Author: Duan Yongping
Source: The Great Road: Duan Yongping's Investment Q&A
1. Don’t touch something if you don’t understand it.
The old tune is repeated: Don’t short, don’t use margin, and don’t do things you don’t understand. It’s never too late to understand, but I’m afraid you’ll only truly understand after paying a heavy price. (2012-03-14)
Buying something you don’t understand is why 85% of people lose money in both bull and bear markets. There is no more ridiculous reason than buying a stock just because it has gone up a lot. (2015-06-26)
My Stop Doing List for investing is very simple: I don’t touch anything I don’t understand. Understanding mainly focuses on two aspects: business model and corporate culture. (2020-10-10)
Netizen: I really want to buy a company that can allow me to sleep peacefully.
Whether you can sleep peacefully or not is determined before you buy it. (2011-03-29)
I just got lucky and understood a few good companies that I just happened to understand. I don’t understand most of them, just like most people. But if I don’t understand, I won’t touch them. Many people can’t do it but still want to make quick money. Of course, I also want to make quick money, but I know it’s impossible. (2024-06-17)
Buffett has always been like this: he doesn't do something if he doesn't understand it. But sometimes it takes a process to understand something, and Buffett is no exception. He also encounters things that he thought he understood but later found out that he didn't fully understand. In addition, there are other people in Buffett's company who are in charge of investment. Buffett delegates the power to them, but their understanding is sometimes different from his. Therefore, Buffett's holdings that everyone sees may not necessarily be Buffett's style. In fact, BYD is not Buffett's style, and neither is General Motors. Buffett also believes that he made a multi-billion dollar mistake in oil companies (he lost a lot of the money he earned from PetroChina). (2012-10-10)
Buffett's circle of competence refers to the fact that everyone has their own limited scope of understanding. Everyone always knows some things and does not know others. So if you invest in something you understand, it is easy to know the value, know what is cheap, and have the opportunity to make money, and vice versa. If you buy something that you feel guilty about, it is speculation. Of course, speculation can make money sometimes, but the risk is high and you will not be able to sleep well. (2010-03-25)
Netizen: If a company repurchases its own shares, can it be considered that the company is cheap and should we follow up and buy? Any "follow-up" is wrong, because you will be wrong sooner or later.
Following the trend means that you don’t understand the meaning of blind buying, so you will follow the wrong path sooner or later. Moreover, it is difficult to make money by following the trend because you don’t understand it very well, so you can’t hold on to it. If you understand it, it will be different. (2010-07-23)
Today I saw someone online saying to follow me and buy Alibaba. Those who say this are all speculators! Don’t follow others to invest in something you don’t understand. It’s useless to encourage others to invest, no matter who the person is. The same is true in reverse. Don’t be afraid of others not liking what you understand, even if that person is Buffett or Munger. (2014-09-23)
Those who lose money in the stock market for a long time are mostly those who do not know the size of their circle of competence. (2012-12-29)
Knowing how big your circle of competence is, or knowing where the boundaries of your circle of competence are, is far more important than how big your circle of competence is. This is also the reason why people can see that many very "smart" people have poor investment performance in the long run. Of course, these "smart" people will attribute the success of others or their own failure to luck or accidents, and they can always "smartly" find ways to make themselves believe that this is indeed the case. "There are no accidents" in "Kung Fu Panda 1" actually makes sense. (2013-02-01)
“Investing is not a game where a person with an IQ of 160 can beat a person with an IQ of 130.” (Buffett)
Perhaps people with high IQs may not know the boundaries of their circle of competence, but they may tend to go beyond their circle of competence easily.
"We have gotten to where we are today because we have cared more about finding the one-foot hurdles we can jump over than about having the ability to fly over seven-foot hurdles." (Buffett)
This is also about the circle of competence. I often see people discussing investment concepts that they themselves are confused about, which reminds me of this saying. (2012-07-28)
People who have been entrepreneurs can have an advantage, that is, it is easier to understand the company and know where their circle of competence is. But I found that many entrepreneurs I know have no knowledge of the stock market, just like ordinary people, and most people do not touch the stock market (because they think they do not understand it). Those who do not understand and do not touch it are good investors, even if they do not touch it at all.
If you think about it carefully, people who have been entrepreneurs may not necessarily be more likely to know the size of their circle of competence. In fact, it may be the opposite. (2011-09-07)
Netizen: When investing beyond your field, seeking expert advice may not be the worst option?
Do you dare to listen to the advice of "experts"? It is best not to touch it when it is beyond your field, unless you can understand it. When you don't understand, experts can't help you. Experts can only provide reference opinions. If you don't understand, you still can't make a decision. (2010-04-18)
Experts can help you with details, but they cannot help you make decisions. (2010-04-19)
Netizen: Can you talk about your experience of losing money? Everyone wants to know your investment failure cases.
