Graham: to invest, you need to understand these four business principles.

Author / Zhang Zhixiong

Editor's note: Graham's book "Smart Investor" is recognized with Securities Analysis as the "epoch-making and landmark investment Bible". This book is about the most fundamental and important concept of investment.

Buffett spoke highly of the Smart Investor, admitting in the 1973 preface that he was 19 in the early 1950s. After reading the book, he thought it was the best book in the field of investment. I haven't changed my mind since then.

He went on to say an oft-quoted saying: "A successful investment career does not require outstanding intelligence, extraordinary economic vision or insider information. all that is needed is a sound knowledge framework for decision-making and the ability to avoid being undermined by emotions. "

Because investment is really like what the last two sentences of the book say: "it is actually easier to get satisfactory investment results than most people think, but if you want to get excellent results, it's actually more difficult than people think. "

1

In the 1990s, I was excited when I first read Peter Lynch's "defeating Wall Street" because his stock selection method is so simple-pay attention to which products or merchants are popular and best-selling in your daily life, and then buy their shares. At that time, domestic appliance companies in mainland China were catching up with foreign brands, which was very impressive. As a result, the home appliances I buy are all domestic products, and I want to research the company and choose stocks through the actual use of these products. After the enthusiasm, I found that things were far from that simple. There are a lot of problems in choosing stocks based solely on daily experience.

In 2000, Lynch made a statement in the preface to "Peter Lynch's successful Investment":

Peter Lynch has never suggested that you should buy shares in a store just because you like to buy it. Nor do you suggest that a manufacturer should buy shares in a store just because they produce your favorite products or because you like the food in a restaurant. Liking a store, a product, or a restaurant is a good reason to be interested in a company and add its stock to your research list, but it's not a good reason to buy stock in the company!Don't rush to buy a company's stock until you have fully studied its earnings prospects, financial position, competitive position, development plans, and so on."

Lynch stressed that on the key point, his words were misunderstood: if you own shares in a retail company, the key point is to determine whether the company's expansion phase is coming to an end (Lynch likens to the "last inning" of the baseball game). The development prospects of companies that set up branches in only 10% of the country are certainly very different from those that have already set up branches in 90% of the country.Investors must pay attention to what is the source of the company's future growth and predict when the company's growth rate may slow down.

It seems that I am not the only one who misunderstood Lynch's point of view. In order to encourage people to invest on their own, build up self-confidence and simplify complex issues, it is understandable, but it is also easy to cause "misunderstandings". For example, from the launch of "Peter Lynch's successful Investment" in 1989 to 2000, more than 1 million copies have been reprinted 30 times. If there is no "misunderstanding", it may be difficult to explain.

Lynch still has a lot of insights. By contrast, it is popular at home and abroad to "manage money easily", to meet Buffett at a snack bar, and to be careful about "the millionaire next door". They will only easily take money out of your pocket, not let you make money easily.

A person with a little brain just needs to think that if it is so easy to make money, everyone in the world must have made money, and money will not be a scarce resource. But can most of us easily buy a yacht? It's not easy to win the lottery and make a lot of money in the only seemingly easy lottery, if you want to succeed on purpose.

Unfortunately, apart from buying lottery tickets, many people think that speculation through stocks (or real estate) is the easiest way to make money. By the same token, if it is the easiest way to make money, the rich in the stock market or real estate industry should account for the vast majority of the world's rich list since ancient times (for at least 300 years). Of course not.

that,Why do so many people continue to believe that speculating in stocks or real estate is the most profitable?

Graham, the father of value investing, thinks they made a fundamental mistake of buying stocks and doing business (such as doing business) as two different things.

Graham cited a popular "trend investing" principle, that is, a stock or market has gone up, so it should be bought; a stock or market has fallen, so it should be sold. But this completely violates "sound business common sense", that is to say, in daily experience, the price of general goods falls, and we have to buy them as soon as possible.

Not to mention ordinary people (amateurs), that is, most financial experts like to distinguish the financial capital market from industrial operation. It seems that the former is "virtual" and has its own special rules. In the 1990s, I remember that some smart and promising mainland entrepreneurs liked to talk about and carry out "capital operations", and many of them have now collapsed. To investigate the reason, I think they all divide their industrial operation and capital speculation into two parts, thinking that there is really a different "capital operation" in the world.

Of course, each industry has its own particularity, the skills of dentists and lawyers are different, and the capital investment of the telecommunications industry and the retail industry is also different, but they must obey the basic business common sense, accumulate over time, and gradually move towards success. even if it is due to a certain opportunity, to make an industry or enterprise succeed rapidly, there must be continuity, otherwise it will either be called a nouveau riche, or the evening festival will not be guaranteed.

