The "Root" Of The Cycle After "The Most Important Investment"

Yolande

Howard Max is a famous value investor with 50 years of investment experience, but we only know his name after reading the most important thing about investment. Recently, his new book "cycle" has caused a sensation again, and it has been included in several books list. There are also some financial practitioners who feel worse than expected. Actually, this book talks about cycles, but it is not a traditional economic cycle or financial cycle, but a practical guide to behavioral finance and investment psychology.

It is quite surprising that the value investing giant talks about the perception of market psychology in his investment experience. After all, this is the two school. Value investors usually do not pay attention to the timing of investment. In their view, the market price will eventually return to the value center of the investment target. As long as the price of the purchase is not too high, the price fluctuation itself is not worth paying attention to. Value investors have discovered the impact of investors' psychology, emotions and decisions on investment. This is an unusual case in itself. It is also a side example of the importance of behavioral finance to investment.

The logic given by Marx is that "psychology affects behavior, behavior can affect the economy and lead to short-term fluctuations in the economy". It can be understood as what you think and what you will do and what you will get eventually. He believes that many investors' psychology and emotions have led to a cyclical fluctuation in the market. In fact, this view and Kostolany's reputation as "European stock god" in the last century are different. The latter believes that investors' psychological and emotional responses determine at least 90% of market volatility. This principle is very simple. Investment behavior is first of all human behavior, human behavior comes from two aspects: subjective and objective: subjective is the impact of investors' cognition and emotion, and the objective is to have available funds. Moreover, subjective decisions determine investors' actions. It is the buying and selling transactions of funds that constitute price fluctuations and trends.

The root cause of market volatility, or the root of the market cycle, is investor psychology, and emotions and decisions are highly unstable and random. This is the essential characteristic of human nature. People have obsession, so they tend to go to extremes, which is determined by the mode of thinking of the brain, and is the result of human evolution. Few people can avoid cognitive bias, and few can always maintain a calm and stable mood.

The cognitive bias of investors often appears as "selective perception, distorted interpretation". The perception is not comprehensive. It is a universal problem of human beings. Although there are two sides to the development of anything, few people can be impartial. This kind of cognitive bias leads investors to make wrong judgments, and personal emotion as an amplifier will distort biased views and form an obsession. Investors act accordingly.

The corporate profit cycle, economic cycle, financial cycle and so on are actually external manifestations of human psychology from action to action. For example, the economics often say that the base cycle is the enterprise stock cycle. This short-term fluctuation is often related to the inventory change. Because the decision maker is too high or too low to estimate the demand, the increase or decrease of inventory results in the short-term rise or fall of the economic output. All cyclical phenomena are often characterized by extreme conditions, which is caused by the mentality and emotions of the perpetrator, the psychological cycle of investors.

The fundamental value of value investors is that the market cannot be accurately measured for most of the time. Take the author's investment for 47 years as an example, only 3 years' yield is in the reasonable income range of 8%-12%, and more than half of the investment income deviates greatly from the reasonable level. The ups and downs of stock market investment are the real experiences of investors.

Why is the market not a "weighing device" of value? This is because investors' cognition is hard to accurately assess the value of fundamentals, and the wrong cognition of emotion as an amplifier may be far from the real fundamentals. "The market is swinging back and forth between greed and fear", behind which investors are swaying between greed and fear. If we regard the investor's psychological emotion as a continuous spectrum, then greed and fear will occupy one end, and the real emotions and psychology of human beings are only swinging back and forth in this middle, fast, slow, and very few in the middle.

The essence of Chinese culture is the golden mean, but keeping in balance is not consistent with human nature. Investors are most prone to over optimistic forecasts and greedy portfolios, so the bull market is developing very fast. This is also the mentality of most investors. So for investors, the demand is very high, where is the IQ requirement cycle? To answer these two questions correctly, your response to the changeable market is self-evident. (editor Dong Mingjie)