Learn to invest with Buffett

Chapter 13

Chapter 2 Section 4 Reverse Investment: The Key to Profitable Investment
When I saw the very good arbitrage results in 1988, you might think that we should continue to work hard to get better returns, but in fact our attitude was to continue to wait and see.

However, the reason why we decided to significantly increase our investment in long-term options is that the current cash level has dropped. If you often read our annual report, then our decision is not based on short-term stock market performance. We pay more attention to We have not and will not make any commentary on short-term stock markets, interest rates or business activity regarding the long-term economic outlook for individual businesses.

--Warren Buffett
Buffett believes that doing the opposite, that is, the reverse investment strategy, is the key for investors to avoid market risks and ensure investment profits.

The so-called reverse investment strategy is to invest when most people do not invest; to sell when most people are eager to invest.The concept of the reverse strategy is very simple, as long as it can achieve "what others give up, I take, and what others give up, I give".However, in order to practice the reverse strategy, one must overcome the weakness of human nature, be able to not conform to the crowd, be able to make independent judgments, and endure loneliness in order to win.Most investors only start investing when their relatives and friends around them agree. But stock speculators are just the opposite, unless they know that most of their relatives and friends are worried.Contrarians believe that when the public view of the future converges, it will be wrong most of the time and the forces of reversal will be strong.

Why Are Contrarian Investing Strategies So Effective?The reason is simple, if most people in the market are optimistic that the price will continue to rise, the people and funds entering the market at this time have already bought in large quantities because of unanimous optimism, so the price usually exceeds the scene due to a large number of overbought.And because the people and funds that should enter the market are already in the market, there are very few funds outside the market that can drive up the price, and everyone in the market is ready to wait for an opportunity to sell, resulting in a potential supply greater than demand in the entire securities market. Therefore, as long as there are any unfavorable factors, the price will drop rapidly.Conversely, if most people in the market think that the price will
If it continues to fall, those who should sell at this time have already sold a lot because they are unanimously pessimistic, so the price is usually oversold due to a large number of overselling.And because the people who should sell are no longer in the market, there are very few floating chips in the market that want to sell, so there is very little selling pressure, and everyone outside the market is ready to buy on dips, causing the entire stock market to fall. The potential demand in the market is greater than the supply, so as long as there are any favorable factors, the price will rise rapidly.

So how should investors measure the judgmental thinking of most people?Generally speaking, if the stock market is in a high-speed rising stage, almost everyone's stock account is full of profits at this time, and most stockholders are elated and forget about it.At this time, the media and stock commentators are even more excited, exaggerating the development trend of the bull market, and depicting new highs one after another for shareholders.The funds in the outfield couldn't withstand the temptation and actively joined the army of stock speculation, and there was a tendency for the whole people to speculate in stocks.At this time, we can judge the state of thinking of most people.If you use a reverse investment strategy, at this time, you must achieve "everyone is drunk and I am alone, and everyone is firing me to leave".If the stock market is in a high-speed decline, at this time, almost everyone’s stock account was still full of profits yesterday, but it disappeared in a flash, and they were seriously locked up. Most stockholders were depressed and hopeless.At this time, the media and stock commentators are even more pessimistic, exaggerating the terrible development trend of the short market, and depicting new lows one after another for stock investors.The number of bicycles at the entrance of the securities business department has also decreased significantly.The funds entering the market and the funds for profit have been withdrawn one after another, and there is a tendency for the whole people to hold short positions.

Investment motto:

Reverse operations are not simply mechanical contrarian actions, and opposition for the sake of opposition is more risky than blindly following the trend.The probability of the stock market judging whether the company's stock price is correct or not is almost the same, so the only situation in which investors can operate in the opposite direction with the market public should be: the stock market's psychological reaction to events seems to have reached the extreme of madness; Everyone's analysis is wrong.In particular, it should be noted that when there is insufficient evidence to support one's reverse operation point of view, one must not oppose the market.

(End of this chapter)