To achieve investment success, the most important thing is often not to decide what to do, but to decide what not to do.

Author: Duan Yongping

Source: "The Great Way: Duan Yongping's Investment Q&A"

1. Not Understanding Means Not Touching is a Hard Rule

The old saying: do not short, do not use margin, do not engage in things you do not understand. It is never too late to understand, but truly understanding often comes at a high cost. (2012-03-14)

Buying things you do not understand is why 85% of people can lose money in both bull and bear markets. There is no more absurd reason to buy than because a stock has risen a lot. (2015-06-26)

My "Stop Doing List" in investing is very simple: do not touch what you do not understand. Understanding mainly focuses on two aspects: business model and corporate culture. (2020-10-10)

Netizen: I really want to buy companies that allow me to sleep peacefully.

Whether you can sleep peacefully is decided before you buy. (2011-03-29)

I just happened to understand a few good companies that I know well. The vast majority I also do not understand, just like most people. However, I do not touch what I do not understand; many people cannot do this and still want to make quick money. Of course, I also want to make quick money, but I know it is not feasible. (2024-06-17)

Not understanding means not doing; Buffett has always been this way. But understanding sometimes requires a process; Buffett is no exception and will encounter things he thought he understood but later found he did not fully understand. Additionally, Buffett's company has other people managing investments, and Buffett delegates authority to them, but their understanding may not always align with his, so the stocks everyone sees Buffett holding may not necessarily reflect Buffett's style. In fact, BYD is not Buffett's style, nor is General Motors. Buffett also believes he made a multi-billion dollar mistake with oil companies (losing a lot of the profits made from PetroChina). (2012-10-10)

Buffett's concept of the circle of competence refers to the fact that everyone has a limited range of understanding. Everyone always understands some things and does not understand others. Therefore, investing in what you understand makes it easier to know the value, to know what is cheap, and to have the opportunity to make money; the opposite is also true. If you buy something that makes you feel uneasy, it is speculation. Speculation can certainly make money at times, but it carries high risk and leads to sleepless nights. (2010-03-25)

Netizen: If a company buys back its own stock, can we consider that the company is cheap and should we follow up and buy? Any "following" is wrong because you will eventually make a mistake.

Following means you do not understand and are buying blindly, so you will eventually follow the wrong path. Moreover, following is also hard to make money because if you do not understand, you cannot hold on. If you understand, it is different. (2010-07-23)

Today I saw someone online saying to follow me to buy Alibaba; those who say this are speculators! Do not follow others to invest in things you do not understand, and it is useless to have someone else to bolster your confidence, no matter who that person is. Conversely, if you understand something, do not be afraid if others do not like it, even if that person is Buffett or Munger. (2014-09-23)

Most of those who lose money in the stock market long-term belong to those who do not know the extent of their circle of competence. (2012-12-29)

Knowing the extent of your circle of competence or knowing where its boundaries lie is far more important than how large the circle is. This is also why many "smart" people have poor long-term investment performance. Of course, these "smart" people will attribute others' success or their own lack of success to luck or accidents, and they always find a "smart" way to convince themselves that this is indeed the case. The saying in "Kung Fu Panda 1" that "There are no accidents" is quite reasonable. (2013-02-01)

"Investing is not a game where someone with an IQ of 160 can necessarily beat someone with an IQ of 130." (Buffett)

High IQ individuals may not necessarily know where the boundaries of their circle of competence lie, but they often find it easy to exceed their circle.

"The reason we have achieved our current success is that we focus on finding those one-foot hurdles we can cross, rather than having the ability to jump over seven-foot hurdles." (Buffett)

This also speaks to the issue of the circle of competence. I often see people discussing investment concepts they are completely confused about, which reminds me of this saying. (2012-07-28)

Those who have been entrepreneurs can have an advantage in that they can more easily understand companies and know where their circle of competence lies. However, I find that many entrepreneurs I know have no understanding of the stock market, just like ordinary people, and most do not engage in the stock market (because they believe they do not understand). Not understanding and not touching is what makes a good investor, even if they do not touch it at all.

Upon reflection, those who have been entrepreneurs may not necessarily find it easier to know the size of their circle of competence; it could be the opposite. (2011-09-07)

Netizen: When investing beyond your field, seeking expert advice may not be the worst plan?

You dare to listen to "experts"? It is best not to touch areas outside your field unless you can understand them. When you do not understand, experts cannot help. Experts can only provide reference opinions; if you do not understand, you still cannot make decisions. (2010-04-18)

Experts can help a lot with details, but they cannot help you make decisions. (2010-04-19)

Netizen: Can you talk about your experiences with losses? Everyone is very interested in your investment failures.

