Read the first book to understand investment and financial management

Chapter 6 Classic Principles and Common Sense You Need to Understand in Investment and Financial Management (1)
Do you want to be "two" or "eight"

The 19th Law (also known as Pareto's Law) was invented by Pareto, an Italian economist at the end of the 20th century and the beginning of the 20th century.He believes that in any group of things, the most important only accounts for a small part of it, about 80%, and the remaining about [-]%, although it is the majority, is secondary, so it is also called the [-]th law.

二八定律得到了广泛的认证，一个企业80%的利润来自20%的项目；20%的人掌握了世界上80%的财富；20%的人身上集中了人类80%的智慧……在理财投资领域这个定律也有其价值，在股市上就有这样的有趣现象。

80% of investors in the stock market only think about how to make money, and only 20% of investors think about contingency strategies when losing money.But the result is that only those 20% of investors can make long-term profits, while 80% of investors often lose money.

20% of people who make money have 80% of the correct and valuable information in the market, while 80% of people who lose money do not collect information carefully for various reasons, but only grasp 20% of the information through stock reviews or TV.

When 80% of the people are optimistic about the market outlook, the stock market is close to the short-term head; when 80% of the people are bearish about the market outlook, the stock market is close to the short-term bottom.Only 20% of people can shovel the bottom and escape the top, and 80% of people buy and sell when the stock price is halfway up the mountain.

80% of brokerage commissions come from 20% of short-term customer transactions, while 80% of stockholders' income comes from 20% of the number of transactions.Therefore, unless you have proficient short-term investment skills, don't rush to participate in short-term trading.

The large-cap index stocks, which only account for 20% of the market, play an 80% role in the rise and fall of the index. When studying and judging the trend of the market, we must pay close attention to the performance of these index stocks.

Only 20% of individual stocks can become dark horses in a round of quotations, and 80% of individual stocks will fluctuate with the market. 80% of investors will miss the dark horse, only 20% of the investors have a chance with the dark horse, and there are very few who can really ride the dark horse.

有80％投资利润来自于20％的投资个股，其余20％投资利润来自于80％的投资个股。投资收益有80％来自于交易数的20％，其余交易数的80%只能带来20％的利润。所以，投资者需要用80％的资金和精力关注于其中最关键的20％的投资个股和20％的交易。

In the stock market, 20% of the institutions and large investors own 80% of the mainstream funds, and 80% of the retail investors own 20% of the funds. Therefore, investors can only make stable profits if they grasp the trend of mainstream funds.

Successful investors spend 80% of their time studying and researching, and 20% of their time on actual operations; unsuccessful investors spend 80% of their time on actual trading, and 20% of their time regretting.

股价在80％的时间内是处于量变状态的，仅在20％的时间内处于质变状态。成功的投资者用20％的时间参与股价质变的过程，用80％的时间休息；失败的投资者用80％的时间参与股价量变的过程，用20％的时间休息。

It can be seen from this that there are very few people who can truly master investment and financial management skills and make themselves successful in financial investment where profits and risks coexist. Are you willing to be the "second" of success, or the "eight" who accounts for the majority? Woolen cloth?

There are two kinds of people. The first type accounts for 80% and owns 20% of the wealth; the second type only accounts for 20% but controls 80% of the wealth.why?It turns out that the first type of people only stares at the boss’s pocket every day, always hoping that the boss can give them a little more money, and rents their whole life to the second type of 20% of people; In addition to doing the work at hand, they will also use the other eye to pay attention to the changing world. They know what to do when and what to do, so 80% of the first type of people are working for them.Everyone does not want to be a person who achieves nothing, but hopes that he can be a part of the enviable 20%.In modern society, if you want to find your own first pot of gold, you must not only know the skills, but also be able to look for opportunities.

It is not impossible to become a member of the "two", as long as through your own efforts, you are good at discovering your own advantages, dare to fight hard, and good at finding opportunities in a highly competitive society. Opportunities must be seized, and don't give up opportunities that can bring you wealth just because of temporary difficulties.

The [-]/[-] law inspires us: in investment and financial management, the more investment is not more effective, the investment cost should be considered, the cost should be reduced, and the maximum return can be obtained with the minimum investment. This is the best policy for investment and financial management.

The time value principle of money management

For everyone who wants to learn about investment or is interested in investment, the first concept they need to come into contact with is the principle of time value of money. The meaning of this principle is to tell people that 1 yuan today is not equal to tomorrow 1 yuan.For example, if the bank's deposit interest rate is 10%, if you deposit 1 yuan in the bank today, it will be 1 yuan in one year.It can be seen that after one year, this 110 yuan has increased in value by 1 yuan, which means that 1 yuan today is equivalent to 010 yuan in the next year.