For example, the basic common sense that we like to say that investments can continue to succeed is compound interest. Buffett (Berkshire) 's average annual return from 1957 to 2003 was 26.59%. The original $1000 has become $51356784, which is enough to make him the second richest man in the world.

But how is this way of success different from other so-called industries? Which successful enterprise does not need to accumulate every penny and earn every penny? Which sustainable development enterprise does not need to face all kinds of risks, large and small?

I make such a wordy statement because most of the financial market figures I have met or read through books do not admit that their livelihood is not fundamentally different from that of ordinary industry, so they often lack the necessary business common sense. They will only deduce the numbers on paper to "logically" enlarge or shrink the development of events, which is also one of the psychological reasons for the turmoil in the financial markets.

If we admit that there is no essential difference between investment and actual business, we will not make simple deceptive remarks about easy investment or speculation. We know that even the small grocery store next door is hard and difficult to operate, but is it easy for us to invest most of our assets or billions of dollars on behalf of others?

The reason why Graham's "Smart Stock Investor" is still regarded as a classic today, the most important thing is that he pointed out:

If you look at investment with the attitude of running a business, investment requires a high degree of wisdom. It is surprising to see that many shrewd entrepreneurs show their skills on Wall Street, completely ignoring the so-called sound investment principles that make them successful in their businesses.

However, every kind of securities of a company had better be regarded as the ownership or creditor's rights of a particular enterprise first. If someone tries to make a profit through the sale of securities, he is running his own business, and if he wants to succeed, its operation must comply with recognized commercial principles.

The first and most obvious principle is: "know what you're doing-- know your business." "As far as investors are concerned, this means not trying to make "commercial profits" from the trading of securities-that is, excess returns other than normal interest and dividends-unless you know enough about the value of the securities. just as you know about the value of goods when you trade or manufacture.

The second business principle is: "Don't let other people run your business unless (1) you can monitor their performance in every detail, or (2) you have unusually strong reasons to rely entirely on his character and ability." "For investors, this principle can determine the conditions under which money can be managed by others.

The third business principle is: "do not do business rashly-in other words, make or buy or sell goods-unless it is considered that the business will give rise to reasonable profit opportunities." In particular, it is necessary to avoid businesses with limited profits and large losses. "For enterprising investors, this means that profitable operations cannot rely on optimistic ideas, but must be based on calculations. For every investor, this means that when returns are very limited-like the traditional bonds and preferred stocks mentioned earlier-he must make sure that most of his principal will be at no risk of serious losses.

The fourth business rule is more positive: "you must have the courage to use knowledge and experience."If you draw a conclusion from the facts, if you know that your judgment is sound, you should follow the instructions-although others have different opinions or doubts. The difference between the opinions of the masses and yours is not enough to deny or affirm your views, you are correct, because your information and reasoning are correct. By the same token, in the field of securities investment, except for sufficient knowledge and sophisticated judgment, courage is a great virtue.

Fortunately, for a typical investor, the success of his investment plan does not have to meet the above conditions-as long as he limits his ambitions to his capabilities and engages in activities in the security area of defensive investment, it is easier to achieve satisfactory investment performance than most people think, but to achieve excellent performance, most people underestimate the difficulty.

2

In fact, a long paragraph above is Graham's final conclusion in "Smart Stock Investor." Graham is a master of classical writing who pays great attention to writing and connotation. if we taste it carefully, we will feel that it is always new and rich.

Let's start with the first principle, "know what you're doing-- know your business." Peter Lynch once reminded everyone that when one deals in clothing, one should at least know whether to sell women's clothing or men's clothing, children's clothing or adult clothing and style, color, size, and so on.

But when buying a stock, how many people think about what it does, what its performance is, and what its future prospects are. We either listen to the news or look at the graphics, and people who are more attentive only have a general understanding of the company. But even if we don't do business and buy something worth a few hundred yuan, we can still compare goods with each other. why do we often spend tens of thousands or hundreds of thousands of yuan to buy stocks without thinking?

However, Graham is more "conservative" than Lynch, and he believes that it is highly likely that ordinary people are not as familiar with the value of securities as they are about the value of goods purchased, so they should not try to get excess returns other than dividends, that is, capital gains, from securities trading.