I once bought an airline stock called FRNT and lost a lot of money (I had previously made a lot of money on another airline stock). This company had good cash flow but was a bit too small, and in 2008, credit card companies suddenly demanded full cash (because four other small airlines suddenly went bankrupt). At that time, if the CEO had found a way to provide cash (they could have sold some planes and other assets), they could have made it through. Instead, this CEO suddenly announced they were going into bankruptcy court, and in the end, they paid what they owed and truly bankrupted the company. When I bought this company, I mainly thought that oil was too expensive and would definitely drop. When oil dropped, airlines would benefit first. Everything turned out to be correct; oil did drop, and this company did make a lot of money later, but we lost.

What I did wrong was engaging in something I did not actually understand. The regret is that Buffett had already warned me to be cautious with airlines. After this company went bankrupt, I truly understood what Buffett meant. So I will not easily touch airline companies again. (2010-03-27)

Netizen: What mistakes have you made in the investment process? How did you discover and correct them?

I have mentioned some earlier; here I will add one I have not mentioned. Last year, I bought an ETF (Exchange-Traded Fund) called UNG, which is linked to natural gas. When I bought it, the price of natural gas was only around $3, while the long-term cost of natural gas is about $6 or more. I thought nothing could stay below its cost for long, so I went and bought a lot of UNG. Later, after careful research, I found that UNG does not have a linear correlation with natural gas, and the time decay is significant, so I realized I was wrong. But I was still reluctant to sell because I was already losing money. Later, I remembered the principle that recognizing a mistake and correcting it, no matter the cost, is the smallest cost, and I finally made the decision to sell at a loss.

Haha, across all my accounts, I lost over ×× thousand on this trade, but if I had not made the decision to sell at that time, I would have lost nearly four times the original loss by now. And the price of natural gas is now 50% higher than when I bought UNG. This mistake was mainly due to insufficient understanding of the investment target before jumping in (at that time, the overall profit situation was good, and I had a lot of cash). I must not be careless in the future. (2010-03-22)

2. Investing is a Probabilistic Event

I believe "understanding" is not an absolute concept; it is more like a rough estimate of understanding. Only you know whether you understand or not; it is hard for others to evaluate. For example, I think I understand the cultural value of General Electric (GE), but someone who does not understand may sell me the stock when it is very cheap.

From an investment perspective, when you feel that the stock you bought is dropping and you are really not affected, you probably understand (not a psychological factor); otherwise, you may be speculating (especially when you feel scared).

For instance, Yahoo has dropped quite a bit from its high this year, and I have re-evaluated my reasons for investing in Yahoo, finding that the good reasons have not diminished, and the negative aspects have not increased, so I have nothing to worry about. (2010-05-20)

Do not idealize the definition of "understanding." "Understanding" does not mean having a "crystal ball" that sees everything in the future; being able to see some important things is already quite good. In the long run, I believe investing is actually a probabilistic event; those who truly "understand" have a lower probability of making mistakes and higher final returns. Many times, you cannot simply judge someone's understanding of investing based on their behavior with a particular stock. (2010-08-30)

The so-called investment prowess is actually very hard to define; it is not a competition.

People often like to measure whether someone is "good" at investing by the ratio of returns over a certain period, but this measurement is often unscientific because many factors can affect short-term returns. Here are a few examples that may influence short-term investment returns.

Circle of competence: Investors who understand investing may not always outperform the market, especially when there is nothing to invest in within their circle.

Margin: Some people who use margin, even a lot of margin, may perform well during certain periods if they are betting correctly—but what goes around comes around.

Confidence: Buffett says he generally invests when he feels 95% confident (I think it may not be that high), but many people actually invest when they feel 60% confident (or perhaps even lower, which is why you see them stepping in and out), but among 10,000 people who invest at 60% confidence, there will always be some who get lucky and have particularly good returns, but it does not necessarily mean these people are skilled.

Diligence: The true meaning of understanding investing, in my personal view, is knowing not to invest in what you do not understand. However, the quality of investment returns actually depends on whether the investor can find good investment targets that they understand, which requires a lot of effort to frequently find good targets (Buffett's standard is one a year). For someone like me, who waits for Apple to turn around, finding one in four years is already quite good. (2012-08-27)

Netizen: From the three dimensions of business model, corporate culture, and market price, what are the boundaries or standards of understanding? To what extent must one investigate to be considered truly understanding? There often arises the situation you frequently mention where one thinks they understand but actually does not, and there can also be cases of investment mistakes due to a lack of consideration of a key factor. I remember Mr. Munger has a filtering checklist for selecting companies.

There is no formula here, but when you truly understand, you will know. The most important thing is that you can genuinely ignore market fluctuations and focus on the business. Imagine you plan to buy a company and can sleep well for ten years without it going public; then you probably understand. Conversely, if you think a company will definitely have major troubles within ten years, you probably would not want to buy it, right? (2019-05-04)

The simplest standard for understanding a company is that you do not feel the need to ask others, "Do I understand this company?" (2019-07-24)

Companies you do not understand are relatively easy to identify; you want to sell as soon as the stock price drops, and you also want to sell even with a slight increase. Understanding means you do not want to sell no matter how much it rises, and when it drops significantly, you will buy in with all your strength.