I once bought an airline stock called FRNT and lost a lot of money (there was an airline stock that made a lot of money before). This company had good cash flow, but it was a little too small. As a result, in 2008, the credit card company suddenly asked for full cash (because 4 other small airlines suddenly went bankrupt). If the CEO had found a way to give the other party cash (at that time, he could have sold some aircraft and other assets), he could have gotten through it. As a result, the CEO suddenly announced that he would go to bankruptcy court, and in the end, he still paid the money he owed to the people, and the company really went bankrupt. When I bought this company, I mainly thought that oil was too expensive and would definitely fall. Once oil fell, airlines would be the first to benefit. In the end, everything turned out to be right. Oil did fall, and this company did make a lot of money later, but we lost money.
My mistake here was to do something I didn't really understand. Unfortunately, Buffett had told me to be careful with airlines before. After this company went bankrupt, I really understood what Buffett meant. So I won't touch airlines easily anymore. (2010-03-27)
Netizen: What mistakes have you made in the investment process? How did you discover and correct them?
I have mentioned some of this before, and here is one more thing I haven't mentioned. Last year, I bought an ETF (Exchange-Traded Fund) called UNG, which is an index linked to natural gas. When I bought it, the price of natural gas was only about 3 yuan, while the long-term cost of natural gas was about 6 yuan or more. I thought that nothing could be priced below the cost price for a long time, so I went and bought a lot of UNG. Later, after careful research, I found that UNG was not linearly related to natural gas, and the time loss was still very large, so I felt that I was wrong. But I was still a little reluctant to sell it because I had already lost money. Later, I remembered the principle of correcting mistakes as soon as I knew them, and no matter how great the cost is, it is the smallest cost, so I finally made up my mind to sell it at a loss.
Haha, the combined losses of all the accounts I managed on this order exceeded XX thousand, but if I had not made up my mind to sell it at that time, I would have lost nearly 4 times the original loss so far. The current price of natural gas is 50% higher than when I bought UNG. This mistake was mainly due to insufficient understanding of the investment target (the overall profit situation was very good at that time, and I had a lot of cash in hand). I must not be careless in the future. (2010-03-22)
2. Investment is a probabilistic event
I think "understanding" is not an absolute concept, it probably means "roughly understanding". Only you know whether you understand or not, and it is difficult for others to judge. For example, I think I understand the value of General Electric's (GE) culture, but people who don't understand will sell me the stock when it is very cheap.
From an investment perspective, when you feel that the stocks you bought are falling and you are really not affected, you probably understand (not a psychological factor), otherwise you may be speculating (especially when you feel scared).
For example, Yahoo has fallen a lot from its high point this year. I have re-examined the reasons why I invested in Yahoo and found that the good reasons have not decreased at all, and the negative factors have not increased at all, so I have nothing to worry about. (2010-05-20)
Don’t be too idealistic in your definition of “understanding”. “Understanding” is not a “crystal ball” that can see everything in the future. It’s good enough to be able to see some important things. In the long run, I think investment is actually a probabilistic event. People who truly “understand” have a low probability of making mistakes and a high return in the end. Many times, we cannot simply judge someone’s understanding of investment by his behavior towards a certain stock. (2010-08-30)
It is actually very difficult to define whether one is good at investment or not, as this is not a competition.
People often like to use the return ratio over a certain period of time to measure whether an investment is "good" or not, but this measurement is often unscientific because there are many factors that can affect short-term returns. Here are a few examples that may affect short-term investment returns.
Circle of competence: People who understand investment may not always get better returns than the market, especially when there is nothing to invest in within their circle of competence.
Margin: Some people who use margin or even a lot of margin may perform very well in a certain period of time if they bet right - but they will definitely pay the price.
Certainty: Buffett said that he usually invests when he is 95% sure (I think that may not be that high), but many people actually invest when they are 60% sure (or even lower, so you will see them taking one step forward and one step back). However, among the 10,000 people who invest with 60% certainty, you can always find those who are lucky and get particularly good returns at some point in time, but it is not necessarily because these people are great.
Diligence: My personal understanding of the true meaning of understanding investment is that if you don’t invest, you don’t understand. But the quality of investment returns actually depends on whether investors can find good investment targets that they understand, which requires a lot of diligence to find good targets frequently (Buffett’s standard is one per year). For someone like me who is waiting for Apple to turn around, it would be great if I could find one in four years. (2012-08-27)
Netizen: From the three dimensions of business model, corporate culture, and market price, what are the boundaries or standards of understanding? At what level of investigation can we be considered to have truly understood? Often, you will think you understand something but actually do not, and there will also be situations where investment mistakes are made due to lack of consideration of a key factor. I remember that Mr. Munger has a filter list for screening companies.
