Gene_

#Longbridge Reading Club

Humans always infer the future based on past experience, but disruptive events often occur in the real world.

"If you're faced with a difficult choice, such as:

Should I marry this person?

Should I accept this job?

Should I buy this house?

Should I move to this city?

Should I go into business with this person?

If you find it hard to decide, the answer is no. The reason is that modern society is full of choices, with thousands upon thousands of options. We live on a planet of 7 billion people, we are connected to everyone on the internet, and there are thousands of careers in the world for us to choose from. In this vast world with so many people, there is never a shortage of choices.

Throughout history, physiological limitations have determined that humans cannot realize just how many choices they actually have. In ancient tribes, 150 people was the limit for operation and collaboration. When a person appeared in your life, that person might have been your only potential partner.

A major decision can affect the trajectory of your life for the next decade, or even decades. Starting a business might take 10 years. A romantic relationship could last 5 years or even longer. Moving to a city could mean living there for 10 or 20 years. These decisions will have profound consequences. One cannot be absolutely certain, but we must be very sure before making a decision.

Sometimes we really struggle to decide, even needing to make a list to compare and weigh the pros and cons of different options. Just give up. If it's hard to decide, the answer is no."

"Money is not the root of all evil. Money itself is not sinful; what is truly harmful is the greed for money. From a moral perspective, pursuing money is not a bad thing; it has little to do with one's character. However, greed is harmful to people.

The reason why greed for money is harmful is because desire is a bottomless pit. Greed will occupy your mind, making it impossible to break free. Loving money and earning money are not inherently wrong, but the key point is that no matter how much money you earn, you will never feel satisfied. The reason people never feel satisfied is because once the switch of desire is turned on, it won't automatically turn off at a specific number. As the saying goes, greed is a valley that can never be filled. So, don't think that once you earn a certain amount of money, you will naturally feel satisfied and stop.

Of course, the punishment for greed also goes hand in hand with money. Those who earn money will only want more. They become sensitive, suspicious, paranoid, and afraid of losing everything they currently have. There's no such thing as a free lunch; everyone has to pay for their own greed.

The purpose of earning money is to solve financial problems and meet material needs. I believe the best way to get rid of the greed for money is not to upgrade your lifestyle after earning money. People who earn money often naturally raise their standard of living. Suppose you earn a large sum of money all at once, rather than through gradual accumulation. At this point, you still maintain your original lifestyle, and before you have time to upgrade it, your money will far exceed your actual needs and desires. This, in turn, puts you in a state of financial freedom.

Another point that benefits me: I value freedom above all else. The freedom I speak of is diverse: the freedom to do what you want, the freedom not to do what you don't want to do, the freedom from being influenced by your own emotions or the outside world, and so on. Freedom is the value I cherish most.

To some extent, money can buy freedom, which is certainly good. But to some extent, money can also impair my freedom, and I don't like that.

The winners of any game are those who are addicted to the game. Even if the marginal utility of winning decreases, they will continue to play."

“99% of effort will ultimately be wasted.

Obviously, no effort is completely wasted, because we can always learn something in the process of trying. Any experience can become an opportunity for learning. For example, looking back on one's academic career, 99% of the papers written, books read, and exercises done at the time are not applicable to the real world. Some of the geography and history knowledge you learned was never put to use, a foreign language you studied is no longer used, and some math knowledge you have completely forgotten.

Of course, the learning experience at school did teach us some things. For instance, you understood the importance of effort, some ideas subtly became your mental drive, or to some extent prompted you to pursue your current career, and so on. However, at least from the goal-oriented perspective of the real world, only 1% of the effort you put in at school has paid off.”

“Therefore, my definition of wealth is businesses and assets that can generate income while I sleep.”

The price of investment success is not immediately visible. It is not written on a label. So, when you need to pay this kind of bill, you feel that this money is not the price paid for buying something good, but more like a fine that must be paid after doing something wrong. Although paying bills is seen as normal, paying fines should be avoided, so people think they should take some wise preventive measures to avoid being penalized. Fines, whether from traffic police or the IRS, mean you did something wrong and should be punished. Therefore, for those who see their wealth decrease and think they are paying a fine, avoiding potential future fines is just a natural reaction.

 Viewing market volatility as a price to be paid rather than a fine to be paid may seem insignificant, but it is an important part of developing the right financial mindset. This mindset allows you to stick to a financial strategy long enough to eventually reap long-term investment returns.

Few investors have the courage to say, "I can withstand a 20% loss." Among novices who have never experienced a 20% drop, even fewer are like that.

 However, if you view volatility as the admission ticket you need to buy, the situation becomes completely different.