The best state for companies you understand and invest in is that you do not want to sell. (2019-04-06)

As long as you adhere to the principle of not doing what you do not understand, you will make fewer mistakes. Over time, your results will naturally be much better than if you do not understand and still invest; this is about doing the right things.

How to understand the scope of doing things right; if you really cannot understand, then don't touch anything, just put your money in the bank, and your performance may be better than most people. (2022-02-18)

In the process of doing things right, mistakes are inevitable; it is a learning process. Everyone has their own learning curve. (2020-12-13)

Netizen: When do you think it's okay to copy homework? Or is it just for fun with a small position to track?

I only occasionally copy Buffett's homework, purely for fun. If you do not fully understand, you should not bet your fortune. Investments that you are afraid to bet your fortune on are hard to consider as serious "investments." (2023-03-12)

If you do not understand, you cannot copy homework. If you understand, there is no need to copy. Investing is very simple; it is about buying businesses. The only way to understand investing is to understand business. Of course, for those who do not understand business, there is another way to manage money, such as buying the S&P 500 index or ETFs like QQQ. Buying funds is actually harder than buying companies because understanding a company is much easier than understanding a person, and funds also charge fees. (2024-08-08)

Netizen: I spent two years studying the automotive industry, but I still can't truly understand it. Should I reflect and give up? Or is there a way to optimize?

There are very few companies that I can understand myself, and if I do not understand, I can only give up. Personally, I believe that understanding a company is not easier than completing an undergraduate degree. However, spending a lot of time on companies that you do not understand is not cost-effective. A very important lesson I learned from Buffett is to first look at the business model; unless you like the company's business model, do not look further, as this can save a lot of time. I actually do not understand your example of the automotive industry; although I made a lot of money on Tesla, I ultimately gave up everything because I did not understand it. (2019-03-13)

Netizen: It's really easy to identify what you don't understand, but this half-understanding can be deadly.

Most people's problems do not lie here. Moreover, the meaning of "understanding" varies greatly. Many people spend their whole lives trying to understand the market, while I just try to understand certain companies, which is a very different level of difficulty.

Understanding the market is an impossible task, Mission Impossible! Got it?

The phrase "understanding the market" is not precise. The market is a "weighing machine" in the long term and a "voting machine" in the short term. Understanding the difference between these two points is very important. Most people spend too much time and effort trying to understand the "voting machine." (2022-03-05)

3. What You Understand is Your Good Business

Netizen: Everyone knows Buffett does not invest in tech stocks, which does not align with his philosophy. But tech stocks have made you successful; how do you measure this contrast?

I only do what I think I can understand (thinking you understand does not necessarily mean you truly do), and some of these may just happen to be what people call tech stocks. I cannot distinguish what is a tech stock. (2010-05-30)

What you can understand is not important. It seems that the current richest person in China is someone who understands beverages; perhaps the next one will be someone who understands pig feed.

Additionally, I have never considered myself involved in the internet or high-tech sectors. The internet or so-called high-tech is just a tool, just like railways, roads, highways, and aviation in the past. (2010-10-22)

Netizen: Can you reveal the name of your investment company? I want to track its 13-F.

Isn't it simpler to directly ask what to buy to make big money? Knowing what others invest in will not help those who do not understand the company. You might as well watch Buffett's speech in Florida in 1998; there is a video of it. (2024-06-08)

You understand, so it is your good business. (2010-10-23)

Netizen: Does Buffett dislike the high-tech industry because it changes too quickly?

Does Buffett dislike high-tech? Buffett has never said he dislikes it; he only said he does not understand it. However, once he understands, he will also invest, like in IBM. Buffett has also said that if you can understand change, you will make a lot of money. The most important thing is not what Buffett can understand, but what you can understand. (2013-05-26)

Netizen: A low price-to-earnings ratio is a form of value investing, which is relatively basic. The advanced form of value investing is to value a company, buying a dollar's worth of value for 40 cents. This requires a true understanding of the company to make a correct assessment.

I personally believe that there is no formal hierarchy in investing; there are only differences in the level of understanding. If I can foresee that a company has high growth, I would certainly be willing to invest. I have always been willing to invest in high-growth companies—if I can confirm that they will be high growth. (2010-04-28)

Netizen: In stock investment, which industry are you most passionate about? Which industry has the greatest certainty? Buffett proposed that the best companies do not need to invest heavily in updates to maintain their advantages and create profits. From this point, many tech companies are excluded. Yet it seems you have invested in quite a few tech companies? Haha, the industry issue is not clear; it seems there are good companies in most existing industries.