There is no formula here, but you will know when you really understand. The most important thing is that you can really ignore the fluctuations of the market and focus on the business. Imagine that you plan to buy a company and you can still sleep well without listing it for 10 years, then you probably understand. Or the other way around, when you think a company will definitely be in big trouble within 10 years, you probably won’t want to buy it, right? (2019-05-04)
The simplest criterion for understanding a company is that you don’t want to ask others “Do I understand this company?” (2019-07-24)
It is easier to identify companies that you don't understand, because you want to sell when the stock price drops, and you want to sell even if it rises a little bit. If you understand them, you probably don't want to sell no matter how much it rises, and you will buy in with all your strength when the stock price drops sharply.
The best situation for a company that you understand and buy is that you don’t want to sell it. (2019-04-06)
As long as you always follow the principle of not doing something if you don't understand it, you will make fewer mistakes. Over time, your results will naturally be much better than if you did it without understanding it. This is about doing the right thing.
How to understand is the scope of how to do things right. If you really don’t understand, don’t touch anything and put your money in the bank. You may perform better than most people. (2022-02-18)
In the process of doing things right, mistakes are inevitable and it is a learning process. Everyone has their own learning curve. (2020-12-13)
Netizen: When do you think it’s time to copy homework? Or is it just a small position just for tracking?
I only occasionally copy Buffett's homework, just for fun. If you don't fully understand it, you shouldn't gamble your life. "Investments" that don't dare to gamble your life can hardly be considered serious "investments". (2023-03-12)
If you don't understand, you can't copy the homework. If you understand, you don't need to copy. Investing is very simple, it's just buying a business. The only way to understand investing is to understand business. Of course, for people who don't understand business, there is another way to manage their finances, such as buying indexes such as the S&P 500 or QQQ. Buying a fund is actually more difficult than buying a company, because it is much easier to understand a company than to understand a person, and funds also charge fees. (2024-08-08)
Netizen: I have spent two years studying the automotive industry, but I still cannot really understand it. Should I reflect on myself and give up? Or is there a way to optimize it?
There are very few companies that I can understand myself. If I can't understand them, of course I can only give up. Personally, I think it is no easier to understand a company than to get a bachelor's degree. However, it is not cost-effective to spend a lot of time looking at companies that you can't understand. A very important point I learned from Buffett is to look at the business model first. Unless you like the business model of this company, don't read on. This can save a lot of time. I don't actually understand your example of the automotive industry. Although I made a lot of money on Tesla, I gave up everything in the end because I didn't understand it. (2019-03-13)
Netizen: It is relatively easy to distinguish if you really don’t understand, but it is this kind of half-understanding that can kill people.
Most people's problem is not here. In addition, the meaning of understanding is also very different. Many people spend their whole lives trying to understand the market, while I just try to understand certain companies. The difficulty is very different.
Understanding the market is an impossible task, Mission impossible! Do you understand?
The term "understanding the market" is not rigorous. The market is a "weighing machine" in the long term and a "voting machine" in the short term. It is important to understand the difference between these two points. Most people spend too much time and effort on understanding the "voting machine". (2022-03-05)
3 You know, that's your good business
Netizen: Everyone knows that Buffett doesn't invest in technology stocks, because that doesn't fit his philosophy. But technology stocks have made you successful. How do you measure this contrast?
I just do what I think I understand (thinking I understand doesn’t necessarily mean I really understand), and some of them may just be what everyone calls so-called technology stocks. I can’t tell what technology stocks are. (2010-05-30)
It doesn't matter what you understand. It seems that the richest man in China now is someone who understands beverages, and maybe the next one will be someone who understands pig feed.
In addition, I never think that I have ever been involved in the Internet or high technology. The Internet or so-called high technology are just tools, just like railways, roads, highways, aviation, etc. in the past. (2010-10-22)
Netizen: Can you tell me the name of your investment company? I want to track its 13-F.
Wouldn't it be easier to just ask what to buy to make a lot of money right away? Knowing what others invest in is not helpful to people who don't understand the company. If you have time, watch Buffett's speech in Florida in 1998. There is a video. (2024-06-08)
You understand, so it is your good business. (2010-10-23)
Netizen: Does Buffett dislike the high-tech industry because it changes too fast?
Buffett doesn't like high-tech? Buffett never said he didn't like it, he just said he didn't understand it, but once he understood it, he would still invest in it, such as IBM. Buffett also said that if you can understand the changes, you will be able to make a lot of money. The most important thing in investment is not what Buffett can understand, but what you can understand yourself. (2013-05-26)
Netizen: Low P/E ratio is a kind of value investment, which is relatively low-level. The advanced form of value investment is to value the company, using 40 cents to buy the value of 1 yuan. You need to really understand the company to make a good and correct evaluation.
Personally, I think there is no formal high or low in investment, only differences in the degree of understanding. If I can foresee that a company will have high growth, I am certainly willing to invest. I have always been willing to invest in high-growth companies - if I can confirm that they will have high growth. (2010-04-28)
Netizen: When investing in stocks, what industry are you most interested in? Which industry has the greatest certainty? Buffett proposed that the best companies are those that can maintain their advantages and create profits without investing a lot of capital in renewal. From this point of view, many technology companies have been kicked out. And you seem to have invested in many technology companies? Haha, it’s hard to say about the industry issue. It seems that there are good companies in most industries.
