This post will repeatedly quote the words in my book “The Rules of Super Growth Stocks Investing”, and the words in the book referred to are my book.
The first thing to remind everyone is that “Most investors’ problem is concept and psychology, not stock selection“.
Stock invesment is an art
In section 1-1 of the book, at the beginning I have the following paragraph: stock investment is an art, not a science, there is no such thing as a 100% guarantee that you can make money after simple mathematical formulas. But there are ways to succeed in investment. It is better if you are talented; but as long as you work hard, have a general level of ability, and add a desire to succeed and become rich, you can rely on stock investment if you are willing to invest for a long time. Successfully achieved the goal of getting rich. Always remember this sentence: “The correct investment concept, and the use of simple investment methods that have been validated by many successful investors, holding this concept is always more important than how to choose stocks.”
The consensus of investment gurus
In section 1-2, there is the following paragraph: In fact, stock investment belongs to the field of economics, not scientific laws such as mathematics or physics. There is no such thing as a simple mathematical formula that can easily get 100% correct answer. Keynes, a master of modern economics, once pointed out: “The atomic hypothesis is excellent in physics, but it is invalid in the discipline of economics.” Because the whole is not the sum of the parts, the result of comparing the quantity is meaningless, and small changes are also not meaningful. May have a big impact. Keynes insisted: “Economics is not a natural science, but a moral science; in other words, economics includes reflection and value judgment.”
In the book, section 1-2, there is also the following paragraph: Howard Marks once said “Investing, like economics, is more art than science.” Benjamin Graham said: “Common stock selection is a difficult art — naturally since it offers large rewards for success. It requires a skillful mental balance between the facts of the past and the possibilities of the future.” Peter Lynch (2000) said: “Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.” Peter Lynch said in an interview: “In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten. This is not like pure science where you go, Aha and you’ve got the answer. By the time you’ve got Aha, Chrysler’s already quadrupled or Boeing’s quadrupled. You have to take a little bit of risk.” Peter Lynch said “All the math you need in the stock market you get in the fourth grade.” Peter Lynch stated “Philosophy and logic are more important than math or finance in picking stocks.”
Buffett also pointed out: “Investing is the art, essentially, of laying out cash now to get a whole lot more cash later on, and something at some point better deliver cash.” He knows that it is impossible to obtain the true value of stocks with precise quantification or scientific calculations. However, investors can still use non-quantitative methods (such as increasing the margin of safety when buying stocks, evaluating the ability of the management team, judging whether the company has lasting competitiveness, and whether the company has proven the ability to continue to generate surpluses), To make up for the lack of accuracy in evaluating the stock price of a company.
Most people are superstitious about science
In section 5-1, there is the following paragraph: Both Keynes and Buffett object to the use of false precision when valuing stocks. Because stock investment has never been a science, and the most important feature of science is that inferences and hypotheses can be expressed by mathematical formulas, and they can withstand repeated calculations and verifications and get the same results.
In section 5-2 of the book, there is the following paragraph: Buffett’s strategy is very similar to Keynes’s. They believe that evaluating enterprises is not a science, but an art. The factors that affect stock market prices and company operations are very similar. It’s complicated, and people’s predictive ability is very limited.
Especially highly educated investors, usually like to show off their cleverness, always thinking that statistics and their own ingenuity can definitely find scientific formulas (as Hayek said). But investment is not science, there is no absolute right and wrong, there is no certainty, there has never been an authoritative and unique bible or guide to judge by, let alone a formula. The key to investment is to try to find a higher probability of success. The market is full of unknowns and risks. No judgment is impeccable and flawed, and there has never been any.
Why is this happening?
In section 5-2, of the book, there is the following paragraph: Albert Einstein once hung a striking slogan in his laboratory “Not everything that matters can be measured.” Too much focus on quantitative data may distort the evaluation of stocks. Benjamin Graham wrote “The combination of precise formulas with highly imprecise assumptions can be used to establish, or rather to justify, practically any value one wishes.”
One of the most famous economist Friedrich Hayek has the same view. He believes that almost everyone pays too much attention to quantitative factors, because these values can make use of statistical techniques taught in schools; and factors that are difficult to measure may be more important. Munger agrees with Hayek’s view, and further elaborated everyone takes things that can be quantified too much, because they want to carry forward the statistical skills they learned in school, so ignore those that are impossible to quantify but more important things.