Buffett has a few principles: circle of competence, economic moat, and margin of safety; he did not specify any industry. Buffett pursues companies whose products are unlikely to change, so he can hold them for a long time. But he has also said that if you can understand change, you will make a lot of money. Ultimately, buying stocks is buying companies. Whether you understand something long-term or something that changes, as long as you truly understand, buying when it is cheap is a good opportunity.

If you can see such a good opportunity in one or two years, your returns will definitely be good. (2010-05-08)

Netizen: Bank stocks are valued cheaply, but Mr. Duan just does not believe in bank stocks… Haha, I have no fear of banks, but I really do not understand them.

By the way, the interesting thing about investing is that what you can understand is already enough to keep you busy and provide sufficient returns. Additionally, trying to understand things you are not good at is often not that easy; the same opportunity cost (time) in your own understanding circle often yields much larger returns. (2011-03-04)

Netizen: Can you talk about the direction of small capital investments?

Choosing good companies that you can understand is actually unrelated to the size of the capital. (2019-03-15)

Netizen: Can you say which is cheaper, the $460 Apple or the 160 RMB Moutai?

It depends on which one you understand and how much you understand. (2013-03-23)

My circle of competence is small, and I can understand very few things; over the years, I have not found any companies that I could exchange for Apple or Moutai. (2017-03-13)

Netizen: You once said you were optimistic about Tencent's business model and corporate culture; it is a good company. But later you said you could not understand its future cash flow. Moreover, your position is very low at only 1% (it seems you are not too optimistic afterward). I do not understand what you mean by not understanding its future cash flow, and what uncertainties do you have about it?

Not understanding future cash flow means not understanding how much money the company can earn in the future. Investing requires spending money, so you need to know how much money the company you are investing in can earn in the future and whether it can earn more than what you invested; otherwise, you should not invest. I do not understand most companies; I understand Tencent a bit but not thoroughly.

Netizen: According to this standard of understanding, ordinary people may take a long time (3 years, 5 years) to find a company with a good business model, almost fully understood, and at a suitable price.

This is also why I have always felt that I am an ordinary person. In the past decade, I have really only understood two companies: Apple and Moutai. On average, it takes six years to understand one. (2023-11-16)

Netizen: May I ask what you think is the biggest gap between you and Li Lu compared to Buffett and Munger in value investing? In what areas do you and Li Lu still need to learn?

The biggest gap is probably that their English is much better than mine. Of course, in terms of English, Li Lu and those two also have a significant gap (the difference between a native and a non-native speaker), but his gap does not greatly affect his investment career, while my gap is fundamentally different.

From the perspective of value investing, perhaps it is better to describe the gap as "differences."

In terms of understanding value investing, I believe we are completely the same because the essence of value investing is simple: buying stocks is buying companies, and buying companies is buying the discounted future cash flows of those companies. All other discussions about value investing are actually about how to determine how much this future cash flow discount will be. Our differences mainly manifest in the differences in our circles of competence; everyone understands different things. Of course, there are also differences in the size of the circle of competence, as they have been investing in stocks for much longer than I have.

The circle of competence means the range within which you can judge future cash flow discounts. Knowing how large your circle of competence is is much more important than how large the circle itself is.

However, the absolute value of the money I manage now is actually more than Buffett and Munger had at my age, haha. I cannot compare with Li Lu; he is much younger than me.

The biggest difference between the three of us is indeed that they are all professional investors, while I am an amateur; the proportion of time I allocate to investing will be somewhat different.

We all have a lot to learn in various aspects, but Li Lu probably does not need to spend time learning English like I do. (2011-01-04)

The most important thing to learn from Buffett is his principles, as everyone's circle of competence is different. Just like I dare to heavily invest in Apple, Buffett probably would not. A friend of mine lost a lot of money on BYD; when I asked him why he bought BYD, he said Buffett bought it. This way of learning will lead to problems. I have never bought BYD, although I have always been interested in it, but I have never found the interest to buy it, so Buffett's decision to buy or not buy has no impact on me at all. In short, idolizing anyone is wrong; the most important thing is the "rationality" that Munger talks about. (2012-01-09)

Let me give you an example, and you might understand. Buffett has many investments in insurance and finance, while I have basically none because I do not understand them and always feel insecure. I have invested in some internet-related companies that Buffett has not invested in because he does not understand them. He believes Coca-Cola is something people must drink, while I believe games are something people must play. (2010-04-30)

What is the most important thing in investing? My personal understanding is that what is lacking is what is important. The most important thing in investing is to invest in things you truly understand. The subtext of this statement is to invest in places (companies) you truly believe will make money.

My definition of making money is: returns higher than long-term risk-free bonds. Whether a person understands a company and whether it can make money is not necessarily related to their education level. Although people with higher education generally have stronger learning abilities, schools do not teach how to invest because those who truly understand investing are often hard to teach in schools; otherwise, investment masters would be professors. However, you can learn many basic things in school, such as how to conduct financial analysis, which can be very helpful in understanding investment targets.