Buffett has several things: circle of competence, moat, and margin of safety. He did not say which industry. Buffett pursues companies whose products are difficult to change, so he can hold them for a long time after buying them. But he also said that if you can understand the changes, you will make a lot of money. In the final analysis, buying stocks is buying companies. Whether you understand the long-term or the changes, as long as you really understand, it is a good opportunity when it is cheap.
If you can see such a good opportunity once every one or two years, your return will be very good. (2010-05-08)
Netizen: The valuation of bank stocks is much cheaper, but Mr. Duan just doesn’t believe in bank stocks... Haha, I have no fear of banks, but I really don’t understand it.
By the way, the interesting thing about investing is that the things you can understand are enough to keep you busy and get enough returns. In addition, it is often not that easy to understand things you are not good at. The same opportunity cost (time) often has a much greater return in the circle you understand. (2011-03-04)
Netizen: Can you tell me about the direction of small capital investment?
Choosing a good company that you can understand has nothing to do with the size of your capital. (2019-03-15)
Netizen: Can you tell me which is cheaper, an Apple at $460 or a Moutai at RMB 160?
It depends on which one you understand and how much you understand. (2013-03-23)
My circle of competence is small, and there are very few things I can understand. In recent years, I have not found any company that I can trade Apple or Moutai for. (2017-03-13)
Netizen: You once said that you were optimistic about Tencent's business model and corporate culture, and that it was a good company. But later you said that you couldn't understand its future cash flow. And your holding was very low, only 1% (it seemed that you were not so optimistic later). I don't understand what you were not sure about its future cash flow, and what you were uncertain about?
Not being able to understand future cash flow means not being able to understand how much money a company can make in the future. Investing costs money, so you need to know how much money the company you invest in can make in the future, and whether it can make more than you invest, otherwise you should not invest. I don’t understand most companies, but I understand Tencent a little bit, but not that thoroughly.
Netizen: According to this standard of understanding, ordinary people may not be able to find a company with a good business model, almost complete understanding and suitable price for a long time (3 years, 5 years).
This is why Dadao always thinks he is an ordinary person. In the past ten years, Dadao has really understood two companies, Apple and Moutai. On average, he understands one company every six years. (2023-11-16)
Netizen: What do you think is the biggest gap between you and Li Lu and Buffett and Munger in value investing? What do you and Li Lu still need to learn?
The biggest difference is probably that their English is much better than mine. Of course, I guess there is a big gap between Li Lu and the other two in English (difference between native and non-native), but his gap has little impact on his investment career, and the gap with me is fundamentally different.
From the perspective of value investing, perhaps the gap you mentioned would be better described as "different".
In terms of our understanding of value investing, I think we are exactly the same, because the essence of value investing is this: buying stocks is buying companies, and buying companies is buying the discounted future cash flows of companies. All other arguments about value investing are actually discussing how to determine the approximate amount of the discounted future cash flows. Our differences are mainly reflected in our different circles of competence, and everyone understands different things. Of course, there are also differences in the circles of competence, for example, they have been investing in stocks for much longer than I have.
The meaning of the circle of competence is the range within which you can judge the discount of future cash flows. Knowing how big your circle of competence is is much more important than how big the circle of competence itself is.
However, the absolute value of the money I manage now is greater than that of Buffett and Munger when they were my age, haha. I can't compare with Li Lu, he is much younger than me.
There is one biggest difference between me and these three people. They are all professional investors, while I am an amateur, so my time allocation for investment is a little different.
We all have a lot to learn in all aspects, but Li Lu probably doesn't need to spend as much time learning English as I do. (2011-01-04)
The most important thing to learn from Buffett is to learn his principles. After all, everyone has different circles of competence. Just like I dare to hold a large position in Apple, Buffett probably won’t do the same. I have a friend who lost a lot of money on BYD. I asked him why he bought BYD, and he said that Buffett bought it. This way of learning will lead to problems. I have never bought BYD. Although I have always been interested in watching it, I have never shown the interest to buy it, so whether Buffett buys it or not has no effect on me. In short, it is wrong to worship anyone. The most important thing is the "rationality" that Munger talked about. (2012-01-09)
Maybe you will understand by giving an example. Buffett has a lot of investments in insurance and finance, but I have almost none, because I don’t understand them and always feel uneasy. I have invested in some Internet-related companies, but Buffett has never invested in them, because he doesn’t understand them. He thinks Coca-Cola is something people must drink, but I think games are something people must play. (2010-04-30)
What is the most important thing in investment? My personal understanding is what is lacking and what is important. The most important thing in investment is to invest in what you really understand. The subtext of this sentence is to invest in places (companies) that you really think will make money.
