Learn to invest with Buffett

Chapter 83

Chapter 14 Section 3 Mental Calculation of Stock Market Investment
You can't get rich by relying on the wind vane of the market.In fact, you have to remember, don't try to figure out what the market is doing, it's impossible, you just figure out the industry you want to understand, and pay attention to it.

--Warren Buffett
Buffett believes that complex calculations are not as good as simple calculations, and simple calculations are not as good as calculations.Mental calculation refers to the fact that investors change their views on money as the environment changes.Investors have a psychological tendency to put money in different "accounts", which determines how investors think about using them.

As a simple example, suppose you and your wife have just come home from a trip.You pull out your wallet to pay your babysitter, but the $100 you put in your wallet is missing.So when you're driving home from your babysitter, you stop at an ATM, hand over $100 to your babysitter, and when you get home you find that $100 in your pocket. Jacket pocket.

If you're like most, your reaction to the 100 should be one of jubilation.The 100 yuan in your jacket pocket is "for nothing".Although the first 1 yuan and the second 100 yuan are all from your current account, they are all your money, but the 2 yuan you hold in your hand is something you didn't expect, and you feel that you can spend it at will drop it.

To demonstrate this concept, Richard Saray once again offers an interesting academic experiment.In this study, he experimented with two groups of people.People in group 1 were given 30 yuan in cash and had two choices: one, they could pocket the cash and walk away; Lose, 10 yuan is deducted from their money.Most people choose to gamble because they figure that even if they lose, they will still get $10 for nothing.

Group 2 were given different options: one was to try a coin toss, and if they won, they would get 39 yuan, and if they lost, they would get 20 yuan; the other was to get 30 yuan without tossing a coin .Half of the people choose to take the money directly.In fact, the two groups won the same amount of money.The chances are also exactly equal, but the two groups see the situation differently.

The implications of this experiment are clear: how we make investment decisions, and how we choose to manage them, is closely related to how we think about money.Mental operations, for example, further explain why people are reluctant to sell poorly performing stocks.In their minds, losses only become real losses when the stock is sold.More broadly, the theory of mental operations highlights a shortcoming of efficient market theory; it shows that the value of markets is determined not only by the amount of information but also by how people process it. determined by the method.

In fact, the stock market goes up and down every day, and individual stocks fluctuate up and down every day. Thinking and questioning why the market and individual stocks rise and fall is an indispensable homework for every diligent investor.

In fact, no matter how hard we work, every one of us sometimes can't understand the stock market, not only sometimes we can't understand the performance of individual stocks, but sometimes we can't even understand the market conditions. Sophisticated institutional investors are no exception.What surprised stock commentators was that institutional investors missed a wave of market or did not escape the bad luck of a sharp drop.

The "mental calculation" of stock market analysis that really determines the outcome of a stock, or the "selection calculation" to choose the timing, choose individual stocks, choose the price, choose the quantity, choose to buy and sell, choose to invest or speculate, and so on.These six choices are coherent and interrelated, any wrong choice will bring loss or failure.

Why in the stock market, complex mental calculations are not as good as simple mental calculations?
The more complex mental calculations an investor performs, the easier it is to deviate from the average "mental calculation level" of the market, while a lazy investor or an investor with a lower education level, their simple mental calculations are closer to the market average. level of mental operations.

1. In view of the fact that complex calculations are not as good as simple calculations, we investors should "step out of questioning", that is, try to ask as little as possible and confront as little as possible.To be exact, as a fundamental analysis investor, you should "only" focus on the fundamentals like Buffett, and don't ask about K-line fluctuations; as a technical investor, you should not ask about the company's performance and other fundamentals .

In the real world, a person does not succeed because of being smart. In fact, the key to a person's success is action. A person who is not very smart is often able to buy time because he has less consideration for face, consequences and other factors. and seize the opportunity.According to statistics: smart people are often less successful than less smart people under the same conditions; smart people tend to have poorer health and shorter lifespan than less smart people.

2. Simple calculations are worse than calculations.

After further in-depth research on the investment performance of investors, we found a problem worth thinking about: investors who are really profitable do not perform any mental calculations.

Investment motto:

From a global perspective, the profit or loss of the investing public is actually a matter of probability, and their investment performance is inversely proportional to their mental calculations.In essence, in the process of investment, as the market changes, investors' psychological expectations will also change, so complex calculations are not as good as simple calculations, and simple calculations are not as good as counting.

(End of this chapter)