A Disneyland ticket costs $100, but after paying this money, you and your children will have a wonderful, unforgettable day. In 2020, over 18 million people felt this $100 was worth it, and few felt it was a punishment or a fine. When you clearly know you are paying to buy something, the value of this money is obvious.

The same goes for investment. Almost all volatility is a fee, not a fine.

If you want to achieve an 11% annual investment return over the next 30 years to ensure a worry-free retirement, would such a return be free? Of course not, because the world is never that perfect. Such good fortune always comes with a corresponding "price" and a "bill" that you must pay. As an investor, you will be subjected to endless mockery from the market: it may grant you huge returns but will quickly snatch them away from you. Including dividends, the average return of the Dow Jones Industrial Average from 1950 to 2019 was approximately 11%. This is quite remarkable, but the cost of success during this period was terrifyingly high. The shaded area in the chart below represents periods when the index was at least 5% below its previous all-time high.

Charlie Munger once said that the first rule of compounding is: never interrupt it unnecessarily. But when your life goals change, how can your financial-related plans—such as your career planning, investments, spending, and budgeting—not change along with them? It's hard not to change. People like Warren Buffett have been so successful partly because they can stick to one thing for decades, letting the snowball of compounding grow bigger and bigger. However, throughout our lives, the thoughts of the vast majority of us are constantly changing, so we are unwilling to do the same thing day in and day out for decades, or even similar things.

Long-term financial planning is a very important thing, but things are always changing—the world around us is changing, and our personal goals and pursuits are also changing. Saying "I don't know what the future holds" is one thing; admitting that the present self doesn't know what the future self wants is another. In fact, very few people can know what their future self will be like. If your future thoughts may change, then it's difficult for you to make long-term decisions and stick to them.

Financial advice for ordinary people:

1. Invest with spare money, stratify your salary: Only invest money you won't need in the short term. After your salary arrives, stratify it first—emergency fund, investment expenses, living expenses.

2. Stay away from leverage, don't borrow money or take out loans: Ordinary people should not touch leverage, don't invest with borrowed money, don't max out credit cards. Debt is the enemy of compound interest.

3. Be anti-consumerist, control material desires: Don't blindly follow trends to upgrade consumption, distinguish between 'needs' and 'wants'.

4. Develop a habit of keeping accounts: Keep accounts for 3 months to clearly see where your money goes. You can simplify it later, but keep a mental note.

5. Don't chase rallies or sell in panic: Control your hands when the market is frenzied, buy according to discipline during panic. Emotions are the biggest cost.

6. Stick to dollar-cost averaging into ETFs: Dollar-cost average into broad-based indices (like the S&P 500). Long-term, simple, effective.

7. Prepare a 3-6 month emergency fund: So you're not forced to sell assets when unemployed or sick.

8. Don't invest in what you don't understand, review regularly: Don't touch complex products like options, cryptocurrencies; review your portfolio quarterly or semi-annually, don't watch the market every day.

9. Don't let finance replace life: Set aside a 'fun fund' to enjoy the present with small amounts. Long-termism also includes being kind to your present self.

In ancient Egypt under the pharaohs... scribes would look up the records of the Nile's high water levels, using them as a reference standard for the worst-case scenarios that might occur in the future. The Japanese government had similar considerations when constructing the Fukushima nuclear reactors, but in 2011, when the tsunami struck, a catastrophic accident occurred. When building the reactors, the worst-case scenario considered was the most severe earthquake in recorded history, but they did not consider the possibility of something even worse—they did not think that the worst event in history was itself an accident with no precedent to refer to.

Here, the cause of failure lies not in analytical error, but in a poverty of imagination. Recognizing that "the future is not necessarily linked to the past" is important, but this is not given much weight in the field of financial forecasting.

The problem is that when we predict future investment returns, we often refer to events like the Great Depression and World War II, treating them as the worst-case scenarios that could occur. However, before these events occurred, there were no precedents that were equally bad. Therefore, when forecasters use the worst (or best) events from the past to predict future worst (or best) scenarios, this behavior itself goes against historical patterns. They are using historical accidents as a yardstick to measure the future.

Many investors have fallen into a trap I call "mistaking historians for prophets": in a field driven by innovation and change, they rely too heavily on historical data to predict the future.

We can't blame investors for this. If you view investing as a hard science, then history should be a perfect guide to the future. Geologists build models of Earth's processes using a billion years of historical data, meteorologists do the same, and so do doctors—the way our kidneys work today is no different from how they worked 1,000 years ago.

But investing is not a hard science. At its core, investing is the act of a vast number of people making imperfect decisions based on limited information about things that will significantly impact their life satisfaction, and this can make even the smartest people nervous, greedy, and paranoid.