Getting Rich (9) Actively “in action” - the strongest mentality construction in the investment process
- LI Xiaolai
- Sep 14
- 28 min read
Author: Xiaolai Li, Serial editor: Mr. Y
Introduction
Xiaolai Li once said: “Everything is about your mentality.”
Statistics from multiple large fund companies and data agencies showed that individual investors who received psychological counseling earned an extra 1-3 percentage points in net returns each year on average than those who never received counseling; if you extended the timeline to over 10 years, their long-term net returns could be 15-30% higher than the latter.
From a long-term perspective, a 30% increase in final returns is certainly important, but it's not the only reason for us to build a strong mentality. A good mentality not only affects the investment itself but also directly impacts our overall quality of life. After all, the goal of investing and making money is to lead a better life.
So, why must we continuously build a strong mentality during the investment process?
The core reason is that human beings are inherently very "unreliable." A common situation is that people may make various mistakes at any time and under any circumstances, with or without external information or stimulation. And every mistake in investing leads to an increase in γ (gamma) value, possibly turning the performance value P into a negative one. One of the most typical examples was that during a bull market, many investors not only lost all their profits earned before but even their initial capital because of frequent buying and selling and constantly switching between different investment targets.
Why are people so prone to making mistakes? Because our consciousness is composed of three independent and distinct parts: intellect, emotion, and intuition. The ancient Greek philosopher Plato once used the analogy of a "charioteer, a white horse, and a black horse" to represent the three parts. The charioteer symbolized intellect, the white horse represents feelings or emotions, and the black horse represented impulses and desires. Together, these three drive a "chariot," which is our action. However, they don't always move in sync; in fact, they often conflict with each other. In many situations, before the three coordinated properly, the chariot had already rushed forward, this was the root cause of why we often made poor decisions.
So how can we avoid this situation?
A simple, direct, and effective countermeasure offered by Xiaolai Li was this: when you feel the urge to act immediately out of fear, excitement, or impulse, force yourself to calm down for five minutes. Only after these five minutes should you decide whether to act or not. This habit can significantly reduce your operational errors in the investing market.
After carefully reading this article, you will find that the so-called "mentality" was still our brain at work. Therefore, building a good mentality is, in essence, about continuously improving our cognitive level and decision-making abilities.
What's more interesting is that modern neuroscience has discovered that the brain regions responsible for intellect, emotion, and intuition are indeed different. This, from a physiological standpoint, validates Plato's ancient allegory.
The second method Xiaolai Li offered for building a strong mentality was: actively choosing to be 'inactive'.
In the third part of his book, On Regular Investing (translation of the original version is Regular Investing Changes Destiny), he shared a profound insight that was distinct from traditional financial theory. In classical asset pricing models, "γ" (gamma) is often thought as a type of extra return, an excess profit gained from price fluctuation through tactic operations (like buying low and selling high, dynamic position adjustments, or disciplined rebalancing). In other words, the core of gamma returns is the idea that even if your asset's return was only average, you could still capture price differences from market fluctuation through "smart" operations, thus increasing your overall return.
It sounded very appealing, but Xiaolai Li, through probability calculations, social experimental data, and the long-term performance comparison of actively managed funds versus index funds, revealed a conclusion that was much closer to reality:
Almost all proactive attempts to profit from short-term market fluctuations not only failed to bring extra returns but were more likely to cause losses, especially for individual investors. Since short-term market volatility is difficult to predict, and reacting rashly is prone to mistakes, the best strategy is simply to ignore short-term fluctuations completely.
Don't stare at the market tickers, don't make unnecessary trades, and don't get emotional; don't let your mood swing with the ups and downs of prices. This is "The Art of Doing Nothing" that Xiaolai Li appreciates.
Once we have selected a high-quality investment asset worth holding for the long term, our future investment success is already highly probable. In the following one or two major cycles, we would only need to do one thing: regular investing. This not only greatly simplifies the operational process but also eliminates all unnecessary judgments and emotional interference.
The fewer operations you perform, the smaller your γ value will become, and your investment return P will get closer to α + δ, which is the inherent growth value of the asset itself. For example, the average annualized return for BOX or Bitcoin over the past several years had been continuously above 30%. This perfectly illustrated that the long-term returns came from the assets themselves, not from the "clever" operations.
Let go of that one obsession, and a world of ease opens.