It is worth mentioning that Graham is similar to Berlin, the philosopher who proposed "negative freedom". They both have a deep understanding of the weaknesses of human nature and doubt whether we can completely overcome them. Graham is more like an "old European", not as confident as the typical American Lynch, encouraging others everywhere: "you can, no problem." "

Not to mention that new entrants to the stock market, even many investors with many years of experience, will not approve of dividends. After all, the most eye-catching thing about stocks is the "capital gains", that is, the increase in share prices. Speculators love to run the short-term "price difference", investors hold shares for a long time, but also want it to double or even increase tenfold. The dividend yield is at best 5% a year, which is very inconspicuous.

But research shows thatIf you are a long-term investor, dividends are very important.Not only the role of compound interest itself, but also dividends can be used to reinvest, especially in a bear market, the stock price is too low, through the dividend reinvestment, can really achieve long-term gains.

Graham's second business principle is conditional negation. If you can not carefully monitor the operational performance of the trustee, can not fully trust the character and ability of the trustee, then you should not entrust the funds to others for financial management. Commercial agents cannot be fully trusted. Not only in China, but also in Europe and the United States. Especially in the United States, those listed companies CEO and executives receive huge compensation, has become as difficult to clean up as pollution "public hazard". It is unacceptable that these executives take money from investors but squander it at will. Of course, Graham's main emphasis here is to entrust money to mutual funds or investment advisers.

Graham pointed out that in business activities, securities investment is quite unique, because it always needs to accept the advice of others to some extent, and most investors are amateur investors. And the irony is:

If someone invests in order to make money, the investment advice they seek is to ask others to tell them how to make money, which is quite foolish. Business operators will seek professional advice on operation, but never expect others to teach them how to make money. This is their own major. When someone relies on others to make a profit on their investment, the result they expect is different from that of ordinary business activities.

The above paragraph is very implicit, what I read is a negative, that is, under normal circumstances, investors will not do very well if they buy stocks only through the advice of others. Qiu Yonghan, a Japanese financial writer, told us from his own experience in the Japanese securities industry that there is no good result for people who listen to the advice of securities companies to do stocks. If they really have the ability to invest, those securities practitioners have long been developed, and they still need to take the trouble to "guide" you. The reason why they like to recommend stocks is just to increase the trading volume. The skill of these experts is to observe and report the ebb and flow of the market, and what you need is a way to catch big fish, and they simply can't meet your requirement.

Graham is skeptical of mutual funds, especially those that emphasize performance. According to older people like Graham, first of all, almost all outstanding performance winners are young people in their thirties and forties, whose direct experience in financial investment is limited to long markets that have lasted for many years.

Second, their definition of "sound investment" seems to be stocks that will rise sharply in the next few months, which makes them massively involved in new areas of risk-taking. There is a complete lack of necessary connection between the prices they pay and corporate assets or profit records, and their behavior can only be "reasonably explained" from two aspects. "on the one hand, they naively expect the future operating results of these enterprises. On the other hand, it is shrewd to take advantage of the speculative craze of greed and ignorance. "

Graham cites a book called "Fund managers" published at the end of 1969 as an example, in which 12 fund managers with operational performance performed very well in 1966 and outstanding in 1967. In 1968, the overall performance was still good, but the performance of individual funds varied widely. In 1969, they all lost money on their operations, with only one fund slightly outperforming the S & P index. In 1970, their relative performance was even worse than in 1969.

Graham wrote:

"the purpose of this statement we provide is to highlight the truth that it may be more appropriate to use a French proverb: the more it changes, the more immutable it is. Since the beginning of Pangu, smart and energetic people-often very young-have promised to work miracles with "other people's money". They were able to keep their promises at first-at least on the surface-but ended up causing them inevitable losses.

Half a century ago, such "miracles" were often accompanied by ferocious artificial hype, fictional corporate statements, lawless capital structures and other practices bordering on financial fraud. all this has led the Securities and Exchange Commission to build a stricter financial control system, which has led the general public to take a more cautious view of common stocks. The new generation of "fund managers" from 1965 to 1969 is only 40 years from the era of fraud from 1926 to 1929. "

Investment funds in pursuit of superior performance may involve special risks, and all financial experience shows that the long-term performance of well-managed large funds can only slightly outperform the broader market at best. If the management is not sound, we may be able to achieve outstanding and illusory performance for the time being, followed by disastrous losses.

"however, it is true that some funds can outperform indices for a long time, such as ten years or more, but they are rare exceptions, operating in specific areas most of the time and strictly controlling the size of their funds-rather than actively promoting them to the investing public. "

3

The third business principle that Graham's ideal "smart stock investor" believes in is "don't do business rashly", especially to avoid businesses that make limited profits and lose a lot of money. As opposed to investment, operations cannot rely on optimistic ideas, but must be based on calculations. In addition, the benefits and risks must match.

