Learn to invest with Buffett

Chapter 76

Chapter 13 Section 2 Understand your risk tolerance
We also face another challenge: in a finite world, anything with high growth will eventually destroy itself. If the base of growth is relatively small, this law will occasionally be temporarily broken, but when the base expands to a certain extent , the good show will end, Gao Chang will be bound by himself one day.

--Warren Buffett
As long as you enter the stock market, whether you are an old investor or a new investor, a large investor or a retail investor, although there are many ways to avoid the risk of stock investment, due to the unpredictability of stock prices, local risks will inevitably occur.Therefore, in stock investment, investors should adjust their investment strategies and investment portfolios at any time according to their own risk tolerance to avoid unnecessary risk blows.Buffett often said that as a general investor, before you invest, you must figure out your risk tolerance in order to operate rationally.

The risk-bearing ability of stockholders varies with different conditions, including age, experience, education level, occupational characteristics, economic income, psychological quality, social relations and many other factors.Among them, the most closely related to stock investment can be summarized into four aspects: investment motivation, financial strength, stock investment knowledge and experience, and psychological quality.These four factors determine the tolerance of investors to investment risks.

According to the above four conditions, the risk tolerance of stockholders can be divided into three levels, namely low, medium and high.Among them, investors with low risk tolerance have the following characteristics:
1. Participate in stock investment with a speculative impulse.Most of these stockholders have the desire to enter the market under the infection of the effect of making a fortune in stocks. They hear all kinds of rumors and stories about getting rich in the stock market from their relatives and friends, and get encouragement and stimulation from their demonstration effect, blindly thinking that others can do it. I will definitely be able to do what I have achieved, and I will not lose money if others can make money. Without risk awareness, I am ambitious to invest funds in the stock market.Because these investors are in a hurry to enter the market, they often choose the time when the stock price is at a high level.

2. Apart from daily work, I have neither other sources of income nor ways to make money, and I have an urgent need to get rich, so I regard stock investment as a shortcut to enter the ranks of the propertied class. Investing to obtain high returns has high expectations.These stockholders are generally working-class employees, employees of ordinary enterprises and institutions, teachers of primary and secondary schools, government officials, retired employees, etc. who rely on wage income to maintain their lives.

3. The amount entered into the market is much higher than their regular income. The difference between the two is several times or even more than 10 times. The proportion of their funds in their life savings is too high, exceeding 50%. Even debt stocks.

4. The level of education is low, and they have little understanding of stock-related knowledge and hype techniques. All aspects of information are blocked. The sources of news are limited to the stock market, investors or regular publications. They have not participated in stock investment for a long time and lack practical experience. The relationship is simple, and there are no people who are familiar with economics, finance and business management to provide valuable investment advice.

5. Introverted, cautious in dealing with people, usually stingy, and attaches great importance to money; not psychologically prepared for the risks of stock investment, and panics when the market fluctuates slightly, afraid of falling when buying, and afraid of rising when selling, Once the investment is locked up and the capital is lost, the psychological burden will be extremely heavy, which will have a great impact on daily life.

Investors with strong risk tolerance generally have the following characteristics:
1. Investing in stocks is mainly attracted by the generous dividends of stocks, and attaches great importance to long-term investment benefits.Don't rush for success in investment, and don't care much about immediate interests.

2. Have relatively stable and generous economic income, many ways to make money, have certain business experience and awareness, and have relatively high extra income.These stockholders are generally the property class, such as self-employed businessmen, employees of foreign-funded enterprises or senior employees of joint-stock companies, actors, middlemen, writers, inventors, and relatives of overseas Chinese.

3. The amount of stock investment is not much different from the regular income. The amount of stock investment only accounts for a part of one's own savings funds, usually about 1/3. There is a stable source of funds to make up for investment losses.

4. Have relatively rich theoretical and practical knowledge of stock investment, have practical experience in stock investment, and have relatively extensive social relations.Its sources of information are not limited to the stock market or among stockholders, but relatives and friends who are experts in economics, finance or business management can get more valuable investment advice.

5. Cheerful, open-minded, regardless of temporary gains and losses, optimistic mood.Once you suffer a partial loss in stock investment, you can "afford it and let it go" to regroup and fight again.

Investors with medium risk tolerance are characterized by being between the above two.

In the process of stock investment, stockholders can compare and analyze which situation they belong to based on the characteristics listed above, and take corresponding investment strategies according to their own risk capabilities.But in reality, investors with weak financial strength and poor risk tolerance are often the most impulsive in investment, most looking forward to be able to fight big with a small amount, and have the most serious gambling psychology.However, some property-owning classes cherish their hard-won wealth and are more psychologically prepared before entering the market, and their investment behavior is relatively conservative and rational.

Before investing funds in the stock market, investors should first determine their own risk tolerance. The method is to summarize the above-mentioned situations into several multiple-choice questions, and then check the number according to their own situation and answer with affirmative or negative.

1. The purpose of investing in stocks is not speculation.

2. Investing in stocks is based on dividend income.

3. Hope to get rich price difference income in stock trading, but don't covet such income.

4. Investment income from stocks is not an important source of income.

5. More interested in long-term investments.

6. Have a stable source of income.

7. Have a stable residual income.

8. The remaining income can meet the minimum margin requirements for entering the market.

9. Ability to bear and make up for losses in stock investment.

10. Familiar with stock investment knowledge.

11. There are fixed and effective sources of information.

12. Have friends who are engaged in stock investment.

13. Participated in stock trading.

14. Belongs to those who make quick decisions, not those who worry about gains and losses.

15. Be energetic.

16. Mental health, not vanity but pragmatism, can maintain optimism and confidence in adversity.

Next, the test results are summarized. When the positive and negative answers each account for 50%, the risk tolerance is moderate; if the positive answer is more than the negative answer, it indicates that the risk tolerance is strong; If the answer is affirmative, it means that the investor's ability to bear risks is relatively weak.

Investment motto:

Those with strong risk tolerance are more suitable for stock investment.If you are a person with poor risk tolerance, you should try to restrain your investment impulse. Generally, you should first familiarize yourself with the basic situation of the stock market and master some basic investment knowledge and skills.If you must enter the market to speculate in stocks, you can temporarily invest a small amount of money to avoid the unbearable blow to yourself from the risk of stock investment and affect your work and life.

(End of this chapter)