Investing in the stock market requires knowledge, but few people think about what kind of investment knowledge we need.
Why most engineers can’t get rich by investing?
Have you ever thought about why technology stocks have soared almost every year in the past few decades, which is the fundamental force driving the rise of US stocks. Technological engineers who know a particular field very well are like the crucian carp, but most of the technologists have no way to become successful investors.
Of course, most technology engineers are much richer than their peers in other industries, but their money is hard-earned money in exchange for selling livers at work, whether it is cash salary,bonus, or company-issued stock; rather than relying on them on their own earned by investment — What’s more deadly is that even if they know a certain product of their company well, most of the engineers have long cultivated to look at everything from a technical point of view, rather than from a business and market point of view.
Engineers understand engineering, which is a small number of details in a very specific field. Leaving this tiny fixed field is a mortal. Engineering pays attention to numbers, science, formulas, and anything that can be copied. The training they have received in their career emphasizes elimination, reduction of possibilities, finding steps that can be repeated, black and white, and no flexibility. However, these skills are mostly opposite to the qualities or success factors required for investment–In short, the world of investment has no formula and is not a science; we have emphasized this sentence many times.
Another more convincing example is that friends who work in the financial industry, according to ordinary people’s views, know more about the stock market and investment, and these people should have a good return on investment. But as long as investors with considerable experience in stock market investment know it; this view of course does not hold true in practice.
This is why I reminded investors on the postscript of the book “The Rules of Super Growth Stocks Investing” that MBA and PhD in Finance can only prove the ability to study, and do not represent the equivalent ability in financial practice and investment. Those who work in the financial industry have the ability to “sell”, not investment or financial management– this is very important. If you can understand this, things will be easier.
Investment complexity is beyond our imagination
Every investor wants to take the lead in discovering industry trends, and then enter the market as soon as possible to gain the first opportunity, because the forerunners and those who can gain market share in all industries can enjoy most of the profits of the industry. This is a basic logical problem. In the 3-4 subsections of my book “The Rules of Super Growth Stocks Investing”, when I discussed how to discover game software, I mentioned how to grasp industry trends.
But I have to be frank, limited to the length of the context, I can only list a summary and a few tips. What I want to say is that it is not as easy as most people imagine to grasp the industry trend and find the way to super invest in new stars. Investment is really not easy. The stock market is more complicated than people’s imagination, understanding and capability.
Why your own investment philosophy and ecosystem required?
Why do you need to spend time and effort to establish your own investment philosophy and ecosystem? The main reason is — because the world of investment is much more complicated than you and I imagined. It cannot be easily mastered by a certain or a few fields of expertise alone. This is very important.
That is, “the knowledge required for investment is breadth, not the depth that most people think.” Experts in a single field of depth have no advantage in investment, otherwise all the Nobel Prize winners, Mensa members, or the greatest scientists in history should invest success and get rich easily, but the actual answer is well-known, not so. One of the most well-known examples is Newton, who invented the three laws of motion in physics. Newton himself confessed this point.
But why do we need to establish a “our own” investment philosophy and ecosystem? Every friend with investment experience knows that copying others’ investment methods (but imitation is necessary and the most effective way) is difficult in practice. Only by finding an investment philosophy and method that suits you can investment be successful in the long run.
This is because everyone’s birth, experience, social background, understanding, values, plans for the future, views on world affairs, and ways of doing things cannot be the same────Don’t forget the famouse quote “Investment is the craft of the specific,” by John Train. A miss is as good as a mile. All of this will lead to huge differences in everyone’s investment preferences, target (shareholding or industry), length of shareholding, degree of portfolio concentration, and risk tolerance. However, in the general direction, the methods and principles of investment success will not be different.
How does this affect investors?
Based on the above analysis, I think this is a good thing for most investors. why? Because most of the ingenuity is born, we mortals are only at the average level. If cleverness decides everything, isn’t it extremely unfair? Fortunately, the world does not work like this. The principle of “working hard to catch clumsy” is not only valid, but it must be so. Therefore, most people can make up for their shortcomings (not just natural ingenuity) through acquired efforts.
This is why I have always advocated that friends who take investment success as their professional ambitions need to invest a lot of time in reading, because reading is the most effective, easiest, and most acceptable way to learn and increase the breadth of human knowledge─── This is something that most successful investors in history agree with, and this is the biggest reason why Buffett’s daily itinerary is centered on reading.
This has been the case for thousands of years, it’s not just in the investment, all successful people do, and it will not be changed in the future, because books are the most important way to pass on human knowledge and civilization. This is also the original intention of another blog post I wrote before, “The Irreplaceability and Necessity of Reading for Investors“.
Build Munger’s system needed for investment
It is better to understand and study every subject. I personally agree with his statement. why?
- Investment is not a natural science: it is a science under sociology. The characteristic of sociology is that there is no formula, and it is the only truth that does not rely on or believe in numbers. Or it can be said that there are too many humanistic, emotional, psychological, life, social, economic, commercial, political…, all the factors of human society; this is investment, in fact, it is no different from the elements of our daily life.
- Expanding horizons: Once investors know more, they will not only have more choices, but they may also increase their investment ability circle (but expanding the investment ability circle is extremely difficult).