This principle can be carried out in many ways. Graham wants investors to develop the habit of quantification. At least 99 of the 100 stocks can be said to be cheap and should be bought at one price, while at others, it is very expensive and should be sold. Assessing the relationship between the price paid and the value obtained is a very valuable trait in investment behavior.

Graham once advised readers in an article in a women's magazine that they should buy stocks in the same way as groceries, not perfumes. In the stock market, people suffer really serious losses because buyers forget to ask, "how much is it?" "

There are at least two reasons for treating stocks as perfumes rather than groceries: first, "fashion". Perfume stocks in each period are often hot stocks, rising very hot, and the owners will be quite proud, which attracts more people to be willing to hold it, so the price is extraordinarily high; second, speculative, perfume stocks are very expensive, but as long as they can be sold at a more expensive price, it doesn't matter.

This obviously goes against business common sense, because no matter how good the quality is, it has a price. I said many years ago that precious works of art should not be easily described as priceless. Experts in the art market all know that, with the exception of a few collections in museums, most of the works of art are valuable, but some prices are really high, and some have to wait for the right time. The core of the commercial economy is the price, regardless of the price of the transaction is irresponsible and smashed, no enterprise or tycoon can go on like this.

The attitude of not asking about the price and the ignorance of the importance of the price make us often compare value investment with investing in blue chips. Generally speaking, blue-chip companies are of course more valuable than ordinary enterprises, so people regard investing in valuable blue-chip stocks as value investments. actually,The so-called value investment means to invest in products or companies whose prices are much lower than their value.When a blue chip company becomes a hot stock, the price is often higher than its value, so buying it is not a value investment.

Some people feel contradictory and call it "value speculation", but it is also irrelevant. In order to avoid misunderstanding, some people call "value investment"rational investment", but it is only synonymous with repetition, because if a behavior can be called the right investment, it must be rational. In fact, in the eyes of Graham and Buffett, the right investment and value investment are the same thing, and value investment can be called investment.

Similarly, because junk stocks or riskier stocks are of little "value", we often refer to the act of buying them as "speculation". This is also wrong. As long as you are carefully considered, the risk and return match, especially the price of the trading variety is much lower than the value, this kind of behavior is investment.

Graham put it this way: "If the price is low enough, mediocre securities will also become a sound investment opportunity.As long as the buyer has sufficient information and experience, and can diversify the investment. Because if the price is cheap enough to provide a considerable degree of security, the securities will meet our investment standards. "

He cites, for example, that during the Great Depression of the 1930s, there was a class of bonds that had become highly speculative and their prices collapsed because they were unable to repay interest, some at a discount of as much as 90%. At this time, investment advisers, who recommended buying them at parity as safe investment vehicles, now treat them like waste paper on the grounds of speculation and unattractiveness.

However, prices have fallen by about 90 per cent, making many of these bonds attractive and reasonably safe because their true value is about four or five times what is quoted in the market. Although buyers end up with the so-called "huge speculative profits", these bonds really have the quality of investment at low prices. "speculative" profits are the reward for buyers' precise investments and are well-deserved "investment opportunities".

This also shows that in the real market, investment and speculation can be transformed into each other. The speculative variety in the long market brings serious losses to the ignorant, but provides a profit opportunity for savvy investors to buy at the ideal price.

As early as 1934, Graham's textbook Securities Analysis had a clear definition and distinction between investment and speculation:Investment behavior must be thoroughly analyzed to ensure principal and appropriate returns. An act that does not meet the above conditions is speculation.

Nearly 40 years later, Graham still thinks this is important, although most of the time, investors must recognize that there is a "speculative element" in holding stocks. The task of investors is to keep this speculative component within a reasonable range and be prepared financially and psychologically to respond to long-term or short-term adverse changes.

The following passage shows that Graham is more undogmatic and informal than we thought:

Outright speculation is neither illegal, immoral nor (for most people) increasing the amount of money in their bank accounts. What's more, some speculation is necessary and inevitable, because there are considerable opportunities for profits and losses in many common stocks, and the risks involved must be borne by some people. Intelligent speculation, like intelligent investment, co-exists in the market.

The last sentence was interesting, but Graham hastened to add, "there are many ways of obviously unwise speculation, the most of which are:First, speculating is regarded as investment; second, speculating in a serious rather than recreational manner, but without relevant knowledge and skills; third, the amount of money involved in speculation is more than one can afford."

For example, for every non-professional who buys stocks through financing, and everyone who buys so-called "hot" stocks or similar stocks, we should remind them that they are engaged in speculation or gambling.