Regardless of education level, a person will always understand something, and what you understand may one day help you discover opportunities. The opportunities I have seized seem to have no necessary connection to education level.

For example, we were able to earn over 100 times on NetEase because I had a lot of understanding of games from my time at Little Boss, and this understanding is not taught in school, nor is it found in books or financial reports. I have also tried to share my understanding with others, only to find it very difficult. Similarly, I was willing to heavily invest in GE because, as a business operator, we had tracked GE's corporate culture for many years, and I genuinely believed GE was a great company.

What I mean by "anyone can engage in investing" is that I believe there is no definition that says "only 'certain people' can invest." However, the proportion of people suitable for investing should be very small. Perhaps it is because the principles of investing are too simple, and simple things are often the hardest.

By the way, what are simple investment principles: when you buy a stock, you are buying that company! Simple? Difficult? (2010-02-06)

Netizen: I remember what Peter Lynch said: if you like a company's products, you should consider whether to buy its stock.

I generally think the opposite: I don't touch stocks of companies whose products I don't like because I can't understand (or feel) them. (2011-03-24)

Netizen: Is it necessary to visit the location of a listed company to understand it? Some people rent a place near the company for half a year just to learn about it.

Insiders of a company may not necessarily understand their own company; how can living there for half a year guarantee understanding? Understanding a company does not have a formula; otherwise, we could teach it in school. (2011-01-13)

Visiting companies too much can lead to shortsightedness. What I mean is that many people visit companies to understand their short-term operations, and this mindset may not be very helpful for long-term investment. (2010-04-12)

"Never ask a barber if you need a haircut." (Buffett)

Do you know why Buffett thinks visiting companies may not be useful? (2012-07-27)

Value investing, when understood, is about being able to comprehend a business. Anything that helps you understand a business is useful, but there will not be a sufficient condition that guarantees you will invest. I don't have any better advice. I generally talk about having things you don't do; how to do things right relies on your own exploration. (2019-06-26)

Netizen: I don't understand many things. I feel that the information I gather about corporate culture and business models through annual reports, company websites, reading corporate biographies, and personally experiencing the company's products is too limited, and I can't understand future cash flows (I can't see what position the company will be in future competition). Can you advise on any methods to deepen my research?

Actually, there is a way: start a company, and after a few years, you will understand. Don't think this is a joke. Huang Zheng once asked me a similar question; he always felt something was missing when looking at companies. At that time, we said that running a company might help. Later, he returned to China and started a company. (2020-12-03)

Netizen: How do you know if you understand (or do not understand) a certain company? For example, Moutai; I remember you said you don't drink white liquor and haven't heard of you running a distillery.

Generally, I also understand through public channels. With the internet so developed now, almost everything can be found, but you need to be able to discern. For example, with Apple, you can watch all of Apple's product launch events and compare them with other peers at the same time to see the differences. The company homepage is also a way to understand. Be cautious with news because authors often have opinions; if you don't understand, it can easily mislead you. Once you put in the effort, you will understand.

To answer your question from another angle, I mainly look at two things when evaluating a company: the business model and corporate culture. If I dislike either of these, I won't continue looking, so there is no question of understanding or not; I don't need to understand companies I'm not interested in. If I like the business model (which means I at least understand it), and the corporate culture is also good, then I will patiently wait for a better price. Holding a company that you understand and like means you can completely ignore market fluctuations and sleep well. Buying a "ticket" and then not sleeping well every day, asking others for their opinions, and searching for various related news online is a sign of not understanding. Truly understanding a good company is not easy; in most cases, it's not as simple as just looking at the financial statements, but occasionally, there are cases where you can find a gem just by glancing at the statements, like some of Buffett's companies, but that is actually a rare occurrence over many years. (2019-04-07)

Netizen: The difficulty in investing lies in the uncertainty of future risks.

Uncertainty is dealt with using a margin of safety. (2011-05-09)

Netizen: I believe the margin of safety is paramount; what do you think?

It's one of the important things. (2010-04-04)

My understanding of the margin of safety is based on understanding the company rather than the short-term price fluctuations of the stock. For a great company, sometimes a small price difference won't matter ten years down the line, but missing out on a good company because of a small price difference could be a big deal.

I've thought about this question for many years and never understood what Buffett meant by margin of safety, but my final takeaway is that a company you don't understand, no matter how cheap, may not be cheap. (2020-10-15)

"If you have a thorough understanding of a business and its future development, then the margin of safety you need will be very small. So, if you still want to invest in a relatively fragile business, you will need a larger margin of safety. It's like driving a truck across a bridge that has a weight limit of 10,000 pounds, and your truck weighs 9,800 pounds; if there is only a 6-inch deep ditch below the bridge, you might feel fine. But if the bridge spans a canyon, you might feel you need a larger margin of safety." (Buffett, 1997)

I had never seen Buffett's original words before; I happened to see them today and found they align perfectly with my thoughts. (2024-01-21)

4. Masters Have a Low Error Rate

"I rewatched 'Winning in China' today and heard a contradictory statement from Jack Ma: he said that not making mistakes would be the biggest mistake, while Mr. Buffett's principle is to avoid mistakes. How should we understand and grasp this?" This quote is from a netizen, and I think it's a great question, so I will share my thoughts.