When we are no longer obsessed with the short-term gains and losses and forget about all the "advanced techniques", our mentality naturally becomes peaceful, and we can truly achieve a double-win situation in both investing and life.
Once you have chosen the strategy of regular investing and carry it out firmly, your mentality will also undergo a magical and positive transformation during the process. Because you firmly believe that after two consecutive major cycles of investment (approximately 8-10 years for cryptocurrencies, 15-20 years for stocks), you will surely get considerable returns. In addition, because your operation is extremely simple and free of distracting thoughts, returns often appear earlier in the process, which again reinforces your confidence in your strategy. Your mentality becomes more resolute as you continue with regular investing, and your actions become more decisive and simpler, ultimately creating a virtuous cycle.
Of course, here we must emphasize again: the only prerequisite for all of this is to choose the right asset from the very beginning; Only if you make the right choice will your regular investment be meaningful and successful. How to choose the right asset? Xiaolai Li has already provided examples: the cryptocurrency portfolio BOX, or the more iconic BTC (Bitcoin).
In my personal opinion, deflationary digital assets, represented by Bitcoin, are entering a phase of so-called an "eternal bull market": For a long period of time in the future (perhaps even our entire lifetimes), the exchange rate of Bitcoin against the US dollar is likely to continue to break historical highs in a cycle of 2-3 years. Regarding the extraordinary future of cryptocurrencies and blockchains, the editors will write articles and publish them on " Blossoms Blog" in succession, exploring in depth why they are worthy of attention and long-term holding.
Returning to our main topic, how do you establish a correct and strong mentality at the beginning of your investment journey? The answer has already been revealed: Copy the masters' homework (for example, regularly invest in BOX, Bitcoin, or the high-quality assets chosen by Warren Buffett), then stick with the plan and continuously buy. As long as you have chosen the right asset and insist on buying and holding for two major cycles, your investment return (P) is highly likely to grow multiple times, or even by orders of magnitude.
However, we're not done yet. In the fourth part of his book, On Regular Investing, Xiaolai Li told us: within these two major cycles, it was not that we did nothing at all. It's just that on the field (meaning, in the investing market), we actively choose "inaction". We don't stare at market tickers, we don't trade frequently, and we don't get disturbed by short-term ups and downs, in order to avoid the loss of returns caused by an increase in γ (gamma) value.
But "off the field", we have plenty of space to be proactive, that is where we should be pouring our attention. Whether it's learning, growing, accumulating cognitive capital, or increasing our income, these are areas we can and should actively work on while we wait for a leap in our investment returns.
According to Xiaolai Li's suggestions, once an investor has their on-the-field set up in place (that is, establishing and implementing the regular investment strategy), there are two things most worth doing off the field:
Continuously improve your ability to make money.
Repeatedly receive investment education.
Improve your earning ability so that you have more money for investment, increasing your investment capital, and thus increasing the base for your future returns (P value). Meanwhile, repeatedly receiving investment education can continuously strengthen your understanding of the essence of investment, build your mental resilience, and gradually cultivate exceptional rationality and decision-making abilities. You could say that both efforts are, in essence, a way of "building your mentality and improving your cognition through action". This is because both earning money and investing ultimately rely on mastering and applying logic.
We will detail the methods for improving your earning ability in the next article in this series.
But there is one question we must face right now: even if you have finished this article, or even you have read the bible of investment (On Regular Investing) from Xiaolai Li, why do you still need to continuously and repeatedly receive investment education over the next two major cycles? Do you remember what we mentioned before? Because human beings are inherently extremely unreliable!
Before you have completely experienced one or two major investment cycles, even if you already "knew" a lot of correct and effective investment knowledge, it is still very difficult for you to continuously implement them correctly. When prices drop sharply, ordinary people instinctively feel fear and can't help but want to sell. And when prices soar, people can easily get carried away by the excitement and vainly attempt to sell high and buy low to make a short-term profit. The result is more and more action, a continuously rising γ (gamma) value, and long-term returns being eaten away.
Focusing your attention "off the field" is precisely for the purpose of weakening emotional volatility and reducing the interference of market fluctuations on your mentality. As long as you don't trade frequently, don't stare at the market tickers, and don't worry about the ups and downs, you are less likely to feel the impulse to do something on the field". And as we know, the more actions you take on the field, the higher your γ (gamma) value will be, and the returns (P) you ultimately get will only become smaller.