Graham is a smart man, and he certainly knows the charm of speculation: speculation is often seductive and fascinating, and it would be fun to take the lead in the game. If you want to take a chance, try your luck and set aside another sum of money, the smaller the better, for this purpose. Never increase the amount of your account because of higher prices or better profit opportunities (in fact, in this case, you should consider "withdrawing" speculative money). You can't invest or speculate in the same account, and your thinking can't be confused between the two.

To speculate with a small amount of money, the term in Hong Kong newspapers is "small gambling", which is similar to winning or losing money occasionally playing mahjong on New year's Day or festivals.

Graham is dismissive of people who speculate with a "serious" rather than "entertaining" attitude but don't know the relevant knowledge and skills, which reminds me of many years ago. I met a college alumnus in the mid-1990s. She said her husband works in a securities company every day.

"are you an agent? "I asked.

"No, he goes to the big room to make deals every day," she told me rather proudly.

I stopped talking. I just imagined her husband going to work with a serious face every morning. At that time, I am afraid that the people in the big room were speculating or gambling in disguise, but outsiders seemed to be trading there every day. I wonder, would the alumnus be proud if her husband went to the underground casino with his wallet?

Really, at that time, most of the big companies were seriously speculating (gambling), but did not know it, this is the real trouble (has the situation changed now? ).

Today, I cannot say that many people entrenched in large rooms or securities companies are speculating a lot, which will deal a big blow. However, we should always reflect on whether we are shouting about value investment every day, but in fact we are speculating. In doing so, it is not a question of hypocrisy or non-hypocrisy, but is very likely to make a big mistake. For example, a blind man rides a blind horse and faces a deep pool in the middle of the night. if that is the case, ask a groom to lead him to leave quickly, even though it is dangerous, it will not cause an accident.

In the whole process of investment, correct understanding, strict implementation and really doing well are interrelated, but there is no inevitable causal relationship between these three things. Graham believes that there are many people in the market who do not know the essential difference between value and price, but those who do know this and are wise should not think that they can simply profit from the stupidity of others. Graham reminds us again:

"it seems so, but in fact it may not be so simple.Buying unsought-after and undervalued stocks to make a profit is usually a severe test of patience.Shorting well-loved and overvalued stocks will test not only the courage and endurance of investors, but also the depth of their pockets.The principles are correct and successful application is possible, but this is not a skill that can be easily mastered. "

4

Graham's fourth investment principle, which must be in line with the commercial legal system, is permeated with in-depth psychological and human analysis.

Because Buffett extracted the analogy of "Mr. Market" created by teacher Graham in his famous annual report, it has been appreciated by more and more people, some of whom may not agree with Graham's concept of value investment. but they all admire "Mr. Market" for interpreting the highly complex psychology of the stock market so accurately and simply.

We believe that with Mr. Market alone, Graham can become one of the few securities masters, and, with the depth of Mr. Market's human nature, it may gradually become classic and immortal with the literary images written by writers such as Shakespeare and Dickens.

Let's revisit the lovely Mr. Market:

Suppose you own a small stake in a private company at a cost of $1000. Your partner's name is Mr. Market-a very courteous person who tells you every day how much he thinks your shares are worth and gives you advice to sell or buy shares based on the value he judges. According to your understanding of the development and prospects of the enterprise, his value judgment is sometimes quite reasonable. On the other hand, Mr. Market is often tainted by passion and fear and offers a slightly stupid price.

If you are a cautious investor or a keen businessman, will you let Mr. Market decide what you think of the $1000 equity based on your daily quotation? Only when you agree with his judgment or when you want to trade with him. If his offer is very low, you may be willing to buy it. At other times, however, you will judge the value of your equity holdings based on the business's operating and financial reports.

In line with Mr. Market's analogy, Graham gives the example of an American listed company of Atropp, which is of great help to investment practice if we think about it carefully.

Atrep went public in 1929 with a share price of $494 a share. In 1932, the company's operations were unaffected by the Great Depression, but its share price fell to $104 per share. In 1936, Atropp's share price was between $111 and $131 per share; then, under the dual pressure of the 1938 recession and the short market, the share price fell to a new low of $36 per share.

This is absurd because America's largest retailer at the time had an excellent profit record for many years, with a cash balance of $85 million and working capital (net current assets) of $134m. however, the total market capitalization is only $126 million, which is not worth its current assets-meaning its liquidation value is higher than the value of its ongoing operations.

