Short Note 9-5

This would be my last update of this cycle. It does not mean smooth sailing from now on but the worst is probably behind us.

Let me repeat the BASICS of investment: buy a broad-based index fund, such as SP500. Also, check the management fees of the fund. If the cost is high, it would eat into the return. A benchmark of a low-cost index fund is Vanguard.

The most common mistake of investing is thinking that stock investing is easy. Suppose you think that you have discovered some rules that will outperform the market. Such a ‘rule’ could be valid once, twice, maybe even more. (Mainland Chinese are more likely to suffer this ‘practice proves truth’ Marxism rubbish.) Then you become overconfident and put more and more money to take advantage of this ‘rule’. Eventually, it will come back to haunt you. Someday you would lose big.

You may wonder why. It is the result of both human nature and the nature of the market beast. It is human nature that everyone tends to discover rules in life. For example, you might want to find rules of traffic to your work, or when shopping the supermarket is better. You may even discover unconsciously your study method (overviewed in my earlier writeups). Second, a successful investment strategy has to beat an army of professionals, which is extremely difficult. And you have to be on your toes, knowing that you might need to revise your strategy anytime. My knowledge of macroeconomics is perhaps as good as anyone in the world who is alive. But I know that I must adjust my view constantly. I will consider top-rate economists and investors knowing very well that none of them is perfect but each provides some valuable insight and experiences. I generally discard lower-level comments. If you read my earlier writeups you probably appreciate the above.

It is not impossible. I myself outperform the market and Warren Buffett, by a large margin. The problem is such a strategy is not transferable. Preferably you would develop your own strategy. If a reasonably good strategy is passed to you, there are two practical problems. It has to fit into your expectation and needs, risk tolerance, and temperament. Every person has a different temperament. Further, a good strategy needs to be updated constantly. Remember that the market is changing constantly. If you rely too much on some fixed strategy, it is almost certain that your investment will explode someday.

If you really want to learn stock investment, I will suggest you read a list of 15 or so books. You need to read them carefully, using the true learning methods of Socrates/Plato, and write your notes. For example, from one of them, you should find 3 previous Nobel Prizes were wrongly awarded. One of them is relatively easy to find since it led to a market crash. But you must give your own reasoning. The others are not as obvious. If you cannot find at least some of these problems yourself, then stay with index investing and forget the rest.

A quick explanation of the market. What worried me earlier was possible bubble explosion, over-leveraging, or other hidden problems. When the interest changes so fast, such worries are prudent. Fortunately, it did not happen this time. A few days ago, Liz Young, Head of Investment Strategy at SoFi, warned that it was not all clear yet. True, but such a crisis is relatively unlikely. In the NotesEconomy file in the shared folder, Jeremy Siegel is relatively sanguine. I think this is due to the fact that he viewed the economy from macro-finance. Also, I think that it can be explained by my earlier hypothesis that the American economy is adjusting quicker than in previous cycles. Allianz's El-Erian is more cautious. He is from a bond investor and stock market observer perspective. I agree with him that it is no easy task to reduce inflation to 2%. Whether 2 or 3 % inflation could have a huge impact on market performance. Other risks, such as the China property crisis, Ukraine War, or the European energy crisis are still present but they are hard to factor in. If you wait until all risks are gone, then you probably have already missed good opportunities. September is a tricky month but December and January often are good months.