Unfortunately, correct and effective systematic investment education is extremely rare to find in this world. Xiaolai Li's class, "Regular Investing for Life"*, is one of the few high-quality investment education resources, but it has now stopped recruiting new members.
Fortunately, it is still possible for us to conduct our own "self-education in investing", specific methods include:
Repeatedly reading Xiaolai Li's works, regarding them as the investment bible, reviewing them regularly, and understanding them deeply.
Deliberately practicing your own logical thinking skills. Two important readings recommended by Xiaolai Li were:
The English classic Beyond Feelings, which was also the book that introduced Xiaolai Li to logic thinking.
The list of 137 cognitive biases on Wikipedia, which helps us identify and overcome the various traps in our everyday thinking.
By continuously feeding the brain with correct concepts and knowledge, your reason, like the "charioteer" in Plato's allegory, will gradually become stronger and more dominant. It will get better at managing your emotions (the white horse) and intuition (the black horse). Over time, these three parts of your consciousness will no longer conflict with each other but instead will move forward collaboratively in a unified direction. This will help us to truly invest rationally and win in the long run.
After experiencing two major cycles, those who use the regular investing strategy will become wise enough. They will have enough knowledge to make right decisions, thus becoming truly smart investors.
Investing is a long journey of self-improvement.
Ultimate success does not come from predicting short-term market price fluctuations. Instead, it comes from a deep understanding of yourself and others, an objective view of the world, an investment philosophy of "long-termism" and "inaction," and a relentless commitment to continuous learning and personal growth.
Main texts
by Xiaolai Li, rewritten in English by John Gordon & Xiaolai Li ©2019
The key to successful investing is to be completely objective -- about yourself, the world, and every aspect of everything. Any time we are not sufficiently objective, our gamma (γ) goes up.
It's easy to despair when looking at research done by psychologists around the world over the years. They have repeatedly shown us one result: humans are completely unreliable, and we make absolutely terrible decisions.
Daniel Kahneman, who won the Nobel Prize in Economics in 2002, and his research partner, Amos Tversky, discovered many years ago that people have an extreme aversion to loss. We've already mentioned several times that the pain of losing a dollar greatly exceeds the pleasure of gaining a dollar. Actually, even the way that we describe something can lead to different choices.
For instance, a paper by Benedetto De Martino and his collaborators describes an experiment in which participants were told that they had received an amount of money, such as fifty British pounds. They were told that they would not necessarily be able to keep all of the money, but would instead have to choose between a "sure" option, in which they would keep a portion of the money, and a "gamble" option, in which they would either keep all of the money or lose all of the money. The expected outcomes of both options were the same, meaning that the average results of the "gamble", if repeated over time, would be the same as the "sure" option. For each round of the experiment, subjects were split into two groups, with the only difference being that the "sure" option was framed in different ways:
Gain frame: you can keep 20 out of the 50 pounds.
Loss frame: you will lose 30 out of the 50 pounds.
Obviously, the results of these two frames are the same, because the subject ends up with 20 pounds no matter what. But since the second frame described a loss, the test subjects' loss aversion was activated. The key is what happened next: the activation of their loss aversion influenced their subsequent decisions.
While only 42.9% of the subjects who had been presented with the Gain frame chose to gamble, 61.6% of the subjects who had been presented with the Loss frame decided to gamble. Remember, the amount that participants would keep with the "sure" option was the same for both frames -- the only difference was the way the option was described. Furthermore, this effect was present in all of the test subjects, albeit to varying degrees.
It turns out that people take many risks because they are afraid! Or, to put it another way, it turns out that the reason many people take risks is not that they are brave! And furthermore, the thing that they are afraid of doesn't exist...
But we're not done yet...
The most interesting part of the experiment was perhaps the post-experiment interview. Most of the subjects, when directly asked, were unaware of any bias, but 20% of them were aware of the framing effect, and they couldn't really understand why they had made the choices that they did. Their feelings can be described like this:
I knew what was happening, but I couldn't control myself...
This is really scary. Even when we know what is going on, we still can't control ourselves.
The results of this experiment should leave serious investors like us speechless and terrified. Why? Because we are investing with our own money, not just twenty British pounds. And we're not just investing with the money that we have today, but also with our future money and time, and with the money that we hope our money will make in the future.