The following year (1939), Atrep's share price rose to $117.5 a share, three times what it was when it was low in 1938. After 1949, the share price of the department store chain climbed with the market. In 1961, the stock was split into 10 shares and reached a high price of $70.50 per share, which was equivalent to $705 per share in 1938.

At $70.5 a share in 1961, A & P trades at 30 times earnings, higher than the Dow's average price-to-earnings ratio of 23 times that year, meaning investors have high expectations for future earnings growth, and judging from the company's earnings records in recent years, this optimism is not only totally unfounded, but also completely wrong. In 1962, Atropp's share price fell by more than 50% to 34 US dollars per share, but at this time, the stock no longer has the cheap stock quality shown in 1938. After many shocks, its share price was $18 a share in 1972-and the company posted its first-ever quarterly loss.

Graham sighed that from this period of history, we can find that in a short period of more than 30 years, a major company in the United States has experienced such great fluctuations, and the general investment public has made such a serious mistake in their assessment of the enterprise. sometimes over-pessimistic, sometimes over-optimistic.

It provides two important lessons:First, the stock market is often so wrong that shrewd and brave investors can occasionally profit from obvious mistakes；Second, most enterprises change their characteristics and quality over time, sometimes for the better, but most of the time for the worse.. Although investors do not need to keep an eye on the operations of enterprises like an eagle, they should always evaluate and analyze them carefully and clearly.

Even if there is Mr. Market in other markets, it is not as on-call and passionate as in the stock market. During the Great Depression of the 1930s, the lack of market quotations for investment targets was a psychological advantage. For example, people who bought real estate with loans would tell themselves that they had no losses, because no market quotes showed other results. And many listed senior rating companies, although the financial situation of their issuers is excellent, but the bond market price has fallen sharply, making investors think that they are obviously getting poorer and poorer.

I have a similar experience. A relative of mine bought two stocks with investment value, but asked me every three or five times if I should sell the stock. She also invests in real estate, but can hold it for two years or more. So I asked her, "Why can't you hold stocks like investing in real estate?" She looked confused after hearing this, and I knew that although she understood the truth, she was still fascinated by the liquidity of Mr. Stock Market.

In fact, price volatility (Mr. Market) has only one clear meaning for real investors. When prices plummet, they provide sensible opportunities to buy and when prices soar, they provide sensible opportunities to sell. "at other times, he should forget everything about the stock market and focus only on the return on dividends and the operating performance of the company. "of course, compared with other assets, the liquidity of stocks is not only easy to sell, but also easy to buy, for example, we may like a house in a certain location, but there is no housing supply.

There is also an interesting example. I know an investor who wanted to buy cheaper corporate shares in 2001 in order to avoid the risk of the upcoming A-share bear market in mainland China. However, due to the lack of circulation of corporate shares, he could not buy corporate shares of good companies, so he could only buy shares of poor companies. A few years later, the returns of good companies, which are also tradable corporate shares, are much higher. If I had known, this investor could only look helpless.

I prefer Graham's observation of the stock market and investor psychology to his financial analysis:

Serious investors should not believe that daily or even monthly fluctuations in the stock market will make him richer or poorer. But what if the period is longer and the range is greater? Here, the actual problems are very obvious, while the psychological problems are quite complex. A long rally can be a reason for contentment, a cause for cautious anxiety, and a trigger for reckless action.

Your stock has gone up. Good! You are richer than ever. Good! But has the share price gone too high? Should you consider selling? Or should you hang your head and stop buying more stocks at a low price? Or-worst of all-should you bow to the bulls, infect the passion, overconfidence and greed of the general public (of which you are, after all), and invest more money and take higher risks? The answer to the last question is obviously no. But even smart investors need a lot of willpower to avoid following the masses.

When I copied this, just after China's A-share market rose 130% last year, in early 2007, some friends called to exchange ideas and future investment strategies. Graham's words more than 30 years ago are still ringing in our ears.

Let's take a look at how he explains the rebalancing of stocks and bonds in the portfolio:

We advocate some mechanical way to adjust the ratio of stocks to bonds in the portfolio, not only because of profit and loss, but mainly to overcome the weakness of human nature. Perhaps the main advantage of regular investment is that it gives investors "something to do".

When the stock market rises, the shares are sold every once in a while, while the recovered money buys bonds; when the stock market falls, the opposite process is carried out. This kind of behavior can relieve his energy that he could not vent. If he is a rational investor, he will still feel satisfied, because his method of operation is exactly the opposite of Volkswagen.

Haha, it is wonderful to give investors "something to do" and "relieve the energy he could not vent". It is difficult to combine knowledge with practice. Most people are either bored with inaction or brooding. The same is true in the stock market, where people are too active and trade frequently in a big bull market, while they are scared to death and timid in a big bear market.

