"Sun Tzu's Art of War" and Value Investing Mindset - Cryptocurrency Exchange Platform

I will explain the reasons and logic behind the philosophy,

Only then can you truly strengthen your faith in value investing.

Every concept I mentioned earlier,

Every point,

I have explained why it is so,

And the logical relationship between them.

Today, I want to take this opportunity,

To summarize all the concepts and the entire logical framework.

For example: Why should we choose value investing? Why prioritize risk first? Why have a margin of safety,

Ability circle? How about Mr. Market? Why invest contrarily? Why be patient? Why understand human nature, and so on.

I will clarify these big ideas,

Concepts,

And the logical relationships between these concepts.

We start from the top, with investing,

The profit model of investing is compound interest,

Like a snowball rolling and accumulating.

First,

The snow layer must be thick,

Use time as a force,

Keep rolling,

After exceeding a certain number of years,

It will generate tremendous wealth growth.

Therefore,

Initial capital,

Annual return rate, and time,

These three factors are all very important.

Why should young people save money? Because initial capital is very important,

It’s the seed money,

Today’s 1000 yuan could be the future’s 1 million,

And 10 million after forty years.

For friends interested in this,

You can check the previous chapter on compound interest,

This is a very important concept.

Also, annual returns need to be sufficient,

But not too high,

Because too high returns bring disproportionate risks,

So, the returns are limited,

Between 10% and 20% is quite good.

If you pursue excessively high returns,

It will bring unnecessary risks,

And you may not even get those returns.

There is also the curse of time,

So, long-term investing is essential,

And sustained.

Holding for 20 years and 40 years is different,

So, the principle is to start early.

A key point of compound interest investing: avoid deep losses.

Once a deep loss occurs,

For example, a 50% drop in one year,

It may take two or three years to recover.

Because a 50% drop,

Requires a 100% increase to bounce back,

If 100 yuan drops 50% to 50 yuan,

It takes a 100% increase to return to 100 yuan,

And in the process, time is lost,

Which damages the most important parameter in the compound interest formula—time.

This is why risk control is the top priority,

Because returns are limited,

If you spend more time,

And if returns exceed a certain range,

Say, over 15% and trying to go higher,

Effort becomes useless,

And your efforts might even harm you! That’s why we use value investing.

Value investing considers risk as the first priority,

It’s not just about looking at the price,

Because price has no foundation,

It’s purely driven by others’ buying and selling causing highs and lows.

If you don’t understand the underlying value of the business,

There will be too much uncertainty and infinite risk.

That’s why we need to control risk,

And risk is the only thing we can control.

Value investors base their decisions on the intrinsic value of a company,

Buying stocks is buying a company.

Following the principle of “risk first,”

Can reduce uncertainty,

Use your ability circle to understand the intrinsic value of the business,

Eliminate the uncertainty in human cognition,

So you won’t pick the wrong stock,

Or choose the wrong industry.

When buying specifically,

The cornerstone of value investing is the margin of safety.

The margin of safety is mainly based on the company’s value,

On the intrinsic value,

The lower the price, the better,

The bigger the discount, the better,

The lower the price, the better.

This is a binary function,

One is intrinsic value,

Which involves valuation that requires your ability circle to fully understand the business.

To gain an ability circle,

You must pay long-term attention,

Not look at everything,

Learn across industries,

That will dilute your focus,

You must be focused.

Prices should be low,

Deal with Mr. Market,

Be patient and wait,

Overcome human weaknesses like fear and anxiety,

Don’t follow the crowd when prices are low.

Contrarian investing allows you to buy cheap,

When everyone is selling,

That’s your chance to buy at a low price.

Don’t panic then,

Don’t listen to the media,

After buying, be patient and hold,

Don’t watch the market every day,

Stay away from the market,

So many human flaws won’t be exposed.

Short-term ups and downs,

Won’t overly influence you,

Patience and staying away from the market are very important during holding.

Holding is a very important process,

It accounts for most of the investment time,

When buying, you need an ability circle,

Based on intrinsic value,

Know how to handle Mr. Market.

Public sentiment is unpredictable,

You need to learn to use it,

And to invest contrarily.

We mentioned earlier,

Price (especially short-term price) is an illusion,

We can use it,

But never trust it,

We won’t follow other investors to bottom fish based on price,

We don’t rely on technical indicators.

Moreover,

The process of stock price falling is a risk release process,

Using risk first,

The lower, the better,

Don’t be fooled by the illusion of price,

Learn to exploit human weaknesses,

And not expose your own human flaws.

