will also fall. You can trade against the trend, but you can never go against the trend. After the price enters a clear trend, it will automatically run along a specific path running through its entire trend. Don’t argue with the market, and most importantly, don’t compete with the market. As long as you recognize where the trend appears and ride your speculative boat with the tide, you can benefit from it.
Set Stop-Profit and Stop-Loss Points, As Long as the Green Hills Remain, There is No Fear of Running Out of Firewood
Since the market is a random walk, that is, unpredictable, even if we buy according to the value investment concept, the market may immediately move in the opposite direction. To protect the position, we need to set stop-profit and stop-loss points. When the amplitude exceeds expectations, we can wait and see first, and then enter the market again after the trend is confirmed. You must never buy lower and lower, attempting to lower the cost.
Be a Researcher Instead of a Trader
Judging the market trend is very important. To make money, you also need to choose a clear trading target. As a value investor, to choose an investment target, you must first conduct fundamental analysis. Graham has explained the framework of fundamental analysis very clearly in “Security Analysis”. Simply put, you have to regard yourself as a shareholder (which you are in fact) and a customer to examine whether the company’s management, technology R&D, market, and products meet your requirements. Only those that meet the stock selection requirements can enter the watch list.
In March 2016, I listened to the management experience shared by Chen Zongnian, chairman of Hikvision, and studied “In-depth Report on Security Industry: Scale Effect and Brand Premium” by Zhao Xiaoguang. I was convinced that Hikvision’s technology, market, and team were all excellent. I bought Hikvision at a price of 26.16 yuan on August 26, but unfortunately sold it on March 8, 2017. If I held it until now, it would have doubled. On November 28, 2016, I bought Gree Electric at a price of 28.61 yuan, and left the market at a loss at a price of 27.12 yuan on February 7, 2017. If I held it until now, the return could reach 75%. Both Hikvision and Gree are top-notch good companies managed by top-notch people, but I, a small retail investor who thought I was smart, bought and couldn’t hold it. Once there was a slight disturbance in the market, I was like a frightened bird, either taking profits to be safe or cutting meat to clear the position. Looking into the reasons behind it, the main reason is that I didn’t figure out where the money earned in the stock market comes from. Buying stocks is actually buying companies. The money we earn from investing in stocks mainly comes from: enterprise growth money, enterprise dividend money and market sentiment money. The vast majority of investors in the market are actually just earning market sentiment money, or losing money through market sentiment. Among the three parts, the biggest return is the enterprise growth money. To earn enterprise growth money, you need to buy at a cheap price and hold for a long time. By holding high-quality companies with significant “economic moats” and huge growth potential and operated by trustworthy management teams for a long time, you can achieve excellent returns.
Think in Reverse, Always Think in Reverse
This is one of Munger’s principles most worth learning. When we make decisions, we must adhere to dichotomy and think more about the probability of extreme situations occurring and the losses they will bring. Always think in reverse, be inclusive, and cite widely. Choosing to filter out facts that you don’t like by yourself may be harmless in many cases, but once it involves the investment field, the situation may be very bad. Imagine when you review your long-term asset allocation (proportion of stocks, bonds and other investments), you consider that the market valuation has been high for some time, so you decide to lock in some profits. Then, you start to do your own research and read everything that can confirm your point of view, and regard any other articles that conflict with it as coming from rookie analysts and untenable views, so you dismiss them. As a result, your investment risk has indeed been reduced. Next time you consider investment, please remind yourself: Have I evaluated all the facts? Doing so may not ensure investment success, but it can definitely increase the probability of investment success.
Uphold a Long-Term View and Wait for Suitable Trading Opportunities
With high-quality targets, we must continuously observe and wait for the opportunity when the stock price is lower than the stock value. In a fully competitive stock trading market, the stock value should be measured by the future earnings method, that is, how much the stock price should be at the time point we expect to leave. This has little to do with the previous price of the stock, and has nothing to do with new highs, new lows, and key prices. It is only related to future expectations. Moutai hitting 1000 yuan is not the key to whether it can be bought or sold. The key is what is the value of Moutai in the future? Livermore said that when the market fluctuates, investors are very likely to make decisions that seem rational but are actually hasty, thereby disrupting established investment plans or deviating from their investment goals. When the stock price rises from $10 to $50, don’t rush to sell, but think about whether there is a further reason for it to rise from $50 to $150.
Invest Early
The market is the teacher, and the participants are students, and you and I, the vast number of retail investors, may not have even graduated from kindergarten. Don’t think about getting rich overnight. If you want to achieve something in investment, you must participate in the market as early as possible. As early as 1941, 11-year-old Buffett had already started buying his first stock and became a small retail investor. Through long-term continuous efforts and day-after-day research, the small retail investor grew into a generation of investment masters. Wall Street legend Livermore also started learning trading as early as the age of 14.