I have a friend who has a lot of "news". He bought a lot of stocks before 2001, but they were all tied up in the big bear market later. By the summer of 2005, he had lost more than 80%. I suggested that he should sell all the bad stocks and change them for stocks with investment value. Because of the stocks he bought based on the news, the company's performance was completely poor, and even if there was a big bull market, the extent of the rebound was limited. Only by changing the door at this time will it be possible to make up for the loss. But he refused to listen, and it didn't help in the bull market that soon emerged. I think he has been crushed by defeat, like an ostrich burying his head in the sand, thinking that if he does not act, he will not lose (after all, he has not been sold, and it is possible to recover the lost ground after rising). They do not realize that this is a complete abandonment.

For stockholders who have lost more than 50%, if the company's fundamentals are really bad and holding it will only get worse, they should sell these stocks for money and buy other stocks with investment value. Before making this choice, you just have to ask yourself, "if I had money, what would I buy now?" "

When you think you won't buy these deeply trapped stocks now, you should be decisive. This is the best way to get rid of the trap, but it is difficult to put it into practice because most people are unable to get through their own psychological hurdle, unable to admit their mistakes and admit compensation, and always take a fluke. Unfortunately, as long as you have a fluke mentality, things will backfire.

By the way, the above analysis also shows that long-term holding is not equal to investment. if you buy stocks without analysis or no longer continue to pay attention to changes in fundamentals and other factors that affect the company, holding for a long time is not an investment behavior.

Another fallacy that we often publicize is that buying blue chips is an investment, which has been explained earlier. Graham also analyzed the speculative origin of blue chips from the aspects of market volatility and psychology.

As we all know, Graham regards "margin of safety" as the motto of sound investment, which is most effective when applied to securities that are too low or cheap. Because the definition of the margin of safety is the difference between price and value, it can contain the bad luck of investment or the error of calculation. However, if the margin of safety is applied to growth stocks, it is difficult in many cases.

The definition of a growth stock is that people have a good vision for their future and are well received, thus pushing up their prices. Buying growth stocks requires not only a good price, but sometimes an exorbitant price. The margin of safety always depends on the price paid, and the margin is sufficient at a certain price; at a higher price, the margin will be reduced, and at a higher price, the margin will disappear. "

Graham reminds us to pay attention to the structural contradictions in the quotations of the entire stock market. The more growing stocks, that is, the better the company's past operating records and future prospects, the lower the correlation between stock prices and the book value of the enterprise (net asset value, or "balance sheet" value), but "the greater the premium above the book value, the lower the correlation between the stock price and the book value (the value of the" balance sheet "), but" the greater the premium above the book value. The more uncertain the basis for determining its true value (intrinsic value) will be-in other words, the true value will depend on the way the stock market is evaluated and the mood changes.

As a result, we encounter the last pair of contradictions. the more successful the enterprise is, the more violent the fluctuation of its stock price is. This means that, from a very serious point of view, the better the quality of common stock, the more speculative it is, at least for medium-sized stocks in general. "

That's why Graham has reservations about growth stocks. Because the investor can no longer control his wealth after paying these market premiums, he has to rely on the stock market quotation to verify his choice. In other words, Mr. Market has a very close relationship with growth stocks, because hot stocks generally arise from investors' unrealistic expectations of some growth stocks, and almost all hot stocks eventually go to crazy bubbles and collapse. this is not consistent with sound investment.

To be honest, how much premium should be given to growth stocks, what is a bubble, what is not a bubble, the margin of safety is difficult to show the opportunity to show their talents, it seems to be more related to group psychology.

And no individual can control the fanaticism of the group, including charismatic and controlling political leaders. The French Revolution successively led elites from all walks of life to the guillotine, and Robespierre, the most revolutionary, was not immune. Everyone also shaved their heads. In the later period of the Cultural Revolution, the initiators also felt powerless, the bones were not cold, and its core group had collapsed.

Stock market bubbles are generally much less intense than the "Great Revolution", but dancing with them is still bad luck. In order to avoid collective madness, we can only avoid participation or moderate participation in the early stage. How to be a maverick, Graham said an important thing in the fourth business law, in a nutshell.As long as the information and reasoning you are based on are correct, no matter how different the group is from you, you must always stick to your own views.. In fact, the most important thing at this time is not how profound knowledge or profound judgment you have, but whether you have enough psychological tolerance. "courage is a great virtue."

This is the hardest thing for a value investor to do-to be humiliated and humiliated.