Overcome herd mentality and short-term trading weaknesses,

Based on value,

Hold patiently,

Stay away from the market,

Don’t watch the ticker.

Risk is mainly based on probability and odds.

So, we try to do things with high success probability,

Avoid companies we don’t understand or are unfamiliar with,

That falls within our ability circle.

Those with complex operations,

Complex products,

Complex supply chains,

Rapid technological updates,

Frequent consumer changes,

Are uncertainties brought by the companies themselves.

We should avoid such industries as much as possible,

And avoid risks caused by company uncertainties.

In our analysis process,

If the links are too complex,

Each step could go wrong,

From a probability perspective,

The overall success rate of the system is low,

And the risk is high.

Therefore, we try not to study such complex, multi-link things,

Like macroeconomics.

As we mentioned earlier,

Studying macroeconomics is useless,

Because its logical chain has too many links,

Leading to overall failure.

Each link is a high-probability event,

But because there are too many links,

The probability multiplies,

And the overall success becomes a low-probability event.

So, don’t use macroeconomic analysis to judge the profitability of individual companies,

It’s only good for casual conversation,

Not for investment decision-making,

Avoid doing things outside your ability circle,

This is also risk awareness.

Don’t try to predict when stock prices will rise,

Stock price increases are determined by millions of buyers and sellers,

What happens tomorrow, we are not sure ourselves,

So how can we know the behavior of millions of people? That’s why we shouldn’t try to predict,

We need to understand ourselves,

And stick to our principles.

Risk is the cost,

And costs are controllable,

Can be managed by building your ability circle—avoid risky and unfamiliar companies,

And we need to overcome human nature,

And avoid risky operations.

Trading based on stock prices,

Or herd mentality,

Short-term actions,

Are not only inefficient,

But even harmful.

90% of retail investors fall into this trap of greed for overnight riches,

Herd mentality,

And frequent short-term trading.

Once trapped in these human flaws,

It’s very hard to succeed in the market.

In summary,

How much we ultimately earn depends on the natural law,

And the return to value.

We can roughly estimate how much a company is worth,

But how much it will rise, we don’t know,

Because that depends on Mr. Market,

How crazy the market is,

Decided by others,

And we cannot control that.

We can only know the margin of safety,

The value, and the price,

At least we can earn the difference between the purchase price and the margin of safety,

Whether it will return in a month or a year,

We don’t know,

But it won’t be forever.

Therefore,

Investing is a game of cognition and human nature.

We know where the natural law is,

Which is the return to value,

That’s the core philosophy of value investors,

Prices will inevitably return to their intrinsic value.

We must follow the natural law,

Do our best,

Focus on our ability circle,

Research the company well,

That’s what we should do,

Overcome our human nature,

And conquer some of our short-term behaviors,

And human weaknesses.

Then, like farmers,

Listen to fate,

The market will bring the value back,

Don’t try to force growth,

Just go with the flow.

In this process,

We can patiently wait,

Enjoy life,

And do many other things.

Travel,

Read,

Make friends,

Not only earn money,

But also enjoy life,

How wonderful is that?

It’s a shame to waste time staring at the market all day.

Compound interest,

Value investing,

Risk first,

Margin of safety,

Ability circle,

Mr. Market,

Contrarian investing,

Patience,

Conquering human nature, etc.,

I’ve connected these together,

Summarizing that they are all about philosophy,

I haven’t yet discussed technical aspects.

The previous chapters are all about philosophy,

Because establishing a solid philosophical foundation first,

Gives you interest and motivation later.

What I will discuss later are some specific techniques,

Such as analysis and judgment of companies,

Quantitative and qualitative analysis of financial statements,

And other analytical methods combined together.

In learning, two types of people often fall into misconceptions: one is when you tell them these “big truths” (philosophy),

They think it’s too simple,

That there’s no need to explain,

No need to repeat.

So they don’t listen carefully,

Don’t think independently,

Feel it’s empty,

Feel it’s superficial,

But these are the most important,

Yet they feel it’s not real; when you really tell them the specifics,

Like financial statements, how to analyze a company, etc.,

They find it tedious.

Most people are in the middle,

They are half-baked,

Maybe not even half-baked.

I don’t mean to insult anyone,

We’ve all been there,

We’ve all been young,

And made similar mistakes.

I hope everyone can avoid these two traps,

Not only in investing,

But in learning any profession,

And in any industry, be aware of these two points.

Avoid these two misconceptions in cognition,

And you can go far.

Next, we enter the deep water zone,

Discussing company analysis,

Financial statements,

Quantitative and qualitative analysis, and so on.