We have our money, our time, and what we believe to be a correct goal, but now we see that sometimes we may be unable to stop ourselves from making a wrong or even catastrophic decision, even when we know exactly what is happening! Could anything be more terrifying than this? It's like a ghost story or horror movie! Ghost stories are all the same, from east to west, from past to present, and you can sum them up in one sentence: for some reason, the main character sees themself moving toward destruction, but there is nothing they can do, even though they can see it happening, because they can't control themselves...
This experiment still wasn't over, though. As the subjects made their choices, the researchers monitored their brain activity using functional magnetic resonance imaging technology (fMRI), and they observed an incredible phenomenon.
This image basically reveals why we can't control ourselves.
The results of the experiment showed that when the subjects were unable to control their loss aversion their amygdalae were extremely active. What are the amygdalae? They are two almond-shaped clusters of neurons in the brain that play an important role in our decision-making, memory, and emotions or moods. They can trigger emergency responses such as the fight or flight reflex when we are faced with danger. The amygdalae are small, but they are extremely important in processing emotions, particularly fear.
If you look back on times when you have felt extremely fearful, you will remember that your fear wasn't just an emotional state, but also a physical one. Your heart rate increased, your stomach felt empty, you felt uncomfortable, and you began to sweat. You felt like your brain was empty, because your brain lacked blood and oxygen. This emergency response of the amygdalae was what doomed the subjects; it was what caused the subjects to feel, "I knew what was happening, but I couldn't control myself".
Even more disappointing is that we are unwilling to change. When our mistakes are pointed out to us, we become even more stubborn in our mistaken choices. At this point, you're probably thinking, "But I'm not like this, am I?" Allow me to answer you: you are like this, because we are all like this to some extent.
Francis Bacon made the following observation:
Once a human intellect has adopted an opinion (either as something it likes or as something generally accepted), it draws everything else in to confirm and support it.
What about when that opinion is proven wrong? Nassim Taleb observed the following:
“My characterization of a loser is someone who, after making a mistake, doesn’t introspect, doesn’t exploit it, feels embarrassed and defensive rather than enriched with a new piece of information, and tries to explain why he made the mistake rather than moving on.”
In The Behavioral Investor, Daniel Crosby used the debates over plastic bags and gun control as examples:
Making a paper bag takes three times as much water as making a plastic bag; only 24% of people reuse paper bags versus 67% reuse of plastic bags; paper production creates 70% more air pollution than plastic production; it takes 91% more energy to recycle a pound of paper than a pound of plastic.
98% of guns used in the commission of a crime are stolen; over 100,000 people successfully defend themselves with a gun each year; 9 times out of 10 gun owners defend themselves without firing a shot; more people drown each year than have been accidentally shot since 1980; kitchen knives kill ten times as many people each year as assault weapons.
It doesn't matter which side you belong to, the important thing is that we can see how strongly people hold their opinions, and, if we observe carefully, we will be surprised to see how the fierceness of the debate has nothing to do with the facts. It's as if people don't care about the facts -- all they care about is whether they win or lose. Facts and figures can't change people's opinions. If you win, you keep fighting; if you lose, you keep fighting. And if you happen to notice the facts, will they defeat you? No, you'll keep on looking for facts that support your opinion.
This phenomenon of an opinion growing stronger in the face of evidence that proves it wrong is called "the backfire effect" in psychology. Researchers have discovered that the backfire effect becomes even stronger when the evidence that contradicts the opinion is slightly ambiguous. For instance, after a relatively uneventful New Year's Day in the year 2000, those who thought that Armageddon was coming at the turn of the millennium didn't think, "Oh, it turned out I was wrong, maybe Armageddon isn't coming." Instead, they thought, "Maybe it isn’t coming right in the year 2000", or "Maybe it has been delayed because we weren't pious enough".
The backfire effect, and its tendency to be even stonger when there is not 100% clarity, is even more obvious in investing. The clearest example is the prognosticator who constantly gives inaccurate predictions. They may have been proven wrong many times, but because there is so much uncertainty in the investing world, they not only don't admit defeat, they double down, saying, "Just you wait! I'll be proven right someday!"
There are so many ways in which we are unreliable. Daniel Kahneman and Amos Tversky started exploring behavioral economics around 1972. We now also have behavioral psychology and behavioral finance. More than 130 common cognitive biases have been identified (most of them are listed on this Wikipedia page), and I'm sure many more will be discovered.
