Glamor Economics

Chapter 172

Chapter 22 Manage Your Wealth Like a Rich Man—Financial Management and Investing
Section 1 Rationality is More Important than Wisdom——Rational Investment

Lemmings are common and cute little animals that live in the Arctic all year round. They are oval in shape and have short limbs.Lemmings have a strong reproductive ability and can reproduce from spring to autumn. The gestation period is 20-22 days, and they can produce 9 children in one litter, with multiple births a year.At this rate, each female mouse can give birth to thousands of offspring.

When the number of lemmings expands rapidly and reaches a certain density, for example, there are hundreds of lemmings per hectare, a strange phenomenon occurs: at this time, almost all lemmings become restless, and they run around. , Noisy, and stop eating, it seems that a catastrophe is imminent, the end of the world is coming.

At first, they seemed to have no direction or purpose, and they ran around, just like the rush before departure.But later, I don't know who gave the order or who took the lead, but they suddenly set off in the same direction.They often rest and eat during the day, and advance in the dark at night. Along the way, lemmings will continue to join, and the team will become bigger and bigger, often reaching millions. They go over mountains and rivers, wading in water, and march bravely along a straight route. , Never detour, let alone stop, ran straight to the sea, still without fear, jumped down one after another until they were swallowed by the surging waves.

Buffett likens investors' blindly following the herd to a swarm of lemmings committing suicide.One of his words pointed out the key to investment: "You don't need to be a rocket expert. Investing is not an intellectual game. A person with an IQ of 160 may not be able to beat a person with an IQ of 130. Rationality is the most important factor in investment."

The famous American economist Samuelson is a professor at the Massachusetts Institute of Technology.Once, he made a coin toss bet with a colleague. If the side he wanted came out, he won $1000. If it wasn't the side he wanted, he had to pay the colleague $2000.

From what it sounds like, the bet seems to favor Samuelson's colleagues.If a colleague invests $1000, there is half the possibility of winning $2000, but there is also half the possibility of losing $1000, but the real expected return is $500, which is 50%×2000+50%×( -1000) = 500.

However, the colleague declined: "I wouldn't bet with you because I think a loss of $1000 is more important to me than a gain of $2000. But if it is tossed 100 times, I agree."

For Samuelson's colleagues, betting on the flip of a coin is undoubtedly a risky investment with great uncertainty, which is tantamount to gambling.Any rational investor would reject it.Someone has done a standard coin toss experiment, and the results show that the probability of getting heads for 10, 100, and 1000 tosses is about 50%, but the probability of getting heads for 1000 tosses is closer to 10% than tossed 50 times .By repeating this kind of independent and unrelated experiments many times, the colleague's risk will be avoided, and he will be able to benefit stably.When we invest, we should also be like this colleague of Samuelson, we must be steady and invest rationally, instead of taking risks with the mentality of a gambler.

So, what are the conditions for a rational investment?

First, household and personal financial budgets should be reviewed.If you are waiting for the money to be used in the near future, it is best not to invest in stocks, even if it is considered the best stock, it is not suitable to buy.Even if the stock is good in the long run, it is hard to say whether the stock price will rise or fall in two or three years.You can only invest when you are not waiting for the money to be used, or when your life will not be affected even if you lose the capital.Investors should have sufficient bank deposits to maintain a year and a half of life and temporary emergencies.In addition to buying government bonds without risk, other investments have risks.

Second, you should not invest while in debt.Debt should be paid off first, or reinvested when your ability to repay the loan is more than sufficient.Because the return on investment is not 100% guaranteed, investors should not borrow money to invest.

Third, there should be appropriate insurance before investing, such as life insurance, medical insurance, housing insurance, etc.

Fourth, investment should start with a small amount and proceed step by step.Investing too much is one of the reasons why most investors fail.Not putting all eggs in one basket, diversifying investment and diversifying investment is also one of the important means to avoid risks.

If you don’t have a certain psychological quality and discernment ability, you may fall into a trap at any time. You have to constantly improve yourself in order to cope with sudden changes, avoid risks and embark on a smooth road.

[links to related words]

Investment risk The loss of income or loss of principal that may occur during the investment process.Mainly from investment, technology, finance, interest, politics, exchange rate and many other factors.Investment risk can be divided into two categories: systematic and non-systematic.

(End of this chapter)