My definition of making money is: the return is higher than that of long-term risk-free bonds. Whether a person understands whether a company can make money has nothing to do with his education. Although people with higher education generally have stronger learning ability, schools do not teach how to invest, because it is difficult for those who really understand investment to teach in schools, otherwise investment masters should be professors. However, you can learn a lot of basic things in school, such as how to do financial analysis, etc., which will be very helpful for understanding investment goals.
Regardless of academic qualifications, a person always knows something, and what you know may one day allow you to discover opportunities. The opportunities I have seized do not seem to have anything to do with academic qualifications.
For example, we were able to make more than 100 times the money on NetEase because I had a lot of understanding of games when I was working on Subor. This kind of understanding is not taught in school, nor in books, and it can't be seen in financial reports. I also tried to tell others about my understanding, but found it difficult. For example, I dared to buy GE heavily at that time because as a business operator, we have been following GE's corporate culture for many years, and I believe from the bottom of my heart that GE is a great company.
When I say "anyone can invest", I mean that I don't think there is a definition of "only 'certain kinds of people' can invest". But the proportion of people who are suitable for investing should be very small. Maybe it's because the principles of investment are too simple, and simple things are often the most difficult.
By the way, what is a simple investment principle: when you buy a stock, you are buying the company! Is it simple? Is it difficult? (2010-02-06)
Netizen: I am reminded of what Peter Lynch said: If you like a company’s products, you should think about whether to buy its stock.
I usually think the other way around, I won’t touch the stocks of companies whose products I don’t like, because I can’t understand them. (2011-03-24)
Netizen: Is it necessary to visit the location of a listed company to understand it? Some people rent a house in the location of a listed company and live there for half a year in order to understand it.
Even people inside a company may not understand their own company. How can you be sure to understand it by living there for half a year? There is actually no formula to understand a company, otherwise you can teach it in school. (2011-01-13)
Too many visits to companies can lead to short-sightedness. What I mean is that many people visit companies to understand the company's short-term operating conditions, but this mentality may not be very helpful for long-term investment. (2010-04-12)
"Never ask your barber if you need a haircut." (Buffett)
Do you know why Buffett thinks visiting companies may not be useful? (2012-07-27)
The so-called value investment is to understand the business. Everything that can help you understand the business is useful, but there is no sufficient condition to guarantee that you will invest. I don’t have any better suggestions. I usually say that there are things you don’t do, and as for how to do things right, you have to rely on yourself to explore. (2019-06-26)
Netizen: There are many things I don't understand. When I study a company, I always feel that I don't know enough about its corporate culture and business model by reading annual reports, company websites, corporate biographies, and personally experiencing the company's products. I also don't understand the future cash flow (I can't tell what kind of status the company will be in in the future competition). Is there any other way to further deepen my research?
Actually, yes, it is probably about starting a company first, and then you will understand it after a few years. Don't think this is a joke. Huang Zheng asked me a similar question back then, that is, no matter how you look at the company, you always feel that something is missing. At that time, we said that running a company might help. Later, he returned to China and started a company. (2020-12-03)
Netizen: How do you know if you understand (or don’t understand) a company? For example, Moutai, I remember you said you don’t drink liquor, and I haven’t heard that you have ever opened a winery.
Generally, I also learn about things through public channels. With the Internet being so developed, you can find almost everything, but you need to be able to distinguish things yourself. For example, if you watch all of Apple's product launches, and then compare them with other companies' launches at the same time, you will know the difference. Corporate homepages are also a way to learn about things. Be careful with news, because the author often has opinions, and if you don't understand, they may lead you astray. You will understand if you put in enough effort.
To answer your question from another perspective, I mainly look at two things when looking at a company: business model and corporate culture. If I don’t like any of these two things, I won’t continue to look at it, so there is no question of understanding or not. I don’t need to understand a company that I am not interested in. If I like the business model (of course, at least I have to understand it) and the corporate culture is also good, then I will just wait patiently for a better price. The biggest feature of holding a company that you understand and like is that you can completely ignore market changes, that is, you can sleep well with it. Those who buy a "ticket" and then can't sleep well every day, ask others what they think, and look for various related news on the Internet every day do not understand. It is actually very difficult to understand a good company. In most cases, it is not enough to simply look at the financial statements, but occasionally there are cases where you can pick up treasures by simply looking at the financial statements, such as some of Buffett's companies, but that is actually the probability of encountering one in many years, which is a rare opportunity. (2019-04-07)
Netizen: Investing is difficult because of the uncertainty of future risks.
Uncertainty is dealt with by using a safety margin. (2011-05-09)
Netizen: I think safety margin is the top priority, what do you think?
One of the most important things. (2010-04-04)
My understanding of margin of safety is the understanding of the company rather than the short-term price fluctuations of the stock. For a great company, sometimes a small price difference may not be a big deal 10 years later, but missing out on a good company because of that little price difference may be a big deal.