Overconfidence leads to mistakes, protecting our self-image leads to mistakes, the way we talk about things leads to mistakes, our moods lead to mistakes, a lack of rest leads to mistakes, changes in blood sugar levels lead to mistakes, and even sunlight can make us more likely to make mistakes. Furthermore, our perception of risk is always incorrect, our perception of gains and losses is twisted, a lack of information can cause mistakes, and too much information can cause mistakes. The list goes on and on. Even worse, even when we are aware of our biases we still can't control ourselves, and when we've clearly been proven wrong we double down on our beliefs.
Can you see how unreliable we are?
With more and more evidence showing how unreliable we are, there is an old saying that has become an article of faith for many people:
You are your own worst enemy.
Don't believe this! Since it's only partially true, it provides no useful guidance for anyone. Don't spend all day thinking about how to "defeat yourself". If you treat yourself as an enemy and spend all day thinking that you are someone to be defeated, you'll never be happy. Even if some people who do this make it to some end point, they still won't be happy, and they might kill themselves trying. If you think about it, it's no wonder that some people don't want to keep moving forward after they've reached some arbitrary end point.
I prefer Plato's Chariot Allegory from two thousand years ago. That was a time when even doing an autopsy could be considered witchcraft, so Plato had no way of knowing what we now consider to be common knowledge about the human brain. Namely, that it has three levels, which can be referred to colloquially as the reptile brain, the monkey brain and the human brain.
Put simply, the innermost portion, the reptile brain, is in charge of intuition; the middle portion, the monkey brain, is in charge of handling emotions; and the outermost portion, the human brain, is in charge of logic and reasoning. It's not an exaggeration to say that all of human culture is based on the neomammalian cortex, which I refer to here as the human brain. The largest difference between humans and other mammals is the development of this cortex.
When the subjects of the experiment mentioned in the previous chapter were presented with choices, they used their human brain to understand them. As soon as they started to take action, their loss aversion was activated by their monkey brain, but the not-always-correct instinct that loss is a bad thing comes from the reptile brain. When the subjects were unable to control themselves, this was because their monkey brains acted faster than their human brains, so whenever they had to make an immediate decision, the monkey, or even the reptile, raised its hand first. By the time the human had realized what was going on, it was too late. This is why the best way to have a cool head in daily life is to first close our eyes and do nothing.
The metaphor that Plato came up with 2,000 years ago is surprisingly similar to what scientists today have postulated after closer observations of how brains work. Take a look:
Brain structure | Colloquial name | Plato's Chariot Allegory |
Outer cortex | Human brain | Driver |
Inner cortex | Monkey brain | White horse |
Brainstem | Reptile brain | Black horse |
I like Plato's metaphor better than the "human, monkey, and reptile" names because driver, white horse, black horse and chariot describe a unified system. The chariot is our body, and our brain has three selves: a driver, a white horse, and a black horse. These three selves shouldn't be enemies; they should work together. The better they work together, the more efficient the chariot is. If they can't work together, the chariot is useless.
In the beginning, the black horse is the strongest, because, from a genetic perspective, it is the oldest. It provides the most basic and rapid responses that allow us to survive in a treacherous world. Reptiles have no driver and no white horse, but they have been able to survive for so long -- much longer than humans -- with just one black horse. If a smaller animal of a different species enters its world, it eats it (Feed!); if a smaller member of its own species of the same sex enters its world, it attacks it (Fight!); if a member of its own species of the opposite sex enters its world, it copulates with it (Fuck!); If a larger member of its own species of the same sex enters its world, it runs away (Flee!). If something that is none of the above enters its world, it stays still (Freeze!) All of this is without contemplation and without emotion.
The white horse is younger than the black horse, so it is weaker, but it can handle more situations. Emotions can help us judge good and bad, and make us feel happy or sad based on the results of our choices. This helps us learn and remember so that we can make better and more rapid choices the next time. All of the basic emotions, such as happiness, sadness, fear, revulsion, anger and surprise, can be seen as shortcuts to accessing our learnings. A certain situation will give rise to a certain emotion, which will activate an instinct that activates a behavior, or the emotion may even directly activate the behavior.
You can understand the process like this. When you encounter a situation, if the black horse can handle it it handles it directly. But the black horse can only directly handle limited types of situations, and if it can't handle it it hands it off to the white horse. Once the white horse has processed it, it hands it back to the black horse to take action.
