I know you do not read Chinese characters(at least most of you), and I insisted on bringing this picture in here; Why of course because it has value...
The words on top translates into exactly this:
"A war expert, Stands on a undefeatable position, then seek victory." -SunTzu's Art of war
(that's how I interpret it)
It means, something like the following:
Do not fight a war you have no confidence in.
Don't put yourself in a difficult position, then seek to win.
Put yourself in a good defensive position first, then you look for ways to defeat the enemy.
Why is this important?
If you look deeper into how you invest, you'll understand why it is necessary to understand this quote. What are you thinking when you decided to invest?
The following is my thought pattern when I was in the middle of losing my $60k.
This stock has been growing for the last couple of month.
This is a hot stock, everyone is investing, it'll push the price higher.
This is a chance of a life time, I should go all in.
Should I buy a BMW or should I save for an Audi after I double my money with this stock?
Darn it, it went up another dollar, I need to invest now.
I have so much confidence in this stock, I should use margin for this to get bigger profit.
I only use 50% margin, this should be safe enough.
Famous last words, I'll take profit when I make $10,000.
If any of these thoughts you can relate to, you are in big trouble.
Stop! and think before you do any additional investing.
What determines a good or bad investor is this one unquestionable quality.
Your mindset...
Why do we invest the way we invest? putting all of our capital at ginormous risks, for an uncertain outcome?
There are unlimited opportunities in the market, but you have limited resources. Why do we invest for the fear of missing opportunities.
There are so much opportunities, if you missed one, big deal... move on!
Here are the mindset secrets that helped me, and hopefully it can help you as well.
Mindset Secret # 1 Be defensive.
When it comes to money, we need to be very conservative.
When it comes to sports, we always say: "We play to Win!"
However, when it is money we use to invest.
"We Play Not To Lose." -me
This is very conservative, and I agree it is.
In the essence of it, it really means just this: stock should be invested defensively, not aggressively.
Let me tell you a scenario:
You have $10,000 to invest in stocks, you loss 20% in a bad investment decision, and now you only have $8,000.
Here's the kicker, when your principle is only $8,000, you have to earn 25% in order to get back to $10,000.
The more you loss, the harder it is for you to get back to your original principle.
On the other hand, the bigger your principle grows, your ability to make more money increases as your wealth compounds. So...
Don't ever lose your principle!
Mindset Secret # 2: No derivatives! No Margins! Ever!
When I say derivatives, I mean options, or any other forms of trading that is not a stock but related to stocks.
My friend once asked me, what's the opposite of "Stands on a undefeatable position, then seek victory?"
I said, Stock Options and Margins...
Why using borrowed money to invest is such a bad idea? The one and only reason I am against Margins and options is time.
"Time, the most important resource for an investor."
Why would I allow my most important resource be taken away by borrowed money, and derivatives?
What do I mean?
The reason stocks is easy to be profitable is because it is not limited by time. You can just wait, forever, until your stock starting to make a profit...
The problem is...
Options, they expire... Margins requires minimum deposits...
When options expires you lose money.
When stocks drop below margin collateral, it required addition deposit, or you're forced to sell your stock.
By using these derivatives and borrowed money, you surrender your time required to become profitable. You choose to allow unnecessary risk to be added to your investments, and you alone are the one to suffer the consequences.
"October 24, 1929 Black Thursday, the bloodiest day in trading history."
11 traders committed suicide within hours after the market opens. Thrown themselves off the rooftop of buildings.
The DOW opens the market at 305.85, and closes the market at 299.47 a mere 2% drop. What caused them to commit suicide? -2%?
After a closer examination, I have discovered the following.
The highest point of the day is 312.76 and the lowest point is 272.32, a 13% drop.
Okay, -13% of your principle, was it necessary to kill yourself? The market goes back to -2% at the end of the day. It is not such a bad day...
The truth is... many of these casualties are using 50-100 times leverage, and they basically loss all of their savings and they incurred a large debt when the market fell by 13% and triggered a margin call which sold all their stocks at the lowest point of the day.
They choose to kill themselves instead of carrying on penniless with a large debt to their name.
That is exactly why Warren Buffet and Charlie Munger always tell people not to play with options and derivatives.
One thing we, as value investor to conceive is that, we're not smarter than the market.
We acknowledge that we cannot predict the market in the short term, and in the short term the market is unpredictable.
What we can really do is... to predict the market in the future...months or years later.
We, value investors "Know" we're going to make money when we invested, but we lack the specifics of when...
Just like Charlie Munger once said: "I know I am going to die, but I lack the specifics of place & time; And If I know where I am going to die, I'll never go there.
Mindset Secret # 3: Never Sell A losing stock.
Don't, Fucking, Sell, A losing stock.
This is indeed very, very counter intuitive! I forgive you for saying WTF...
Think of the last time you lose money in the stock market?
Usually it looks like this:
You follow a news article that shows ABC company's stock rose by 30% yesterday, and the article explain why it'll rise by another 60% in the next couple of days.
As soon as you invested, the stock dropped by 30%...followed by a series of negative news about the company's lack of prosperity... You are scared, and you sold the stock to prevent additional losses...
You purchased the stock for the wrong reason, and it is only natural for you to sell it for the wrong reason too.
Here is how to do it correctly...
This is my biggest secret for making money in stocks.
In fact, if you did make money after you read this article, I should be paid for it. Please contact me and send me a check... As I believe I deserved the money.
Anyway! Joking aside!
Being completely honest, and this is reasonable for you to doubt me. But if you follow this rule, you'll eventually make money.
As long as you satisfy the following conditions...
You purchased more than five stocks. (Diversification, so you can avoid a black swan event.)
You buy the shares when the price is low. (Margin of Safety)
Your money is in a good industry with a bright future. (Obviously)
You invested in great companies. (So the price will rebound)
You do not use any leverage or margin. (So you can wait)
When the above conditions are fulfilled, hold the stock forever! You have an extremely high probability of making a large profit as you see fit!
If you somehow encountered a black swan event like Enron, go buy the lottery instead!
Even if you're lucky enough to hit a black swan, you still have four other stocks making profit for you.(Thanks to diversification, you survived the black swan!)
So, I would say it again...
Don't, Fucking, Sell, A losing stock.
In conclusion...
When it comes to risk management, value investors do not tolerate unnecessary risks. Therefore, all of our investments must remain pure.
The purest form of investment is a traditional shares purchases. No margins, No derivatives, No Leverages of any form.
Just like the old saying... A grain of sand in your shoes is uncomfortable for the first mile, but it'll cut into your feet until you bleed in the long run...
Or like Buffet would say... a 1% chance of failure each year, over a 100 years period is a guaranteed failure.
Our investment years are long, and it is easy for us to diverge from our goal. If we're to remain on track for many years to come, we must avoid any form of risk, however small it may be.
Growth takes time, and our job as value investor is to protect this most precious resource of ours with utmost vigilance...
For your reference only...