In fact, I have thought about this question for many years, but I still don’t understand what Buffett means by margin of safety. But my final experience is this: a company that you don’t understand may not be cheap no matter how cheap it is. (2020-10-15)
"If you know everything about a business and its future development, then the margin of safety you need will be small. So, assuming you still want to invest in a more vulnerable business, you need a larger margin of safety. It's like you drive a truck across a bridge marked with a weight limit of 10,000 pounds, and your truck weighs 9,800 pounds. If there is only a 6-inch deep ditch under the bridge, you may think it's okay; but if the bridge spans the Grand Canyon, you may feel that you need a larger margin of safety." (Buffett, 1997)
I have never seen Buffett's original words before, but I happened to see them today and found that they are exactly the same as mine. (2024-01-21)
4. Experts have a low error rate
"I re-watched 'Win in China' today and heard a very contradictory statement from Jack Ma. He said that not making mistakes would be the biggest mistake, while Mr. Buffett's principle is not to make mistakes. How should I understand and grasp this?" This statement is quoted from a netizen. I think it is a very good question, so I would like to share my opinion.
I don't know what Buffett's original words are. I only remember that Buffett said something like this: First, don't lose money; second, don't forget the first one. I personally understand that what he is talking about here is the issue of investment safety. If a person invests in something he doesn't understand, he may lose money, so he should avoid it. This does not mean that Buffett will not lose money. In fact, the total amount of money he has lost is more than any of us, because he also makes mistakes. Haha, the money he lost in ConocoPhillips alone is several billion dollars. I have never understood why he invested in ConocoPhillips. Maybe he also made the mistake of thinking he understood the reality but didn't? However, I personally think that the most important reason why Buffett is here today is that he rarely makes "principle mistakes", that is, he firmly refuses to touch things that he thinks are beyond his ability. Over the past few decades, he has made far fewer mistakes than his peers, that's all.
The most important thing that makes Buffett Buffett is that he insists on doing the right thing, that is, he does not do things that are wrong in principle. For example, he will never do anything that he does not understand. This is the most important thing I learned from Buffett.
Ma Yun talked about the other side, which is how to do things right. No matter who you are, you may make mistakes in the process of doing things right. I don’t think any so-called successful person has never made mistakes. The process of doing things right is often a learning process, and making mistakes is often inevitable. There is only one way to avoid making mistakes, and that is to do nothing. Sometimes doing nothing can be the biggest mistake.
I wonder if you can understand this explanation? Sometimes I think Chinese is really interesting. One day, it says "a kind man cannot lead an army", and the next day, it says "love your soldiers like your own sons"; one day, it says "think twice before acting", and the next day, it says "make a prompt decision". Haha, it doesn't seem contradictory. They are just talking about different aspects of things, right? (2010-03-14)
The general rule of investment is: the more you invest, the less you earn, or the more you lose. (2010-04-23)
Netizen: It seems that your large-scale purchases of NetEase and U-Haul Holding Company (UHAL) occurred around 2002 and 2003. Are there any classic cases of large-scale investments in the past three to five years (except Apple)?
It would be better to get rid of NetEase as well, or I will soon become a joke. (Imitating Munger’s words) (2012-02-02)
The effect of making one major investment decision every two years is definitely better than making two in one year. (2012-06-26)
In the past four years, Dadao has only really made one move, which was Apple. The last time it made a move was GE. Perhaps this is why it has become one of the very few?
If the main board only dares to make a move once every two years on average, how can "retail investors" make more moves? (2012-07-17)
I am not good at stock selection, I am just an amateur, I don't put in enough effort. But I am really good at making mistakes, I don't touch anything I don't understand. People who really understand these two sentences will definitely make good money in the long run. (2011-11-03)
Good value investors are not those who have never made mistakes. The most typical characteristic of good value investors is that the probability of making mistakes (especially big mistakes) is very low based on many years of history. The meaning of a victorious general is that the winning rate is high, but winning every battle is a myth. (2011-12-19)
Running a business is like investing. It is important to make fewer mistakes. But making fewer mistakes is not achieved by not daring to do anything. That is called standing still. Making fewer mistakes is achieved by insisting on doing the right thing. And insisting on doing the right thing means stopping immediately when you find something wrong. No matter how much it costs, it will be the smallest cost. It is also important not to make a list. (2020-10-14)
Netizen: In Berkshire's 2002 annual report, Buffett said: "When investing in stocks, we expect every investment to be successful. In the 38 years we have been operating Berkshire, the ratio of profitable investment cases to investment losses is about 100:1." This is where Buffett is really amazing! He is amazing because he almost never makes mistakes.
Haha, you hit the nail on the head. The difference between a master and other players is the low error rate, not the number of good shots. (2011-09-07)
Netizen: Bill Miller lost all his capital in this financial crisis. He had beaten the index for 15 consecutive years, but the loss in one year wiped out the profits of 15 years. He lost more than he earned. Did he overestimate himself? I used to think he was a value investor, but his true colors were revealed in this crisis. He had stumbled on Enron and this time on Freddie Mac and other companies. In fact, there are quite a lot of value scammers. So it doesn’t matter how many times you are right, the key is not to lose too much when you are wrong, which involves the safety margin.