What’s the consequence?
Peter Lynch wrote “Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.” Peter Lynch stated “If stockpicking could be quantified, you could rent time on the nearest Cray computer and make a fortune. But it doesn’t work that way. All the math you need in the stock market you get in the fourth grade. Logic is the subject that’s helped me the most in picking stocks.”
Only knowing to think rigidly and evaluate everything with numbers, instead of falling into the myth of not seeing the wood for the trees, eventually falling into Charlie Munger “To the man with only a hammer, every problem looks like a nail.”
Why is there no formula?
The market is more complicated than human imagination, and there is no formula to follow for the fluctuation of stock prices. Bernard Baruch’s famous saying “Don’t try to buy the lowest point, sell to the highest point. No one has a way to do this, except liars.” In short, the stock market is not a science. Don’t expect certainty or formulas. In the past hundreds of years, countless people have found out, there is no formula, and no one will find any formula in the future. But there are still some methods or rules of thumb for investment success.
Human civilization continues to progress. The stock market is an activity that everyone participates in, showing collective consciousness and ideas. As long as there is an idea in the stock market (such as the disclosure of major information from listed companies, wars, and important laws related to the industry) with a high probability of immediate profit (this can be regarded as a short-term investment success), it will definitely usher in the imitation of all investors will cause this idea to be profitable and invalid, that is, everyone will immediately follow up (for example, once the acquired company is disclosed, the stock price will immediately rise to close to the offer price). And if the same behavior is repeated in the future, it will no longer be effective, because it is impossible to have the same person, event, time, place, and thing sitting and reappearing for you to copy. But our social, economic, and political situation, these influencing factors are changing all the time — including human nature, the masses, psychology, daily life, economic supply and demand are more related; not like physics, mathematics, engineering, etc. The knowledge in natural sciences can be verified repeatedly with mathematical formulas, with 100% identical, and correct answers.
This is why Keynes said: There are two major uncertainties in the market: “speculation and the animal instinct of human nature”, that is, from people’s “involuntary impulse to act”, it is not determined by basic rationality and knowledge. It cannot be calculated by mathematical formulas.
Buffett said, “Guess the market, that’s what God is doing.” A hundred years ago, when the great banker John Pierpont Morgan was once asked by a young man for his stock market forecast, and he famously replied: “Young man, I believe that markets will fluctuate.”
What are the investment behaviors?
The following common investment behaviors are actually typical operations trying to find investment formulas:
- Superstition in quantitative investment: retail investors are completely unsuitable for this type of investment method designed for Wall Street or super institutions.
- Band trade: Be smart, think that you are comparable to God, can accurately predict stock price trends; back and forth operation can make both ends.
- Trying to find mathematical formulas from historical data: Believe the superstitious of science, thinking that he or she is smarter than all human beings in the past hundreds of years, and insisting on using his or her own power and ingenuity to find mathematical formulas to predict stock prices and markets trend.
- Bragging about financial models: Almost all financial models are expressed in Greek equations and explained by so-called financial experts. In fact, most of them are cheerleaders of financial management professionals. Anything with Greek letters, calculus, advanced mathematics, or mathematics beyond addition, subtraction, multiplication and division is useless in investment, and spending time on it is just wasting your time means that you are the leek and fooled by liars.
- Any prediction: All inferences without factual basis are untenable in investment; whether expressed by mathematical formulas, or predicting the market and the price of individual stocks.
What investors should do?
John Templeton said “Success leaves traces.” There is no formula for investment success, but there are methods; what we want is to find the method by ourselves, not relying on the stock touted by celebrity. It takes time and a lot of effort to find your own successful investment method, but once you establish your own investment method, these costs are worth it, because you have found the key to invest success.
The stock market is extremely complicate, and there are innumerable factors that affect stock prices. These are not completely mastered by human wisdom; this is why it is impossible to have formulas. Trying to find any formula, a shortcut to delusion, and looking for the formula to get rich overnight, there is nothing to do with it, and it will never succeed. These ideas have been tried by countless people in the past and nobody succeeded, and no one will succeed in the future.
Munger once said, “The desire to get rich fast is pretty dangerous.” “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.”
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