This is a painstaking writing of the trade wisdom dry goods, I believe that many foreign exchange traders will see great insight, after reading, you will understand the logic of the transaction.
During the past ten years when I was engaged in financial investment trading, investors and traders often came to me with some questions and puzzles: teacher, I have been trading for seven or eight years, and I still lose money. What is the reason?
After years of studying, spending a lot of money in tuition, and learning a lot of technical methods, why is it still not profitable?
Unwilling ah, every day listening to the analyst’s solution and analysis, also invested a lot of time and energy study, total or loss?
What’s going on? Help me analyze it at ease. Is this market not profitable at all or is something wrong with me?
It’s a common question, and my answer is always the same: You’ve traded for five years, you’ve studied and studied for five years, and at most you’ve been in first grade for five years.
Because, profit or loss has nothing to do with your trading years, nothing to do with your education, nothing to do with the size of your capital.
The loss is because you have not enlightened, now Lao Zhao will analyze for you in all aspects, you should understand after reading, do not understand to save, to understand more.
If you are an investor or an investment enthusiast, maybe this article is worth reading.
First, remember: a methodology that gets out of the way is often fatal.
Like this one.
I saw an article forwarded on the public account of a famous investment company, the title of the article is: “The Big Short” Enlightenment: When you find an opportunity, how to face the inner doubt?
Based on a true story, “The Big Short” tells the story of three teams who made a fortune shorting the U.S. market before the subprime mortgage crisis broke out in 2008.
In the real estate market, they found the potential crisis of “subprime mortgage packaged bonds (CDO)”, dared to bet heavily, and finally grasped this “once in a lifetime” chance of success.
The topic of this article is: Why do you sometimes see an opportunity but fail to follow through and become the big winner?
The author’s explanation is: short-term effective methods are easy to learn, but can not form the core competitiveness.
On the contrary, there are some things that really work in the long run, but in the short term are likely to have no noticeable effect and will discourage you.
Next, the article describes how the three teams in the film “stick to their choices.”
The scientists, the markets, turning to old traders and “convincing more people to support you”.
So they were able to overcome their worst enemy: self-doubt.
In the end, the paper concludes: Persistence is independent thinking and the rejection of mediocrity, but it is never a single heroic bigotry, nor does it depend on willpower.
Persistence is based on rational and scientific methods, it is to deeply understand your customers, your investors, it is to chat with all the people who have used this method, it is to attract more friends who believe in you and support you…
Only in this way can you truly overcome your own inner vulnerability.
After reading the article, I suddenly thought of a new word coined by Taleb: “white knowledge”.
Because of the comparison of the most important secret, these summaries not only hide the difficulties, but also make mistakes in basic principles, thinking and philosophy.
On the surface, the above article seems to be OK, at most is correct nonsense, talk about fatal?
First, I would like to outline my three main points: 1. Investment principles: The main character of The Big Short shorted subprime mortgages, focusing on the discovery of the chips, rather than insight into the housing bubble; 2.
2. Way of thinking: the secret of investment success is the convexity opportunity of “second-order function”, rather than the so-called methodology of “first-order thinking”;
3. Cognitive philosophy: You need to make money by knowing what you don’t know, not by knowing what you know.
Let’s talk about it one by one.
Two investment principles: “The Big Short” the protagonist shorted subprime mortgages, the focus is to find a bet chips, rather than insight into the real estate bubble.
No one can “accurately predict” what will happen.
Keynes had long said that markets can remain irrational longer than you can stay afloat.
If you think The Big Short is an investment story of “call it right and follow through,” think again.
Just as the legendary story of Thales, the philosopher who made a fortune by “accurately predicting the weather”, is wrong.
The story goes that the ancient Greek philosopher Thales was told that he was poor. To prove himself, he looked at the sky at night and predicted a bumper olive harvest the following year.
So he sold his property and the next summer rented out all the local olive oil presses for a fraction of the price.
In the autumn, when the olive harvest was plentiful, everyone needed to press the olive oil, and Thales had a monopoly on the machine, so he rented it to the men for many times the price he had rented the press for, and made a great deal of money.
If so, Thales was not a wise man, but a gambler.
This is not the case.
Thales makes money because it has nothing to do with predicting the weather.
He did it by making a down payment and renting seasonal access to all the olive oil presses near Miletus and Chios at a very low rent.
Thales bought an “option,” or the right to rent the machine first.
The result: a bumper olive harvest that year led to a huge increase in demand for olive oil presses, and he made a fortune by letting the owners sublease the machines on his terms.
What if the olives fail?
The damage was also limited.
The key points of this story are: 1. Climate is hard to predict even today;
2. You can’t predict, you can bet, that’s what convexity means.
Similarly, The Big Short tells a similar story. (Please allow me to repeat what I wrote earlier.)
Tell me about the story in the movie.
I made a brief summary: The Big Short introduction time: 2005 -2007.
Opportunity: In 2005, discovered that the U.S. had a poor record of mortgage payments and rising default rates.
Bet: Bet that the housing bubble would burst and bet against subprime mortgages.
The bet: CDS.
If you lose the annual premium of 1.5%, if you win 30-50 times the premium will be paid.
How it went: The bet began in 2005, and the fund pulled back sharply in 2006.
The result: In 2007, the subprime mortgage crisis erupted and the money was made.
Let’s imagine this: there is a Ming Dynasty blue and white plate worth 200 million yuan, which is displayed by a rich man in his living room.
Once you visited his home, found that there are three children in his home, every day to fight, often break things, parents scold is useless.
You think to yourself that, careful as the host is, sooner or later that plate will be destroyed by the children.
