Text/ Yao Xinlu
When he wrote "The Most Important Things in Investment ", Howard Max thought he could only sell 3,000 copies and let his friends watch and play with it.
In fact, except for the English version, this book has been translated into more than 10 languages, and the Chinese version alone sells 450,000 copies. Buffett 's evaluation of it is: This is a rare and useful book.
Too many people want to know what Howard, the founder of Oak Tree Capital, would say about investment.
, founded in 1995, is the youngest among the eight private equity giants in the United States and the largest buyer of non-performing assets in the world. It is also known as the "king of difficult asset investment." Because of its rapid rise in the two financial crises in 2000 and 2008, it is famous for its Wall Street .
Howard himself, because in January 2000, accurately predicted the bursting of the technology stock bubble and became famous.
Seek opportunities in risk, like picking chestnuts from fire, how to succeed? In "The Most Important Things to Invest", Howard actually wrote 21 "important things" and "everything in investment is very important." Recently, he told the media at the exchange meeting of the new book "Cycle".
Despite this, "Cycle" is exactly "written the most important thing among these 21 things into a book." Howard said , "How do investors improve their investment performance? It lies in two points: asset selection and positioning in the cycle."
The following is Howard's analysis and dry stuff:
The three elements that affect the cycle
Why does there be a cycle? For example, the average annual growth rate of the US stock market is about 9% or 10%. In particular, this number will not actually be the case every year. It may be too high or too low. Why does the market not maintain a constant growth rate at a long-term growth rate? The answer is self-evident: most positive development trends will eventually "over-develop" and will eventually lead to active and passive corrections.
50 years ago, I first entered the investment world and worked as an intern at Citibank . So far, I have personally experienced 6 or 7 cycles. The fluctuation range, duration, and causes and consequences of each cycle vary, but some themes are eternal. I think the three factors that affect the market cycle are:
- Investor sentiment
- Investor risk aversion
- How much available funds are available in the market
Emotion is easy to understand: market development, optimism gradually rises, when it is too high, asset prices will rise, securities prices will be higher than intrinsic value, and the market will have a pullback.
Second, the degree of risk aversion, which can also be called risk aversion.
For example, many investors make 1 yuan and are not very happy, but they are very sad when they lose 1 yuan. This is the high risk aversion sentiment. Since most people are risk averse, risky assets must provide high returns, otherwise no one will come to buy them, we call them "risk premium".
In this way, high risks and high returns have become a consensus, but in many cases, investors gradually lose vigilance about risks in this perception, are too optimistic about the future, and their risk aversion gradually decreases, which leads to a boom in the bull market.
Third, there is too much capital available in the market, too many people have too much money to buy assets, bidding is rising steadily, the price is higher than the value, and the risk is increasing.
All the bull markets I personally have seen are accompanied by investors' overly optimistic, general lack of risk awareness, and excessive funds available. On the other hand, if these three points are removed, the market will be difficult to prosper.
Since all cycles have such risk points, we can try to judge when the price is high in the bull market and when the price is low in the bear market.
How does the market cycle develop?
How do the three elements just mentioned affect the causal relationship of the market cycle? Take risk aversion as an example:
investors have high risk aversion sentiment, which will limit the issuance of high-yield bonds (with high risk). On the other hand, it will push up the demand for high-quality bonds, causing their issuance to rise - the market default rate is therefore adjusted to a lower level overall - investors feel oversatisfied, and are willing to bear high risks - push up the issuance of higher yield bonds - leading to a decrease in the quality of overall bond issuance - being tested by the market when the economy falls into a downturn - leading to an increase in default rate - cooling effect, and risk aversion sentiment.
can be seen that the above is the causal nature of a periodic event.
Overall, how does a typical market cycle develop? The cycle can be divided into four stages: rising stage, top of the cycle, falling stage and bottoming out of the cycle.
is rising in the rising stage, economic fundamentals continue to improve, profits continue to rise and exceed expectations, and the media will choose to report positive news at this time. Investors' performance at this stage is: expectations continue to rise, confidence continues to strengthen, only seeing the positive side, positively interpreting all information, market capital is abundant, asset prices continue to rise, and risk aversion sentiment gradually disappears.
then reaches the top of the cycle, and everyone thinks that the situation will only get better forever, the risk is small, and because of the "high risk and high return", the risk is regarded as "friends". The objective phenomenon at this time is: asset prices are too high, potential returns are low, and risk is high.
entered a downward phase, economic fundamentals deteriorated, profits fell and were lower than expected, and the media began to report only negative news, resulting in weakening investor confidence, only seeing adverse developments, negative sentiment spread, return expectations, asset prices declined, and risk aversion increased. When is the cycle bottoming out? At this time, taking risks has been regarded as "just a way to lose money", and people are scared and dare not buy them again. Emotion often makes people buy high and sell low, and is the enemy of investors. At this time, it is actually a period of low asset prices, high potential returns and low risks, and should be "radically deployed".
Back to the present, the current bull market in the United States has been 10 years. I personally feel that there are too many investment events now and the emotions are a little overly optimistic. In terms of investment, my analysis of this stage is: adopt a defensive strategy.
Of course, I also want to emphasize three things at the same time: I don’t think is a bear market now; I never think it will collapse; I never think that people need to sell their assets and leave the market now. How to invest in
in the cycle?
2005, 2006, we did not know that the United States would usher in a huge subprime mortgage crisis, but at that time, we did think that the global market risks were too high, because we saw too much spare money, and under normal circumstances, there should not be so many investment events.
So we did four things:
1. Sold a large number of assets; 2. Turn off many large funds and start raising small funds; 3. Avoid investing in high-yield bonds with excessive leverage ratio of ; 4. Strengthen the rules for investment review.
Results We did these things right and successfully passed the financial crisis in 2008.
I don’t think selling securities and holding cash is a good way. This is a binary gameplay, and it may miss the opportunity to rise and it is difficult to make money.
A reasonable investment strategy is to find the positioning in the cycle and adjust the investment method. For example, how does look for growth opportunities in the current US stock market? I just said that it is recommended to adopt a defensive strategy. So how to increase the defensiveness of the portfolio without missing out on possible upward opportunities?
can do these things: buy bonds from large companies, established companies, high-security and high-quality companies, increase holdings of short-term bonds, increase holdings of high-quality bonds, buy more developed market bonds, reduce holdings of emerging market bonds, and avoid buying corporate bonds with high leverage ratios.
is easy to judge. In the four stages of the market cycle, the investment at the bottom of the cycle has a greater chance of winning, just like buying a lottery. At the bottom of the cycle, the chance of winning is much higher than the chance of losing.
But as mentioned earlier, this is also the time when the desire for investment is lowest: lack of optimism, high risk aversion, and shortage of funds. Don't be influenced by the market.
In 2016, I wrote an article titled "What does the market know" (investment memorandum). In fact, the market does not know anything about it. The market only reflects the emotions of the overall participants.
If you want to know the answer, you are not looking at the market, but the price is equivalent to the intrinsic value, the price-earnings ratio, bond yield, and real estate return rate. You have a good judgment on these indicators.
As Buffett said: When people's level of caution is low, our level of caution must be improved; people are free and easy, we must worry; people are frightened, we must attack.
(The title image is from the Internet)