Always Stay in the Water
Because the duck is always in the water, it is the first to know when the river water warms in spring. The market always starts when you don’t expect it, and falls to the bottom when everyone is confident. Only those who have been in the market all the time can feel the subtle changes in the market in advance, be greedy when others are fearful, and leave the market when others are greedy. Livermore said that you should always pay attention to possible danger signals, and only by always observing the market will you cope with the occurrence of extreme situations. At the beginning of 2019, the spring offensive was launched. Before the end of February, 300,000 people ran into the market, and by the beginning of March, the index began to make a significant correction. No one can say clearly whether it is a temporary correction or the end of the market, but those who entered the market at the stage high point at the end of February are definitely the ones who can feel the chill of the cold spring. Staying in the water for a long time here is not to suggest that everyone trade all the time, but to always pay attention to the market and look for opportunities. Only by staying in the water for a long time can you enter the market for trading near the starting point of a certain trend and obtain the most profit from this trend.
Buy, Sell and Wait
For those who are just starting to trade, holding positions all the time and trading frequently is investment. The commission rate that retail investors get from brokerages is generally about five ten-thousandths. Plus the tax rate, the cost of a purchase and sale of about 10,000 yuan is about 30 yuan. If you trade once a week on average, the annual cost is 1,500 yuan. You need to complete a 15% annual return rate to cover the cost. Many people, for the pleasure of trading, like Zhao Zilong of Shijiazhuang, rush in and out for a junk stock, waste their lives, get tired, and work for a year just to work for the brokerage.
Overconfident investors not only take greater risks, but also trade mostly more frequently. The annualized return rate of confident and frequent trading investors is 11.4%, while the annualized return rate of less frequent trading investors is 18.5%.
In the eyes of investors, there are only 2-3 sure opportunities to make money every year. In the opinion of investment master Munger, there are only 2-3 investment opportunities that can be encountered in a lifetime. Munger, at the age of 90, has only made three investments in his life: Berkshire Hathaway, Costco and Himalaya Capital invested after the age of 80.
Livermore warned us that excellent speculators are always waiting, always have patience, waiting for the market to confirm their judgment. Remember, do not fully trust your judgment until the performance of the market itself confirms your opinion. When you do nothing, those speculators who feel they must buy and sell every day are laying the foundation for your next speculation, and you will find opportunities to profit from their mistakes. In long-term trading (value investment), apart from knowledge, patience is more important than any other factor. In fact, patience and knowledge complement each other. Those who want to succeed through speculation should learn a simple truth: before you buy or sell, you must study carefully and confirm whether it is the best time for you to enter the market. Only in this way can you ensure that your position is the correct position. But do not act rashly, wait until you get a signal from the market confirming that your judgment is correct. At that time, and only at that time, can you use your money to trade.
Stay Away from Junk Stocks and Hype Stocks
ST in the Shanghai and Shenzhen market, penny stocks in the Hong Kong market, and penny stocks in the three major US stock markets are mostly fighters in the garbage. K-line charts are ups and downs. Buying this kind of ticket, if you are not careful, will capsize in the gutter. For small retail investors with limited principal and limited ability, it is better to stay away. We cannot ask for this wealth. Once young and ignorant, I was fascinated by ST Huiqiu’s 1001 weird announcement operations. I went in and out several times, and finally earned a lunch box money. Also stay away from hype stocks. On December 1, 2015, Lotus Health (600186) announced the nomination of Xi Yinping as an independent director. Since then, Lotus Health has started a long bear journey. Because of this incident, I have been paying attention to this company and its operator Xia Jiantong. After 2018, all 3 listed companies controlled by Xia Jiantong fell into a dilemma. This kind of capital operation not for the purpose of developing the real economy will definitely shoot oneself in the foot.
Be Cautious about Following the Trend
Belt and Road, artificial intelligence, big data, blockchain, VR/AR, edge computing, every concept is like a tulip bubble, coming fast and collapsing fast. If you already hold related concept stocks, it is of course understandable to make a small profit by taking advantage of the concept wind. But if you just follow the concept for the sake of the concept, and rush in when the speculation is hottest, you are bound to lose money. The reason why a concept is a concept is that products and technologies are not mature enough, there is no performance support, and it is difficult to make a profit in a short time. Reviewing the concept stocks that were hotly speculated back then, they were all in a mess.