I think when a person starts to pursue beating the index, he may have lost his composure. Many people have some seriously injured stocks that will never recover in this financial crisis, but Buffett has none. This is definitely not accidental, but it seems that few people have noticed this. (2010-05-23)
Netizen: As your investment experience increases, in what areas have you improved compared to before?
Haha, my mentality is much better now. I am not afraid of losing opportunities. The most important thing is not to make big mistakes. (2010-03-18)
Netizen: Which is harder, investing or playing golf well?
Both are my favorite games, and they are both difficult. Maybe golf is more difficult. I think the reason why golf is more difficult is that you can't say "I haven't thought about this shot yet, so I don't want to play it now" in golf. In investment, you can always say "I haven't thought about it yet, I don't want to do anything." (2019-03-30)
5. Short is stupid
In fact, my greatest wealth is the mistakes I have made, and so is Buffett. (2010-05-05)
Netizen: Can you share what you think is the worst investment you have ever made?
Haha, I have made several investments that have made me lose money. Most of them can be forgiven, but one time was extremely stupid, which was to short Baidu. My previous investment performance was very good, and I was a little proud of myself. I really thought I was very good. At first, I just wanted to play around, but later I refused to admit defeat, and finally I surrendered because I was shorted. All my accounts lost a lot of money, about 150-200 million US dollars, and one of my accounts has not recovered until now.
The most regrettable thing is that this mistake consumed all our cash reserves, and the opportunity cost was huge. Otherwise, I could have helped everyone make more money during this financial crisis. And the most regrettable thing is that this mistake happened after Buffett told me not to short. Now you know the consequences of not listening to the old man, right? Fortunately, the overall performance in the past three years is not bad. I am really grateful that the financial crisis gave me the opportunity to turn around.
Don’t forget what Buffett taught: Don’t short, don’t borrow money, and don’t do things you don’t understand!
However, this is not actually my worst investment because it is pure speculation.
There will be no more such cases in the future. (2010-03-07)
Netizen: "The most regrettable thing is that this mistake has consumed all the cash reserves, and the opportunity cost is huge." Does it mean that the cash is used up, and when really good investment targets come along, there is no money to buy them?
Yes, the opportunity cost is huge, and losing a little money is a small matter. (2010-05-12)
Netizen: What was the reason for shorting Baidu at that time?
First of all, short selling is wrong. I did see some things wrong with Baidu at the time, and in fact Baidu later fell very low because of this (if I could have kept shorting until then, I could have made a lot of money), but I did ignore some important conditions that were favorable to Baidu, such as the policy environment. In short, short selling is a speculative behavior, and I shouldn't have done it. (2010-09-14)
I don't know what nerve took over at the time, it was a stupid act that made me lose my composure. (2012-03-14)
Netizen: Based on the estimation of value, is short when the price is too high considered value investing?
Short is not value investing, because you often have to face the madness of the market, and the worst thing is that you don’t know how crazy the market is, so short will make you sleep poorly. In short, value investing is the kind of investment that allows you to sleep well. (2011-05-22)
At any time, as long as you still want to short someone, it means you are still a speculator (thinking you are smarter than the market). Put away the idea of shorting as soon as possible, and honestly look for deals that can let you sleep well! (2011-10-29)
Short is stupid! (2013-03-04)
I don’t short because I don’t want to make things difficult for myself. Short a company requires much more knowledge than long, and once you are wrong it can be disastrous. (2020-10-28)
I hope that one day you will understand why Buffett said not to short, and then your investment will go a step further. (2010-05-22)
I have a neighbor (I don't know him that well) who specializes in short selling (I don't understand how to do it). Some time ago, he suddenly asked me if I knew the company "GSX", saying that several short companies were short it because it was cooking the books, and the reason was that their growth was too fast. I really asked our colleagues in Education Electronics to find out, and the conclusion we came to was: its growth did not show any obvious illogicality in this environment. So I warned my neighbor that China is very big, and this growth rate of turnover is not impossible. At that time, the stock price seemed to be between 30-40. I ran into my neighbor again when I was playing basketball two or three weeks ago, and asked him if he was still shorting it? He said yes, their growth was incredible, and they must have cooked the books. I took a look at the stock price, which was around 80 that day.
I don't know anything about GSX. What I want to say here is: it's best not to short it! There are many things in this world that you don't understand. Why do you have to make it difficult for yourself?
I actually want to tell those who have the same idea as my neighbor that short is very dangerous and time may not be on your side. When I saw this company's stock price rise from over 30 to over 130, I was really worried about my neighbor. I think he would have a hard time sleeping well. Why bother? !