I don't know what Buffett's original words were here; I only remember him saying something like this: first, don't lose money; second, don't forget the first rule. My personal understanding is that he is talking about investment safety. If a person invests in something they don't understand, they may lose money, so they should avoid it. This does not mean that Buffett never loses money; in fact, he has lost more money than any of us because he has made mistakes too. Haha, just his losses on ConocoPhillips amount to billions of dollars. I have never understood why he invested in ConocoPhillips; perhaps he made the mistake of thinking he understood something when he actually didn't? However, I believe the most important reason Buffett is where he is today is that he rarely makes "principled mistakes," meaning he resolutely avoids things he believes are beyond his capability. Over the decades, he has made far fewer mistakes than his peers, and that's all there is to it.

The reason Buffett is Buffett is primarily that he can stick to doing the right thing, which means he does not engage in principled mistakes. For example, he firmly avoids things he does not understand; the most important lesson I learned from Buffett is this.

Jack Ma is talking about another side, which is how to do things right. Regardless of who it is, there is always a possibility of making mistakes in the process of doing things right; I haven't heard of any so-called successful person who hasn't made mistakes. The process of doing things right is often a learning process, and making mistakes is often unavoidable. The only way to avoid mistakes is to do nothing. Sometimes, doing nothing may be the biggest mistake.

I don't know if this explanation makes sense to you? Sometimes I think Chinese is really interesting. One moment we say "kindness does not lead an army," and the next we say "love soldiers like sons"; one moment we say to "think thrice before acting," and the next we say to "decide promptly." Haha, it seems there is no contradiction. They are just different aspects of things, right? (2010-03-14)

A general rule of investing is: the more you act, the less you earn, or the more you lose. (2010-04-23)

Netizen: Your large purchases of NetEase and U-Haul Holding Company (UHAL) seem to have occurred around 2002-2003. In the last three to five years, have there been any classic large investment cases (besides Apple)?

You might as well exclude NetEase; I’m about to become a joke. (Paraphrasing Munger) (2012-02-02)

Making a major investment decision every two years is definitely more effective than making two decisions in one year. (2012-06-26)

In the past four years, I have only truly made one move, which is Apple; the last time I made a move was GE. This might be the reason I will become one of the very few.

If I only dare to make a move every two years on average, why can "retail investors" make more moves? (2012-07-17)

I'm not great at stock picking; I'm at an amateur level and spend too little effort. But the opportunities I have to make mistakes are indeed at a master level; not understanding means not touching. Those who truly understand these two sentences will definitely have good returns in the long run. (2011-11-03)

Good value investors are not those who have never made mistakes. The most typical characteristic of good value investors is that, from a historical perspective, the probability of making mistakes (especially big mistakes) is very low. A general who always wins means a high winning ratio; winning every battle is a myth. (2011-12-19)

Running a business is similar to investing; making fewer mistakes is important. But making fewer mistakes is not achieved by being afraid to do anything; that is called stagnation. Making fewer mistakes should be achieved by consistently doing the right things. And doing the right things means stopping immediately when you discover something is wrong, regardless of the cost, which will always be the smallest cost. Not having a checklist is also very important. (2020-10-14)

Netizen: Looking at Berkshire's 2002 annual report, Buffett said: "When investing in stocks, we expect every investment to succeed. In our 38 years of managing Berkshire, the ratio of profitable investments to losing investments is about 100:1." This is where Buffett truly excels! The impressive part is that he almost never makes mistakes.

Haha, you hit the nail on the head. The difference between masters and other players lies in the low error rate, not in how many good shots they can make. (2011-09-07)

Netizen: Bill Miller lost his capital in this financial crisis; he outperformed the index for 15 consecutive years, but one year's loss wiped out 15 years of profits, losing more than he earned. Did he overestimate himself? I used to think he was a value investor, but this crisis revealed his true colors; he once stumbled with Enron and now with Fannie Mae and other companies. In fact, there are quite a few value fraudsters. So, it doesn't matter how many times you make mistakes; the key is to ensure that you don't lose too much when you are wrong, which relates to the margin of safety.

I believe that when a person starts to pursue beating the index, they may have already lost their composure. Many people have some irrecoverable heavy losses in this financial crisis, but Buffett did not have any; this is definitely not coincidental, but it seems very few people notice this point. (2010-05-23)

Netizen: With the increase in investment experience, in what aspects have you improved compared to before?