”Invest First, Then Investigate” Cannot Be Learned
Some media said that Soros’s motto is: “Invest first, then investigate”. In 2016, when I saw this sentence, it was like finding a treasure. Isn’t this my style? Then I made a fierce operation on various new stocks and sub-new stocks. Buying first and then researching will indeed make you more attentive, but Soros assumes the trend first -> buys a small amount to test the market -> decides to stay or leave, while we are “old man playing stocks is just a gamble, full warehouse, death”. Completely two different concepts.
Do Not Buy Active Equity Funds
If you buy funds, it is not recommended to buy active equity funds. You never know who is behind the fund. Most public fund companies only earn management fees, and do not care much about fund performance. If you want to say which active fund is the best in the A-share market, I only recommend the Social Security Fund. Any quantitative funds, big data funds, cannot outperform index funds in the long run, and transaction fees are much more expensive than index funds.
According to the “mean reversion” theory, in most cases, the returns generated by investors’ funds will be relatively concentrated distributed around the average (ie market return). The farther the deviation from the average (whether positive or negative), the lower the possibility of generating that return. For example, the returns achieved by many investments are within the range of +/- 1% of the market average, but the returns of very few investments can deviate from the market average by more than 50%.
After deducting investment costs, the higher the cost, the farther the curve deviates, and it becomes more difficult to outperform the broader market. This is not just a theory, but a fact, that is, in most sectors, lower-cost investments tend to outperform higher-cost investments. This is the principle of “in the investment world, pay less and get more”.
Investors cannot control the market, but they can control the investment expenses they are willing to pay. For every yuan investors pay in management fees or trading commissions, the potential return is reduced by one yuan. Based on past experience, low-cost funds are less likely to erode returns, so the long-term performance of lower-cost investment products tends to be better than higher-cost investment products.
Assume a portfolio with an initial value of $100,000 and an average annual growth of 6% to illustrate the impact of investment expenses on returns over 30 years. In the low-cost scenario, investors pay 0.25% per year, while in the high-cost scenario, investors pay 0.63%, which is roughly equivalent to the asset-weighted average expense ratio of US equity funds as of December 31, 2016 (average expense ratio based on Morningstar calculations). The final asset value of the portfolio may differ by nearly $50,000.
In fact, whether active or passive funds, most trends coincide with the broader market index, so it is better to buy index funds directly, which are also cheaper. The most important thing in choosing an index fund is to choose an index that has a high probability of outperforming 80% of the stocks in the market, such as the CSI 300 Index, the SSE 50AH Index, the Nasdaq 100 Index, etc.
Classic Works
Mango reads 20 books a week. Through reading, learn from the strengths of many people and learn different people’s understanding of the market. Instead of spending time reading the sharing of second-rate investors, it is better to read the classic works of masters. Visit Zhihu, Xueqiu, and Guba less, and stay away from Chan theory and Yang Baiwan.
Poor Charlie’s Almanack
Poor Charlie’s Almanack is a compilation of Charlie Munger’s investment system thoughts, including Mr. Munger’s speeches and articles written for newspapers. Each article is a system of its own, and can be read through or read aloud. The title is inspired by Benjamin Franklin’s “Poor Richard’s Almanack”.
It is recommended to read the version with a preface by Li Lu, chairman of Himalaya Capital, published by CITIC Press, and translated by Li Jihong.
Reminiscences of a Stock Operator
A novel written by Livermore himself, mainly telling his own investment journey, failure and success. With the advancement of information technology, we can fully realize Livermore’s technical analysis methods through spreadsheets and stock software, and I personally think that Japanese candlestick charts are more intuitive, clear and informative than his charting methods. But the investment psychology mentioned by Livermore is worth reflection by everyone. No matter how technology advances and changes, and how the trader structure changes, behind the market are always vivid human individuals operating, and individual behavior brings market behavior.
In Livermore’s era, American Stock Exchange listed companies voluntarily disclosed companies, said whatever they wanted to say, and there was no financial report, so there was no fundamental analysis in that era, and it was difficult to define whether it was value investment.
It is recommended to read the translation by Ding Shengyuan published by Enterprise Management Press.
Investor
Livermore · Charlie Munger · Buffett · Soros · Duan Yongping
The process of investment is a process of continuous practice. Su Zi said: The waxing and waning is like the sun and moon, but in the end nothing increases or decreases. If you look at it from the perspective of change, then heaven and earth cannot last for a moment; if you look at it from the perspective of immutability, then things and I are endless. Although my life is short, just a drop in the ocean, I am lucky enough to live in a prosperous age, and I should also enjoy a long life.
This article is the experience of a primary school student in the investment world. There are bound to be deficiencies. Seniors are requested to criticize and correct. I am very grateful. [XYZ](https:// .xyz/) is growing, and this article will be constantly updated.
Published at: Aug 19, 2019 · Modified at: Dec 4, 2025