You have a mental estimate: ¡¤ There is a 30% chance that the plate will be broken within a year;
, so is the probability that two years is not broken (1-30%) ? (1-30%) = 49%;
¡¤ That is, the probability of being broken within two years (1-49%) =51%.
Let’s work together. I’ll buy insurance for your plate. In case something goes wrong, we’ll split the cost 50/50.
Going back to The Big Short, even if Michael Berry had predicted that the subprime crisis would happen sooner or later, who would have given him the benefit of the doubt?
There is.
The instrument is a Credit Default Swap: it’s the equivalent of buying insurance on someone else’s house and keeping it if you lose money.
CDS is likened to “insuring a house that is about to be engulfed in a fire, which belongs to someone else”.
CDS pay just 1.5% a year, and contracts can last up to 30 years.
Using our probabilistic calculations above, this gambling-like game has a close to 100% chance of winning and a very small chance of blowing up.
In fact, before the subprime crisis, many people predicted that the real estate bubble would burst, and there were a lot of bets, many of which were lost.
You’re not gonna make it that long.
The point is that you find the “mispriced” chips.
But once you get your hands on those chips and really understand the math, it doesn’t bother you.
The secret of Mr Thales and the protagonists of The Big Short is that they do not need to anticipate anything to make a bet: to buy options that have “limited losses but great gains”.
It’s first-order thinking to think that the protagonists of “The Big Short” make their money by “predicting correctly and following through.”
So what is second-order thinking?
Three ways of thinking: The secret of investment success is the convex opportunity of “second order thinking”, not the so-called methodology of “first order thinking”.
The key to investment success is to buy convexity opportunities that are mispriced.
For example, in the previous olive oil press story, the curve is as follows: (this image is from Anti-Fragility) This article does not discuss what investment convexity is, because if you do not understand it mathematically, you only know the concept.
To understand convexity, it helps to understand the difference between “first order” and “second order.”
Anti-fragile says: You’ve just been told that the average temperature in your grandmother’s place for the next two hours will be a very pleasant 21 degrees Celsius.
Great, you see, 21 degrees Celsius is the perfect temperature for old people.
This set of data, the average, is the “first order effect.”
It turns out that your grandmother spent the first hour in an environment of -8C and the second hour in an environment of 60C, even though the average temperature of 21C was perfect.
This set of data, above, is called “second-order effects.”
The second set of data, the information about temperature changes, is more important than the first.
If a person is vulnerable to change, then the concept of averages is meaningless — deviations in temperature are far more important than averages.
Your grandmother is vulnerable to changes in temperature and fluctuations in the weather.
(The concepts of “first order” and “second order” are inserted below for analogy and perception only.)
In terms of first and second order, using a physics that we’ve all learned, velocity is the first derivative, acceleration is the second derivative.
Look at the first derivative: a car moves in a straight line, resulting in a distance-time graph of the function.
The graph looks like this: Its derivative is the velocity at each point in time, which is the displacement over time, as shown below.
The second derivative: the second derivative tells us the rate of change of velocity at some point in time, which is the acceleration.
Student: Is there a third derivative?
There is.
It’s the acceleration, which is physically called “rush.”
Return to the convexity of “second-order effects”.
The winners of “The Big Short” depend not on accurate predictions but on positive returns and optional convexity effects.
Higher-order thinking is the ability to understand a problem from another dimension.
For example, when we try to predict the position of a car on a highway, its acceleration, as the second derivative, is more important than the velocity of the first derivative.
Companies like Facebook get high valuations at a young age because investors value acceleration, not speed.
The lack of second-order thinking allows us to bypass the real secrets.
In the real world, however, these difficulties do not exempt us from our ignorance.
More deadly is not ignorance, but our ignorance of their own ignorance.
Cognitive philosophy: You need to make money by knowing what you don’t know, not by knowing what you know.
In the article that led to this article, the author emphasized that his greatest enemy is “self-doubt.”
The reality is that for investors, self-doubt is a virtue.
The biggest earner of the “Big Short” era was Paulson, who made $20 billion for his clients and nearly $4 billion for himself.
Yet Mr Paulson’s success in the following decade has been punctuated by a series of failures that have led to suspicions that he was simply lucky.
Paulson is confident enough and always trying to prove himself.
But investors want to make money, not confidence.
Interestingly, at the beginning of The Big Short, Lewis quotes Leo Tolstoy from 1897: “If a person has not formed any preconceptions, he can understand the most difficult problems, no matter how stupid he is.”
But if a man is convinced that he knows all the questions before him, and that he has no doubts, then, however clever he may be, he cannot understand the simplest things.
Zhuangzi said: Therefore, everyone knows and seeks what he does not know, but not what he knows.
All know that they are not good, and do not know that they are good.
It was chaos.
That is why all the people of the world know to seek what they do not know, but no one knows to seek what they know.
The second half of his sentence is that people only know to criticize what they think is bad, but no one knows to criticize what they think is good.
What we’re talking about here is skepticism as second-order intelligence.
Finally knowing, or not knowing, is first order wisdom.
Knowing that you know, or knowing that you don’t know, is second order intelligence.
A lack of first-order intelligence, at best, prevents you from making money.
A lack of second-order intelligence can cost you a fortune.
One of The articles that prompted me to write this article didn’t even understand the opening line of the Big Short: The trouble with the world is not that people know too little;
it is that they know so many things that just aren’t so.
Mark Twain’s words are similar to those of Zhuang Zi above.
Don’t be like collecting stamps, accumulate too much correct and useless “first-order wisdom”.
This only makes you a “know-nothing”.
Let this not delay the understanding and pursuit of “second order intelligence”.
Because: what determines a person’s short-term fate, is his “luck + (as the first order of wisdom) known”;
What determines a person’s long-term fate is his or her “luck + (as second-order intelligence) knowledge of ignorance”.