Haha, my mindset is much better; I'm not afraid of missing opportunities, and most importantly, I don't make big mistakes. (2010-03-18)

Netizen: Which is harder, investing or playing golf?

Both are my favorite games, and they are both difficult. Perhaps golf is a bit harder. I think golf is harder because in golf, you can't say, "I haven't thought this shot through, so I don't want to hit it now." In investing, you can always say, "I haven't thought it through; I don't want to do anything." (2019-03-30)

5. Short Selling is Foolish

In fact, my greatest wealth comes from the mistakes I've made, and so does Buffett. (2010-05-05)

Netizen: Can you share what you consider your worst investment?

Haha, I've had several losing investments; most can be forgiven, but one was extremely foolish: I went short on Baidu. My previous investments had performed very well, and I got a bit carried away, thinking I was quite capable. I initially wanted to play around a bit, but then I became stubborn, and in the end, I was squeezed out and surrendered, losing a lot of money across all accounts, probably around $150-200 million, with one account still unable to recover.

The most regrettable thing is that this mistake has consumed all our cash reserves, resulting in a huge opportunity cost. Otherwise, I could have helped everyone make more money during this financial crisis. Moreover, the most unfortunate part is that this mistake happened after Buffett told me not to short-sell. Now you know the consequences of not listening to the advice of elders, right? The comforting thing is that the overall performance over the past three years has been quite good. I am somewhat grateful that the financial crisis gave me a chance to turn things around.

Never forget Buffett's teachings: do not short-sell, do not borrow money, and do not engage in things you do not understand!

However, this is not my worst investment because it was purely speculative.

There will be no such examples in the future. (2010-03-07)

Netizen: "The most regrettable thing is that this mistake has consumed all cash reserves, resulting in a huge opportunity cost." Does this mean that when cash runs out, and a really good investment opportunity arises, there is no money to buy it?

Yes, the opportunity cost is significant; losing some money is a minor issue. (2010-05-12)

Netizen: What was the reason for shorting Baidu at that time?

First of all, short-selling is wrong. At that time, I did see some issues with Baidu, and in fact, Baidu later dropped significantly because of this (if I had been able to short-sell until then, I could have made a lot of money). However, I did overlook some important favorable conditions for Baidu, such as the policy environment. In summary, short-selling is a speculative behavior, and I should not have engaged in it. (2010-09-14)

At that time, I didn't know which nerve was in control; it was a foolish act of losing my composure. (2012-03-14)

Netizen: Based on value estimation, is short-selling when prices are too high considered value investing?

Short-selling is not value investing because you often have to face the market's madness, and the worst part is that you don't know how crazy the market can get, so short-selling will keep you up at night. In summary, value investing is the kind of investment that allows you to sleep well. (2011-05-22)

Anytime you are still thinking about shorting someone, it means you are still a speculator (thinking you are smarter than the market). It's time to put away the thought of short-selling and honestly look for deals that will let you sleep well! (2011-10-29)

Short-selling is foolish! (2013-03-04)

I do not short-sell; I don't want to make things difficult for myself. Understanding what is needed to short a company is far more difficult than going long, and once you are wrong, it can be catastrophic. (2020-10-28)

I hope one day you will understand why Buffett says not to short-sell; at that time, your investments will advance further. (2010-05-22)

I have a neighbor (not very familiar) who specializes in short-selling (I don't understand how it works). Recently, he suddenly asked me if I knew about a company called "Genshuixue," saying that several short-selling firms were targeting it because it was cooking the books, claiming that its growth was too fast. I really had our education electronics colleagues look into it, and the conclusion was that there was nothing obviously illogical about its growth in this environment. So I advised my neighbor that China is vast, and such a growth rate in revenue is actually not impossible. At that time, the stock price seemed to be between 30-40. A few weeks later, I ran into my neighbor while playing ball and asked if he was still shorting it. He said yes, their growth was too incredible, and they must be cooking the books. I glanced at the stock price, and that day it was around 80.

I completely do not understand the company "Genshuixue," but what I want to say is: it’s best not to short-sell! There are many things in this world that you do not understand; why make things difficult for yourself?

I actually want to tell those who share the same thoughts as my neighbor that short-selling is very dangerous, and time is likely not on your side. When I saw this company rise from the 30s to over 130, I really started to worry for my neighbor; I thought he would probably have a hard time sleeping, and why go through that?!

It's fine to avoid companies you don't like; just don't short-sell, because being wrong once can make you uncomfortable for a long time, even a lifetime, especially for those who already have money. No one wants to have to get rich twice. (2020-08-11)

6. Not Using Margin is a Basic Requirement for Investing

If you understand investing, you do not need to use leverage because you will eventually become wealthy. If you do not understand investing, you should not use leverage; otherwise, you might end up exposed. Investing is a joyful endeavor, and using leverage can lead to sleepless nights. (2020-12-06)

Netizen: In business, you can take out loans; why do you not recommend borrowing money to buy stocks?

