Is there anything more painful in financial investing than making the same mistakes over and over again?

The answer is: Yes!

That is, making mistakes that look completely different over and over again!

Countless people in the bottom of their hearts should have had similar doubts: TMD, this stock market must be manipulated ah!

Otherwise —

Why is it crashing down every time I buy something?

What do I sell, why is it shut to rise?

That’s right! The stock market of hundreds of billions of Yuan is manipulated by investors like you. No matter how you think about it, no matter how you change your mind, it is up when you sell it, and down when you buy it! If you really want to make money, every time you do something, you have to do it against your will:

When you’re ready to sell, buy.

When you’re ready to buy, sell!

Well, the next place for you, schizophrenic, is not the stock market, but a mental hospital.

One of my favorite great philosophers, Bertrand Russell, said that the problem with the whole world is:

Fools are always determined; wise men are full of doubt.

It is not unusual for someone to give you a lecture on irrelevant macro trends or conspiracy theories and then tell you definitively that this is bound to go up and that is bound to go down. In contrast, those who are really serious investors, always analyze the possibility of upside and downside, future possible scenarios, where the risk point…

Yes, we live in an uncertain world, where everything in the future is a matter of probability.

In yesterday’s article “From Information Theory to Investment”, I deliberately popularized the story of the “Kelly Formula”, just to tell you that in the financial market, only fully understand the relationship between probability and odds, to be a qualified investor.

Where —

F is the proportion of money wagered in each gambling (investment) in the total money;

P is the likelihood that your bet will be correct.

q Is the likelihood of your bet going wrong (losing), q=1-p;

B is for odds — the ratio of what you gain if you’re right to what you lose if you’re wrong.

Where, if b=1, that is, the amount of loss and gain is equal, Kelly’s formula can be simplified as:

f=2p-1

This is known as the Buffett Formula, which states that the ratio of money you put in each time, given the same amount of losses and gains, should be twice the probability that you are right minus one.

Take the stock market for example, if it now has a 60% probability of rising, rising may have 50% profit, falling will also have 50% loss, then you should choose the investment amount each time, 60% of your total amount ×2-1=20%.

In investment, on the premise of relatively accurate odds and accuracy:

The result calculated by Kelly formula is positive, which is the investment opportunity that can be considered to participate in;

A game with a zero or negative result from Kelly’s formula is an investment to be avoided.

Since I have written several articles on bottom-buying A-shares, some people ask me:

How to buy bottom?

I take the CSI 300 index as an example and use the high and low rolling price-earnings ratio (TTM) to determine the possible profit and loss (odds) of buying CSI 300 now. At the same time, assuming that we cannot judge whether the current is more likely to rise or fall, let’s see how to use the Kelly formula to “bottom fishing”.

Based on the history of the past 10 years, the CSI 300 index has traded at a low of 8, a high of 17.7, and now at 10.9. This is the odds, not taking into account the potential for additional point gains from inflation in the future; in the short term, we don’t know if the future is going to go up or down, which means we’re right about 50 percent of the time.

Odds: b= (17.7-10.9)/ (10.9-8.0) =2.34

Accuracy: p=0.5

Investment ratio: f= (0.5× (2.34+1) -1) /2.34=28.6%

That is to say, if you want to invest in the CSI 300 index, in the case of 4200 points, our position should be about 30%.

In the same way, we can estimate the bottom position of China Securities 500.

Over the past 10 years, the TTM P/E ratio of the China Securities 500 has ranged from 14.8 to 69. To be conservative, let’s assume a high of 27.4 in mid-2020. In the short term, we also assume that we don’t know the probability of upside or downside, so the correct probability of buying now is 50%.

Odds: b= (27.4-15.5)/ (15.5-14.8) =17

Accuracy: p=0.5

Investment ratio: f= (0.5× (17+1) -1) /17=47%

In other words, we can use a 47 percent position in the bottom buying of the CSI 500 index when we cannot judge the rise and fall in the short term.

In particular, I’m not taking inflation into account in either the CSI 300 or the CSI 500. If there is inflation, the index level of the stock market is usually elevated (because the nominal income of listed companies will increase), so if inflation is taken into account, the proportion of investment capital should be increased.

Of course, as Carlo says in his book Statistics and Truth: How to Use Chance:

In the ultimate analysis, all knowledge is history;

In the abstract sense, all science is mathematics;

On the basis of reason, all judgments are statistics.

Using the last 10 years of statistics as a basis for investing, and I’m being as conservative as I can be, it could still be wrong.

For example, this time, if the stock market is to fall all the way, the CSI 300 index and the CSI 500 index P/E ratio will fall below the historic low, then the current bottom hunting, is not copied in the middle of the mountain?

I must stress that it is possible, history is not the future, and I cannot rule it out!

But when it comes to investing, if you can’t take any risk, why go to the stock market?

In addition, even if the CSI 300 index and the CSI 500 index will fall below their historical bottom line in the future, you can at least lose some money by applying the Kelly formula.

After all, Kelly’s formula has a basic principle:

Maximizing returns if you never lose your entire principal.

Finally, I would like to present Russell’s ten Laws of Freedom to you:

First, do not hold an absolutely positive attitude;

Do not try to hide evidence, because evidence will eventually be exposed.

Don’t be afraid to think, because thinking can always be helpful;

4. When people disagree with you, even if they come from your relatives, try to persuade them by argument, not by authority, for victory by authority is illusory and deluded;

Do not blindly worship any authority, because you can always find the opposite authority;

Do not use your power to suppress opinions which you think harmful, for if you suppress them, you are only being oppressed by them.

7. Do not be afraid to hold a unique opinion, for all the common sense we now accept was once unique.

8. It is better to disagree intelligently than passively agree with others, for if you believe in your own wisdom, then your disagreement is more agreement;

9. be honest even if the truth is unpleasant, for it takes more effort to conceal it;

Don’t envy those who enjoy happiness in the fool’s paradise, because only the fool thinks it are happiness.