5

Buffett spoke highly of the Smart Stock Investor, admitting in the 1973 preface that he was 19 in the early 1950s and thought it was the best book in the investment field after reading it. I haven't changed my mind since then.

Buffett went on to say an oft-quoted saying: "A successful investment career does not require outstanding intelligence, extraordinary economic vision or insider information. All that is needed is a sound knowledge framework for decision-making and the ability to avoid being undermined by emotions. This book clearly and clearly describes the structure, and you must incorporate emotions into discipline.

If you follow the behavioral and business principles advocated by Graham-especially the precious advice in chapters 8 and 20-your investment will not end badly (an achievement far beyond your imagination). Your outstanding performance will depend on the effort and knowledge applied to investing, as well as the stupidity shown by the stock market during your investment career. The more stupid the market behavior, the more wise investment opportunities there will be. Follow Graham's teachings and you will benefit from foolishness and will not participate in it. "

And we tend to overlook another equally rich saying in "Smart Stock investors":

"the art of investment has a feature, but it is not recognized by ordinary people. It takes only a little ability and effort for a layman to achieve an admirable, if not considerable, result, and it takes a lot of wisdom and effort to try to surpass this readily available achievement. If you want to slightly improve your normal performance and add a little extra knowledge and skills to your investment strategy, you will find that the result is not to advance but to retreat. "

We can also repeat the above quote that "it is easier to get satisfactory investment performance than most people think, but most people underestimate the difficulty of achieving good performance."

I have never really thought about it in the past. What is "satisfaction"? What do you mean "excellent"? For many people, their satisfactory performance in the stock market is actually Graham's excellent performance, so they often underestimate its difficulty. Graham's most satisfactory performance is no more than 10% a year, and how many people are willing to do so?

But if we come back to the corporate world, we will find that Graham is right. Tens of thousands of enterprises are alive and growing, indicating that "food and clothing" is still possible, but how many enterprises are excellent? There are a large number of business media looking for outstanding enterprises and entrepreneurs, but we find that the content they report is often repetitive and identical, and it is really difficult to achieve excellence.

Why take the excellent performance that is difficult to achieve in the industry as the only standard of satisfaction in the stock market? What are our chances of success?

The trap of the stock market is here. An ordinary business owner often acts according to his ability and does not easily want to reach the capacity and scale of a world-class enterprise, but we in the stock market dare to do so. Haste makes waste, and the result can be imagined.

While in other areas, great achievements often require enthusiastic support, on Wall Street, enthusiasm almost certainly leads to catastrophe.

Investment is not easy.

Buffett can be called a disciple of Graham's words and deeds, but he may not fully understand the essence of the teacher. When Buffett was asked in 1989 why he invested $358 million in USAir, he replied angrily: "I think perhaps the most appropriate explanation is temporary insanity." So now I have this 800 number at any time, and if I want to buy shares in the airline industry on the spur of the moment, I will call this number, and I will say that I am Warren, an addict in the aviation industry, and then the guy on the other end of the phone will stop me from doing so. "

Buffett doesn't have to call. In the preface to "Smart Stock investors" in 1973, Graham cited the example of the aviation industry-it is widely believed that the art of successful investment lies first in choosing the industries with the most potential for growth in the future. the second is to pick the most promising companies in the industry-which doesn't make sense. At that time, although the performance growth of the aviation industry exceeded that of the computer industry, its profits were very unstable and even suffered huge losses because of technical problems and over-expansion of production capacity.

Although air traffic hit a record high in 1970, operators incurred a loss of $200 million for their shareholders (they also lost money in 1945 and 1961). Between 1969 and 1970, aviation stocks fell more than the market again. Records show that even well-paid fund managers are completely wrong about the short-term future of this major and unmysterious industry. "

More humorously, in the 19-year-old Buffett's enthusiastic reading of the first edition of Smart Stock investors, Graham has written: "for example, such investors may buy stocks in the air transport industry." because he believes that its future development potential is far greater than the extent reflected by market trends. For such investors, the function of this book is to warn against the pitfalls of this type of investment, not to provide any skills in the investment process. "

I have no intention of finding fault with Buffett. I respect moral people in the face of investment gurus. All I want to say is that even Buffett will neglect the wisdom of "smart stock investors", and we will benefit a lot if we have to read this classic again and again.

Finally, let's conclude this article with Graham's "Golden sentence":The changes in the investment environment are as unpredictable as earthquakes, but sound investment principles will produce sound investment results, which is probably still the same fact, and they will continue to develop in this way. our theory must be based on this assumption."

Edit / lydia