Borrowing money for business generally has a repayment period, and the borrower usually has a good understanding of the business they are engaging in, but many people still end up in lifelong trouble because they borrowed money for business.

Borrowing money to buy stocks means using your other stocks as collateral, which is entirely controlled by the broker, but when the market crashes, they can demand you sell stocks to repay the loan at any time. The stock market can sometimes become unimaginably crazy; someone using margin might only need to encounter one instance of market madness to suffer severe losses (wiped out). Even someone as smart as Munger once got into big trouble because of margin in the 1970s. The impressive thing about Buffett is that he has never had a fatal problem in his investment career. Buffett has said that even if there is only a 1% chance of bankruptcy, you should not engage in it. Those who understand investing do not need to use margin, and those who do not understand investing should definitely not use margin. (2011-09-08)

Netizen: I decided to apply for a margin account! Brother Duan has always said not to borrow money, but I just can't help it!

From now on, you will have an exciting life! (2012-08-10)

Netizen: If 20 years ago I had borrowed money to buy good companies like Apple, Moutai, and Tencent, it seems there would be no problem. But those who use leverage always tend to buy recklessly.

Over the past twenty years, Apple has dropped 40% or more from its peak at least 10 times, and 10-20% drops are countless. If you had bought Apple on margin, even if you didn't go bankrupt, you would likely have been scared out of your wits? (2023-12-19)

Netizen: I invest with low leverage, such as within 0.3 times, with a financing cost of 6%. I build positions when the index is at a low level. In the domestic market, a margin account generally needs to drop by 70% to be liquidated. Is this low-leverage long-term value investment strategy acceptable?

Do not do evil, no matter how small. (2019-05-20)

Those who use margin are not foolish, but using margin can become addictive until you fall into a pit. In fact, Buffett said it well: if you understand investing, you do not need to use margin because you will eventually become wealthy. (2024-09-03)

Long-Term Capital Management is a great example. Those people were extremely smart, with two Nobel Prize winners and a group of particularly "capable" individuals, and they even bet their own fortunes. (2024-09-01)

Netizen: In 2023, I waited for over half a year, but Moutai just wouldn't drop. I couldn't resist and bought it at 1600 yuan with all the money I had. Recently, it has been dropping all the way, but I have no extra money to add to my position. I really want to borrow money to buy the dip.

We do not know how crazy the market can get, nor do we know how bad things can become. Not using margin is a basic requirement for investing! We always talk about 10 or 20 years, but using margin might put you in trouble before that, which is unnecessary. (2024-09-18)

Netizen: The A-shares are in turmoil now; I am so glad I didn't use margin; the pressure is much less. When it really comes to a crisis, you will realize how precious the principles you mentioned are.

The ability to do things right can only make time stand on your side when you are doing the right things; otherwise, something will eventually go wrong. (2015-08-10)

Regardless of whether you borrow money or not, you will lose countless opportunities in your life, but borrowing money might mean you will never have another chance. (2010-04-11)

Using leverage to invest in real estate is not fundamentally different from using margin, but when problems arise, it will be worse because the liquidity of real estate will definitely be lower. (2013-10-09)

Netizen: I feel very ashamed; I have been familiar with these principles for over a decade and can recite them, yet I still occasionally have the "accidental" thought of using margin. Fortunately, I didn't actually do it.

You should feel a bit ashamed. Understanding how to earn slow money is not easy, but understanding compound interest is even harder. Slow money, under the influence of compound interest, can have a very powerful effect. (2024-09-04)

Netizen: If I invest in a company with a high debt ratio, does that count as using margin?

It doesn't seem to directly involve using margin, so it won't require you to get rich twice. However, I do not like to buy companies with high debt ratios unless I can understand them particularly well. (2016-11-12)

"If you want to improve your cognitive ability, it is absolutely essential not to forget the mistakes you made in the past." (Munger)

This reminds me of the story of a thief who, after being caught, was filled with thoughts on how to improve his stealing skills.

So there are two natures of mistakes here: (1) doing the wrong thing—this should not be done again—put it on the "not to do" list; (2) making mistakes in doing things right—this is unavoidable but can be improved through learning. The thief made the first mistake but used the second improvement method, which would be worse.

"It is best to learn profound lessons from the tragic experiences of others rather than from your own. Some of our successes were predicted long ago, while others were obtained unexpectedly." (Munger)

Not listening to the advice of elders leads to suffering both now and later. After reading this sentence, most people still won't listen. Being able to learn from one's own mistakes is already impressive; those who can learn from the mistakes of others are truly geniuses.

Those who persist in making the mistakes they have made before need not be too unhappy; at least over 85% of people in the stock market are like this. Having company is always a good thing. (2012-06-26)

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