We can't treat the white horse or the black horse as enemies. We can't be like those "clever" people who try to eliminate all emotions. Actually, without the white horse the driver has no way to mature, and the chariot would be dominated by the black horse. In fact, emotion is the basis of decision. There have been countless studies showing that if a person's emotional faculties are damaged it impairs their ability to make effective decisions. Even more importantly, emotions are the best and most direct way for people to communicate, and it is because of emotions that people are social animals. At the same time, it is our need for social connection that has developed our emotional faculties.
We can define "keeping a cool head" in the following way:
No matter what happens, all three roles process it once before passing it on to the driver for a final decision.
That is to say that you do not take any action until all three roles have processed the situation. This simple, direct, brutal and effective strategy will change the performance of the whole chariot. The driver will quickly understand that both the black horse and the white horse can have incorrect responses. The driver will further discover that, after repeated communication between the three roles, the white horse may listen to the driver, and the black horse can develop new and correct intuition.
The driver starts off as the weakest of the three, and it is only by keeping a cool head that they can participate, gain experience, and continuously grow. As the driver continuously grows, the white horse and the black horse go through countless cycles of correction and coordination, and they all end up different than before. So when people tell you to "trust your intuition", you now know that your black horse and the black horse of an expert may be completely different. The expert can trust their intuition, but maybe you can't.
Members of my Regular Investing Practice Group have already experienced this magical process.
Before they started regularly investing, their black horses were the same as everyone else's, running away whenever the price fell. As to why they ran away, they didn't even have time to think about it, or even time to be afraid, because they had already run away. This intuition led to the fear and disappointment of the white horse, and the chariot was far away before the driver even knew what had happened.
After reading books, listening to classes and engaging in repeated discussion and thought, the members of the practice group started to exhibit surprising changes.
When the price fell, the black horse still wanted to run, and the white horse was still afraid, but the driver thought about it and said to the white horse, "No! You shouldn't be afraid or disappointed, you should be happy! This situation is good for you, because you can buy at cheaper prices." The white horse understood that its initial reaction was wrong, so it corrected itself. The next time the price fell, the white horse was happy instead of disappointed. After several rounds of this, the black horse also understood, and it began to change: "If the white horse is happy, why should I run?" After each round of successful communication, the driver became more powerful and was able to work more effectively with the horses.
So now, when the price drops, the members of the group have a completely different response!
You must calmly accept this fact:
Your brain contains three roles: the driver, the white horse, and the black horse.
More importantly, these three roles must be friends with each other instead of enemies. In addition to continuously learning, the driver must be in constant communication with the black horse and the white horse, helping them develop new and correct emotions and intuitions that allow the chariot, which is the whole of you, to be its best.
Always remember:
You must be a good friend to yourself, and you must be sufficiently patient with yourself.
As far as how to keep good relations between the three roles, it's really quite simple: "Let's work it out between the three of us." As far as what the chariot, which is your body, should do, first just stay still. Waiting five minutes before taking action is always effective. Don't laugh -- this simple method will greatly reduce your gamma in the trading markets.
……
We previously mentioned the following:
This is the secret of investment: have a 100% objective understanding of the objective world, and a 100% objective understanding of oneself.
This is to say that successful investors must have an objective understanding of themselves and reality. Actually, there is a hidden and even more important area that they must objectively understand: the border between themselves and reality.
Our body is not the border between ourselves and reality, because we are able to actively cause change in areas outside of our body.
We can make extensions to our body. For instance, we can extend our legs using transportation tools like bicycles and cars, and we can extend our brains using Internet devices. Actually, once we are sufficiently proficient with any tool it effectively becomes a part of our body. Clearly, we can influence the world outside of our body. For instance, we can use our trust and respect to gain the trust and respect of another; as parents we can use our behavior to become a model for our children; and as an investor we can hold assets over the long term to achieve excellent long-term returns.
However, there is a border which encompasses the area of reality that we can influence through our behavior. Within this border, we can constantly advance through hard work. Outside of this border, there is nothing we can do.
If an individual is unable to clearly recognize the existence of this border, they will always live a life of chaos and pain.