The meaning of the time value of capital
The first thing to explain is that the time value of funds is generated during the turnover of funds, and usually, the time value of funds is equivalent to the social average profit rate under the condition of no risk and no inflation.In fact, investment activities are always more or less risky, and inflation is an objective economic phenomenon in a market economy.Therefore, interest rates not only include time value, but also value-at-risk and inflation.Only when buying government bonds such as treasury bills is there little risk, where time value can be represented by the government bond rate if inflation is low.The specific available formulas are expressed as follows:
Time Value = Government Bond Rate - Inflation Rate

Factors that affect the time value of money include:

(1) The use time of funds.Under the condition that the fund appreciation rate per unit time is constant, the longer the fund is used, the greater the time value of the fund; the shorter the use time, the smaller the time value of the fund.

(2) The size of the amount of funds.When other conditions remain unchanged, the larger the amount of funds, the greater the time value of funds; on the contrary, the smaller the time value of funds.

(3) Characteristics of capital investment and recovery.In the case of a certain total investment, the more funds invested in the early stage, the greater the negative benefits of funds; on the contrary, the more funds invested in the later stage, the smaller the negative benefits of funds.In the case of a certain amount of capital recovery, the closer to the present time, the more funds are recovered, and the time value of funds is greater; on the contrary, the farther the time is from now, the more funds are recovered, and the time value of funds is greater. Small.

(4) The speed of capital turnover.The faster the turnover of funds, the greater the time value of the same amount of funds within a certain period of time; conversely, the smaller the time value of funds.

[-]. The meaning of future value and present value
Future value, also known as future value, refers to the value of a certain amount of cash at a certain point in the future, commonly known as the sum of principal and interest.For example, a sum of 1 yuan is deposited in the bank, and the annual interest rate is 10% compound interest. After 3 years, the sum of the principal and interest is withdrawn at one time and the total is 13310 yuan. The sum of the principal and interest after 3 years is 13310 yuan.

Present value, also known as principal, refers to the current value of a certain amount of cash at a certain point in the future.The above-mentioned 3 yuan after 13310 years is converted into the current value of 1 yuan, and this 1 yuan is the present value.

We express the relationship between the present value (PV) and the future value (FV) with the interest rate K and the number of periods t as:

FV=PV(1+K)t
For example, what is the equivalent of 1 yuan (FV) in 4 years (t) when the inflation rate is 10% (K) today?The answer is about 148 yuan, which means that 10 yuan 148 years later is equivalent to 1 yuan today.

The time value of funds exists objectively. One of the basic principles of investment management is to make full use of the time value of funds and maximize its time value. This requires accelerating capital turnover, early recovery of funds, and continuous high-profit investment activities; and any backlog of funds or idle funds is not used, which is to lose the time value of funds in vain.

The Golden Section of Investment and Financial Management
The golden section is an ancient mathematical method.The founder of the golden section was Pythagoras of ancient Greece. Under the very limited scientific conditions at that time, he boldly asserted: if the ratio of a certain part of a line segment to another part is exactly equal to the ratio of the other part to the entire line segment, then 0618 , then, this ratio will give people a sense of beauty.Later, this magical proportional relationship was hailed as the "golden section law" by the famous ancient Greek philosopher and esthetician Plato.

The magical and magical power of the golden section line has not yet been clearly determined in the mathematical community, but it has often played an unexpected role in practice.Such as the golden section line in photography, the golden section line in stocks... Similarly, the golden section line also has a magical effect in the investment and financial planning of individuals or families. Using the golden section line can also safely maintain and increase the value of assets.

Sun Min is the finance director of a branch of a catering group in Guangzhou. His wife also works in a finance company. His child is in elementary school and he has two elderly people to support.Sun Min's total monthly household income is about 110 yuan, which can only be regarded as a well-to-do family in Guangzhou, and the daily savings are not much.However, over the years, Sun Minjia's assets have been growing steadily, and the small life is living happily.

It turns out that Sun Min, who is a professional, is very concerned about his family's financial planning, and he is very cautious about every investment in the family.In his daily work, he also creatively summed up the "golden section line" family financial management method, that is, no matter how assets and liabilities change, the ratio of investment to net assets (investment assets/net assets) and the repayment ratio (net assets/total assets) assets) is always approximately equal to 0618.This is what he calls the golden section of financial management.Over the years, Sun Min has been constantly adjusting the ratio of investment and debt under the guidance of this golden section of financial management. Therefore, the family's financial situation is quite stable.

In 28 years, Sun Min's parents passed away one after another, and Sun Min's monthly burden was reduced by more than 25 yuan, and he was also given an inheritance of more than 7 yuan. One year later, with the rapid increase of Sun Min's deposits in the bank, the golden ratio point may be out of balance, so Sun Min decided to make some investments.

Generally speaking, the value of the personal debt-to-income ratio should be below 04. If it is higher than this value, there will be certain difficulties in borrowing and financing.To maintain financial liquidity, it is most appropriate to maintain the debt-to-income ratio at 036.If a person's ratio is greater than 1, it means he is insolvent.Theoretically, the person is broke.

