Never borrow money, shorting, or derivative products

derivative products

In this blog and in my book “The Rules of Super Growth Stocks Investing”, I have repeatedly advised investors never get involved in derivative products. Don’t borrow money to invest, do not shorting, do not invest in derivative investment products such as options or futures – these investment methods will only let you speed up the loss of hard-earned money.

Especially younger investors, most of whom have limited funds, will want to use these highly leveraged investment methods to get rich overnight. They will disapprove of such proposals and sneer at them. These things will exist, one of the major reasons is that Wall Street is to capture the mentality of investors.

Why do I think so?

The reasons why I do not recommend this are:

  • These things are complicated in design. In the investing world, the simpler things can keep you safe; the more complicated things, keep farther away from them, the better.
  • The operation of these things requires a high degree of operational skills, and the profitable side is always Wall Street, which is carefully calculated as the banker, just like casinos. It is impossible for ordinary people to profit from it, and even less for retail investors (if you don’t know why, it means you are really not suitable for operating these things).
  • Investing in stocks cannot make you bankrupt, because at most you will only lose the principle invested. What you have heard about stocks investing in stocks and bankruptcies are all because of doing of these things.
  • Those who can make a lot of money for a long time and survive are “very few” most are Wall Street capital representatives, not retail investors. In general, retail investors can only be harvested leeks. In short, this is a product that is not fair to a retail investor.

Below we put forward my views on these individual operation methods.

Don’t borrow to invest

  • When the economic situation is good, companies can borrow money everywhere, but pay more interest. Once the situation reverses slightly, banks will close their umbrellas and tighten money. Enterprises can’t borrow money in an instant, and a bunch of companies will go bankrupt. This is the common sense of all business people.
  • In the bull market when the stock market is rising, investors think that it is very cost-effective to spend some interest on borrowing money (whether it is financing from securities companies, bank loans, or real estate pledges) in exchange for rapidly rising stock prices. However, as long as there is a substantial correction or reversal, investors who borrow money are usually too late to respond and will immediately receive a notification of financing recovery (please note that the rate of decline in the stock market is much faster than the rate of increase, which is the basic common sense of the stock market). Many people will be cleaned out at this time. It even went bankrupt; and it usually happens in just a few days, which makes it impossible to cope.

Never shorting

  • The possibility of rising stocks and making profits is “in theory” infinite. But the maximum profitability of shorting is only 100%, that is, the company goes bankrupt and you don’t need to cover it. It is very clear which one is more risky and which one may have a higher rate of return.
  • Generally, investors will short stocks, most of which are unfounded on a whim. They only sell shorts based on the feeling that the stock price of a certain stock is just too high; it’s no wonder that most people end up shorting with no where to go.
  • The long-term trend of the stock market is generally stable and upward (if you doubt this sentence, you should really consider leaving the stock market); to go against the long-term trend is basically logically unreasonable.

Give a well-known example (for details, please refer to the description of section 4-2 of my book “The Rules of Super Growth Stocks Investing”). Tesla (ticker: TSLA) almost went bankrupt in 2017. The shorting ratio of its stocks was as high as 30%. The indicators are in line with the standards of a company that is about to fail, and this is true.

However, the stock market changed rapidly; Tesla came alive, and all those who shorted lost a lot of money, and many of them went bankrupt and were washed out. The reason is that not only did Tesla not go bankrupt, but the stock also rose rapidly, causing short sellers to have no time to react to their judgments in the short term, and they were forced to go out of the market. Even David Einhorn, the widely recognized king of shorting on Wall Street, has been struggling because of this.

Don’t speculate foreign exchange

  • The operation of foreign exchange requires extraordinary knowledge and in-depth comprehensive knowledge of international relations, geopolitics, general economics, and financial situations. It is very difficult for those who want to make big money on foreign exchange; this is not a financial product suitable for ordinary retail investors.
  • Foreign exchange speculation must be confronted with central banks of various countries, and confrontation with governments, usually does not end well.
  • Unless you think that your abilities are no less than that of George Soros.

Don’t buy derivative products

  • Derivative financial products broadly include options, futures, interest rates, exchange rates, equity, indices, commodities, credit events, and so on. The characteristic of these products is that the design is complex, with a high degree of interoperability, the rules are difficult to understand, and it is impossible for most people to figure it out.
  • Derivative financial products require high handling fees, rely on frequent turnover rates, and rapid response and investment judgments, which are not suitable for ordinary people to invest.

I know that someone will immediately refute Simmons’ Renaissance Technologies, DE Shaw (Amazon founder Bezos’ ex-boss), and Long Term Capital (LTCM) all adopt these investment methods that I oppose. But they all made a lot of money. Yes, this is true, but everyone has forgotten a few things:

  • They are all representatives of Wall Street capital side with strong financial resources, and they have bottomless funds for turnover.
  • They use high-frequency, ultra-short-term, high capital investment, high leverage, and high-risk operation methods.
  • They will operate options, futures, interest rates, exchange rates, equity, indices, commodities, credit events at the same time, and take advantage of highly correlated interest spreads or short-term events to take arbitrage or dangerous bets (which might make big money or go bankrupt).
  • They are all a rare professional team composed of a small number of Wall Street elites in mathematics, economics, finance, and investment; they cannot fight alone.

With just the points listed above, 99.99 99% of average investors in the world are not eligible to participate in this game. Moreover, Renaissance and DE Shaw are “very few” cases where they can make money for a long time; There are too many bankruptcies, but the media will not report, and you will never know. LTCM l went bankrupt within a few months due to high leverage and high-risk operations, almost triggering a super financial storm on Wall Street.

derivative products
credit: sergeitokmakov

The simpler the investment, the better

The simpler the investment path, the better. Things that are too complicated, the higher the probability of error, the greater the probability of failure and loss.

Related articles

Regarding derivative investment products, it is recommended that you refer to the description of the following related articles in my blog:


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