- Homework: Reading financial news, watching industry reports and trends, tracking the trends of industry leaders and leading groups, doing daily investment homework, reading in-depth investment articles, and repeating classic investment books. You will get something.
- Reduce the possibility of mistakes, cheating and being deceived: Most investors must have experience, because it is difficult for them to judge the target of the investment, so they are forced to shoot birds blindly, or fall into the fake-tomorrow-star stocks that are deceived, and loss big experience (not necessarily telecommunications or Internet fraud, we are talking about the situation where we actively believe and invest, but this is more dangerous; because you may invest more hard-earned money, and there is nowhere to blame others ). The root causes of these unwilling to mention experiences and failures are due to the fact that the vision is too small and the knowledge of most people is very limited.
- “Thinking backwards” suggested by Munger, He said “The mental habit of thinking backwards forces objectivity – because one of the ways you think a thing through backward is to take your initial assumption and say, ‘Let’s try and disprove it’. That is not what most people do with their initial assumptions. They try and confirm it. It’s an automatic tendency in psychology – often called ‘first-conclusion bias’. But it’s only a tendency. You can train yourself away from the tendency to a substantial degree. You just constantly take your own assumption and try to disprove them.”
Kahneman’s Thinking, Fast and Slow
In Daniel Kahneman’s excellent book “Thinking, Fast and Slow“, he lays out a model for human decision making that evolved from his thirty years of Nobel Prize–winning research, Kahneman’s paradigm features two distinct systems as below:
- System 1: is the purely instinctive pattern recognition mode that is instantly engaged in any situation and arrives at decisions very quickly using rules of thumb.
- System 2 is the slower, more reflective track that employs more complex analysis.
System 2 can override system 1. The problem is that it takes more time and effort to engage system 2, and for that reason, it is underutilized in many of us. But after millions of years of biological evolution, huge effort, and human inertia, in most cases, people will not activate System 2 to think.
Kahneman’s system one—in fact, this is what Keynes called “animal instinct”, a reflection of thinking that everyone can immediately act. It often represents the wisdom of the masses. However, even everyone is doing it and all believe it is right, and it is often not necessarily correct.When this passage is used in the stock market, it proves its value.
Kahneman’s system two, to a certain extent, is actually the “second layer of thinking” that Howard Marks has always emphasized is no different between the two. It can be seen that the views of the masters are actually the same in different ways, and they are essentially the same.
Apart from working hard, there is no shortcut
Buffett once said how to increase the chances of investment. He said, “You have to understand this company. There is no other way.” It is true to say that investing in stocks and operating companies, in terms of general directions, principles, or common sense, is actually nothing different. There are any shortcuts to delusions, or any time-saving methods, in one step. Personally, I don’t really believe that there is such a successful way for nothing, or logically unreasonable, to achieve goals in this world.
When Fisher was 91 years old, he once emphasized: “The best stocks are extremely difficult to find. If it is easy, wouldn’t everyone be able to own them. I want to buy the best stocks, or I would rather not buy them. “
I also mentioned in section 1-1 of the book “The Rules of Super Growth Stocks Investing” that the Japanese stock guru Korekawa Ginzo ever warned investors to “Work hard on your own research, honestly, just listen to the opinions of others, or just rely on reports in newspapers and magazines want to make money. This mentality itself is the root of failure. Is there such a beautiful thing in the world?”
Imitate, learn, and observe
Fisher believes that no investment philosophy can be fully developed in a day or a year, unless copying other people’s methods. Among them, part may come from so-called logical reasoning, and part from observing the success or failure of others. But most of it comes from the more painful method: just learn from your own mistakes. Investment is like most other human jobs. To succeed, you must work hard, diligently, and honestly.
Imitation is the most labor-saving and most effective way, but investors still have to be willing to spend time and effort to study the characters, companies, or methods to be imitated; because they must have a deep understanding to be useful. Investors should all have their own successful investment masters. It is recommended that you use all his related autobiography or works (if not, it is really not suitable for you to imitate) as bedside books, as long as you encounter any investment scene, you can turn it over how did he face it.
However, don’t just copy, you go to understand, digest, learn from it, make it become yours, and build your investment philosophy. Or it will be useless and waste your time.
Buffett also said that learning is important in investment. Moreover, he wanted to say very thoroughly; many things are worth learning, but the experience of failure is avoided; because we really can’t make the painful journey of other people’s failures again. Since we all know that it is failure, why should we experience again?
Munger said “There isn’t a single formula. You need to know a lot about business and human nature and the numbers… It is unreasonable to expect that there is a magic system that will do it for you.”
One of the modern successful investors, William J. Bernstein, said that “successful investors are not single champions, but people who are fully proficient.” I agree with him very much. This sentence is actually same as what I described in the first half of this article — Monger’s investment philosophy.
American writer Ralph Waldo Emerson said a sobering sentence, which is suitable as the conclusion of this article “A foolish consistency is the hobgoblin of little minds.” As I said before “We become what we think about all day long. ” Emerson’s point was that only small-minded men refused to rethink their prior beliefs. Or, put another way, he thought that today’s intuition could trump yesterday’s conclusions — This is the root cause that hinders our progress.
In the end, I ended this article with a famous quote from Keynes “The difficulty lies not in the new ideas but in escaping from the old ones.”
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