Learn to invest with Buffett

Chapter 69

Chapter 11 Section 4 Concentrated Investing Tips: Make Big Bets When the Probability of Winning is Highest
Concentrated investment requires us to concentrate our capital and invest in a few outstanding stocks.The most critical link in the application is to estimate the probability of winning and the proportion of investment in decision-making concentration. The secret is to place a large bet when the probability of winning is the highest.

--Warren Buffett
In fact, Buffett's so-called probability of winning is actually the accurate probability of evaluating the value of the invested company, and the accuracy of valuation depends on the accurate probability of predicting the company's long-term sustainable competitive advantage in the future.

Estimating the probability of success is very different from the probability calculations we learn about in mathematics.The traditional probability calculation is based on a large amount of statistical data, and the probability calculation is performed according to the frequency of events in a large number of repeated experiments.However, the companies we invest in will always face a different competitive environment and competitors than in the past. The competitive environment, competitors and competitors’ means of competition, and even the companies we invest in are constantly changing, and everything is uncertain. Yes, everything is also non-repeatable.Therefore, we can't calculate the frequency distribution of enterprise's competitive success at all, and we can't estimate the probability of success at all.

But in order to ensure a profitable investment, we must estimate the probability of success.A somewhat similar example is soccer lottery betting.Every time Manchester United faces opponents may be different teams, even if it is the same team, its players and coaches may have undergone many changes, Manchester United's own players and their status have also undergone many changes, and at the same time the players of both sides played the same day. The state will never be exactly the same as in the past, and the cooperation between the players will also be very different from the past.So, will Manchester United lose or win today?No matter how huge a historical database we have, we can never find exactly the same as today's game, completely repeatable historical game data for probability estimation.From this, the only thing we can do is to make subjective probability estimates.Although there is no fixed model for subjective evaluation of the probability of winning, we can learn from the successful experience of Warren Buffett, who used the method of playing bridge to estimate the probability of success.

Buffett plays bridge about 12 hours a week.He often said: "If there are three people in a prison room who can play bridge, I don't mind going to jail forever." His card friend Holland commented that Buffett's card skills are very good, "If Buffett has enough time to play bridge Bridge, he will become one of the best bridge players in the United States." In fact, there are many similarities between the strategy of playing bridge and stock investment.Buffett believes: "The method of playing cards is very similar to the investment strategy, because you need to collect as much information as possible, and then, as the situation develops, on the basis of the original information, you will continue to add new information. No matter what, Just do it as long as you think you have a chance of success based on the information you have at the time. But you should always adjust the way you behave or the way you do things as you gain new information.”

Perhaps between the great bridge players and the great securities analysts, they all have very keen intuition and judgment ability, and they are all calculating the probability of winning.They are all decisions made to themselves based on intangible, elusive factors.When Buffett talked about bridge, he said: "This is the best way to exercise your brain. Because every 10 minutes, you have to re-examine the situation... Making decisions in the stock market is not based on the situation in the market, but based on what you think is rational. In terms of things ... bridge is like weighing the probabilities of winning or losing. You're doing that calculation all the time."

Investment motto:

Although, not every investor can accurately calculate their own probability, and it does not mean that every investor strives to become a bridge master. Although Buffett uses bridge to calculate the probability of success is not suitable for everyone, but We can learn from his thinking mode, that is, to keep an eye on the overall situation of the stock market at all times.Judge what is a rational thing to do, and then weigh the ratio of wins to wins.

(End of this chapter)