Just avoid companies you don’t like, and never short, because a wrong judgment will make you feel bad for a long time or even a lifetime, especially for those who are already rich. No one wants to be rich twice. (2020-08-11)
6. Not using margin is a basic requirement for investment
If you know how to invest, you don't need to use leverage, because you will become rich sooner or later. If you don't know how to invest, you should not use leverage, or you may be the one running naked. Investing is a happy thing, and using leverage will give you a chance to sleep poorly. (2020-12-06)
Netizen: You can get loans to do business, but why is it not recommended to borrow money to buy stocks?
Generally speaking, borrowing money for business has a repayment period, and the borrower generally has a good understanding of the business to be done. However, there are still many people who get into lifelong troubles because of borrowing money for business.
Borrowing money to invest in stocks is to use your other stocks as collateral, which is completely controlled by the broker. However, when the market plummets, they will ask you to sell your stocks and repay the money at any time. The stock market can be crazy to the point of being unimaginable. People who use margin may only need to encounter a downward market madness once in their lifetime to suffer heavy losses (wiped out). Even a smart person like Munger once got into big trouble because of margin (in the 1970s). The great thing about Buffett is that he has never had a fatal big trouble in his investment career. Buffett once said that you should not do it even if there is only a 1% chance of bankruptcy. People who understand investment do not need to use margin, and people who do not understand investment should not use margin. (2011-09-08)
Netizen: I have decided to apply for a margin trading account! Brother Duan has always said not to borrow money, but I still can't help it!
You will have an exciting life from now on! (2012-08-10)
Netizen: If the financing was used to buy good companies such as Apple, Moutai, and Tencent 20 years ago, it would not be a problem. But people who use leverage always like to buy randomly.
In the past 20 years, Apple has fallen by 40% or more from its peak at least 10 times, and 10-20% countless times. If you bought Apple with margin, even if it didn't go bankrupt, you would probably be scared out of your wits? (2023-12-19)
Netizen: I invest in the long term with low leverage, for example within 0.3 times, with a financing cost of 6 points, and build a position when the stock index is relatively low. The domestic financing market will have to fall by about 70% before the position will be liquidated. Is this low-leverage long-term value investment strategy okay?
Don't do evil, no matter how small it is. (2019-05-20)
People who use margin are not stupid, but using margin is addictive until you fall into the trap. In fact, Buffett said it well: if you understand investment, you don’t need to use margin, because you will be rich sooner or later. (2024-09-03)
Long-Term Capital Management is a good example. Those people are extremely smart, two Nobel Prize winners in economics plus a group of particularly "powerful people", and they also bet their own wealth. (2024-09-01)
Netizen: I waited for half a year for Moutai to not fall in 2023, and I couldn't help but buy it with all the money I had at 1,600 yuan. Recently, it has been falling all the way, but I don't have any extra money to increase my position. I really want to borrow money to buy the dips.
We don’t know how crazy the market will be, or how bad things might get. Not using margin is a basic requirement for investment! We have always said 10 or 20 years, but if you use margin, you may get into trouble before then, there is no need. (2024-09-18)
Netizen: The A-share market is in turmoil. I am glad that I did not raise funds. The pressure is much less. When the crisis comes, I will find out how precious the principles you mentioned are.
The ability to do things right can only make time stand on your side when you do the right things, otherwise something bad will happen sooner or later. (2015-08-10)
Regardless of whether you borrow money or not, you will lose countless opportunities in your life, but borrowing money may make you never have another chance. (2010-04-11)
There is no essential difference between using leverage to speculate in real estate and using margin, but when problems arise, they are more severe because the liquidity of the house will definitely be worse. (2013-10-09)
Netizen: I feel very ashamed. I have been familiar with these principles for more than ten years and I can recite them by heart. However, I still "accidentally" think about using margin from time to time. Fortunately, I don't really do it.
You deserve to be ashamed. It is not easy to understand making slow money, but it is even harder to understand compound interest. Slow money, under the influence of compound interest, has a very powerful effect. (2024-09-04)
Netizen: If I invest in a company with a high debt ratio, does it count as using margin?
It doesn't seem to be a direct use of margin, and it won't cause you to become rich twice. However, I don't like to buy companies with high debt ratios unless I know them well. (2016-11-12)
“If you want to improve your cognitive abilities, you can’t do this without forgetting your past mistakes.” (Munger)
I remember the story about the thief who was caught and his mind was full of ideas on how to improve his stealing skills.
So there are two types of mistakes here: (1) doing something wrong—never do it again—put it on the don’t-do list; (2) making a mistake in doing something right—this is unavoidable, but can be improved through learning. The thief made the first mistake, but used the second improvement method, which was worse.
“It is better to learn profound lessons from the tragic experiences of others than from your own. Some of our successes were predicted, and some were unexpected.” (Munger)
If you don't listen to the advice of the elderly, you will suffer in the future. After reading this sentence, most people still won't listen. It's great to learn from your own mistakes, and those who can learn from the mistakes of others are geniuses.
People who insist on making the same mistakes they made before don’t need to be too unhappy. At least more than 85% of people in the stock market are like this. It’s always good to have someone to accompany you. (2012-06-26)