[-]. The amount of investment should be capped

At that time, Sun Min’s family’s total assets included bank deposits, a 109-square-meter three-bedroom apartment, money market funds and a small amount of stocks, with a total value of 1055 million yuan, of which 28 yuan was not paid off for real estate loans, and net assets (total Assets minus liabilities) is 775 million yuan, and investment assets (other financial assets other than savings) are 39 yuan. The ratio of Sun Min’s investment to net assets is 39÷775=0503, which is far lower than the golden ratio 0618. It means that the effective assets of the family may not be properly invested, and the goal of "money making money" has not been achieved.Therefore, it is necessary to increase investment.

To make funds grow the fastest, there is no doubt that the first requirement is to invest more funds.But because of the possibility of losses, Sun Min set an upper limit for the amount of funds invested.While increasing the amount of investment, the solvency of the family should also be considered, and reasonable financial investment should be made on the basis of a reasonable solvency ratio.This is why Sun Min's family finances have always been stable.When most people make financial investments, they often ignore their own solvency.

[-]. Borrowing can optimize the financial structure

In today's inflated economic risk, if the solvency is too low, it is easy to fall into the crisis of bankruptcy.The solvency ratio measures the level of financial solvency and is a reference indicator for judging the possibility of family bankruptcy.Sun Min's total family assets are 1055 million yuan, of which net assets are 775 million yuan, and nearly 28 yuan of his real estate loans have not been repaid.According to the calculation formula of the repayment ratio, Sun Min's repayment ratio is 775÷1055≈0735.

Judging from Sun Min's years of financial experience, the repayment ratio that varies between 0 and 1 is generally suitable for the golden ratio 0618.If the repayment ratio is too low, it means that life is mainly dependent on debt maintenance. Such a family financial situation may fall into insolvency regardless of debt maturity or economic downturn.And if the repayment ratio is very high, close to 1, it means that your credit limit is not fully utilized, and you need to further optimize your financial structure through borrowing.

0735 is a relatively ideal number. Even in the era of economic downturn, such assets have sufficient debt repayment ability, but 0735 is much higher than the golden ratio. It can be seen that Sun Min’s assets have not been used to the maximum and reasonable, and the credit limit is also limited. Underused.Of course, the repayment ratio of 0735 has increased Sun Min's confidence in investing in residential housing.

Sun Min began to look for investment housing that fit his own finances. On the one hand, he wanted to make reasonable use of effective assets, and on the other hand, he wanted to ensure that the repayment ratio of the family's finances remained at the golden ratio.

It can be seen from Sun Min's case that the golden section line can be used as a measure of investment and financial management.

The golden section law is a yardstick for family investment and financial management. Skillfully using the golden section law for investment and financial planning can produce subtle effects, with the smallest investment to obtain the greatest return, so that the value of assets can be steadily maintained and increased.

The principle of leverage in investment and financial management

Lever is one of the terms in physics. Using a lever and a fulcrum, a very heavy object can be lifted with a small force.The ancient Greek scientist Archimedes had such a famous saying that has been passed down through the ages: "Give me a fulcrum, and I can pry up the earth!" This is the most wonderful description of the principle of leverage.The principle of leverage is also fully applied in investment, mainly referring to the use of small funds to obtain large returns.

To some extent, the use of the principle of leverage can increase your purchasing power and enable you to control your own potential assets.Its mechanism is much more common than you think, for example, when you take out a mortgage, you are actually using leverage to pay for something that you cannot pay with cash, and when you pay off the mortgage , you can make profits in asset trading.

You can also apply the principle of leverage to margin trading in stock investments.In this case, you can buy shares with your own money plus money borrowed from a stockbroker.If the stock goes up, you can sell it for a profit, then return the borrowed money plus the interest on the loan, and the rest of the money is yours.

Because you're investing very little of your own money, you can potentially earn more in return on your investment using leverage than if you didn't.To give an example, if you put out $50 yourself, borrow $50 to make an investment of $100, and then sell it for $150, then your profit is $50 and you have made $50. In other words, Your ROI is 100%.If you invested all of your own money, you would have realized a profit of only $1, or a 50% return, on a $50 investment.

Although using the principle of leverage in investing will increase your returns, it will also bring you huge risks.

If you default on the loan, even if you have been making regular payments in the past, the lender will repossess your home for this arrears.Because leverage requires you to pledge a certain value of items to control the risk of the amount of money invested by your financial partner.If the total amount of assets you sell is not enough to repay the loan, then you should still pay the lender the remainder.

If you buy stocks on margin, once your stock falls below a predetermined percentage of the corresponding purchase price, you must post a certain amount of margin so that your stockbroker's money is not at risk among.Besides, if you cut the meat, you still have to pay the full security deposit.

The greater the volatility of using leveraged investments, the higher the risk of huge losses.In fact, you can lose more money than you invested, which would not happen without using leveraged investing.

As the saying goes, everything has advantages and disadvantages. Sugar cane is not as sweet as both ends, and leverage is no exception.Before we use leverage, we have a more important core to grasp: that is the probability of success and failure.If the probability of making money is relatively high, you can use a lot of leverage, because it makes money quickly.If the probability of failure is relatively high, it cannot be done at all, and if it is done, it will fail, and the loss will be miserable.

(End of this chapter)