The clearest example of this is parents raising children. If parents focus their efforts on improving themselves, then they are within their own border, which is good. But in most situations, we find that parents focus their efforts outside their own border, where they actually can do nothing. Children aren't stupid. Actually, their brains have a radar-like ability to see whether or not their parents follow their own advice. If their parents' actions don't match up with their words, the child will find it quite painful, especially since they still don't have a clear understanding of their own border. Their parents are constantly invading their border, and they don't have the ability to defend themselves. This is the source of most negative reactions in children. The child feels pain, and the parent feels even more pain, precisely because they are exerting effort in an area that they can't control. They keep failing and trying again with increasingly worse results until both sides are exhausted.
Of course, a more common example occurs in the investing world. Do investors really need to participate in operations? Maybe sometimes. But we can be almost certain that traders in the secondary market shouldn't participate in the operations of the companies they invest in. In fact, not needing to participate in operations is one of the biggest advantages of investing in the secondary markets.
However, the operators of almost every publicly traded company receive many letters from shareholders every day. These shareholders have all sorts of complaints and advice, and they often end up working themselves into quite a tizzy. They are incognizant of the fact that they are wasting effort outside of their own border. They have no idea that effort outside of that border is completely useless, and that if it has any effect at all it will be negative. They will never understand, because they themselves lack the ability to create an effective business model and eventually secure investment from the public. If they were able to do so, they would discover that it's terrible to have so many people on the outside trying to influence you, and that it's even worse to be actually swayed by those on the outside. You could even say the following: a company that is easily swayed by the secondary market is not worth investing in.
Let’s take another look at the equation that describes our returns:
p = δ + α – γ
The p (performance) on the left side of the equation represents our final returns. On the right side, δ (delta)is an investment that matches the returns of the market with a β (beta) of 1. For regular investors, α (alpha) depends on our careful choices before we start investing. Finally, γ (gamma) represents gains that were lost due to mistakes.
We have shown several times that as long as you don't do anything you won't make mistakes, so gamma should be zero and performance should be maximized. Unfortunately, you will always have the impulse to do something to change things and make them better. There's no way around it, because you are human, and our brains were designed to survive in dangerous environments. For tens of thousands of years, "do something when you encounter danger" was the best strategy, and those who chose to "do nothing in the face of danger" died out long ago. Our brains are still the same today, only able to understand immediate danger, and unable to understand future gains. It's just like we mentioned in Chapter 3 of Part Four: even in the face of more than two hundred years of data showing otherwise, people still think that cash is a truly safe investment.
But if you invest in an MSCI World Index fund, or an S&P 500 fund, what can you do? Can anything you do influence it? You can't change the direction or speed of the development of the world. You also can't change the direction or speed of the development of a country, region or industry. And even if you hold stock in a company, you're unlikely to be able to change it. Actually, aside from changing yourself, there's not much you can change. The sooner you realize this the better.
Most funds are established to chase alpha. Even though there are some clearly successful examples, they are extremely rare, and we can't eliminate the possibility that they were just lucky. Even Warren Buffett has clearly been lucky: he was born in the US. In addition to the US having been the fastest growing area in the world over the past fifty-five years, it has also had a stable legal environment in which private property has been relatively protected. If Warren Buffett had been born in South Korea, which has the highest rate of presidents and tycoons going to jail, how would he have done?
How difficult is it to create alpha? Someone once joked that if you threw stock certificates in a room, let a monkey into the room, and made a fund based on which stocks the monkey peed on, you could still beat the fund managers of most actively-managed funds. Sadly, the joke is correct!
According to a report in the Wall Street Journal, in the fifteen years ending in 2016, 95.4% of mid-cap funds underperformed the S&P MidCap 400, 93.2% of small-cap funds underperformed the S&P SmallCap 600, and 92.2% of large-cap funds underperformed the S&P 500...
Across the world in recent years more and more money has been flowing into passively-managed funds, and relatively less has been invested in actively-managed funds. It is said that money is smart, and it flows to where it can grow. Another example is how it flows from the hands of those who love to spend to those who choose to invest.
American theologian Reinhold Niebuhr's "Serenity Prayer" is in fact a deep meditation on these boundaries. Its most common form is as follows:
God, grant me the serenity to accept the things I cannot change, Courage to change the things I can, and wisdom to know the difference.
Awareness of borders, a long-term perspective, and macro-observation. Together, these three concepts can change a person's personality. My students and I have all felt this. People say that personality can decide one's fate, but I tend to believe that personality isn't innate, and that personality is only an overall expression of the interplay between the black horse, the white horse and the driver at different times and different stages of development.
For example, deep thinking about these three concepts has made it very difficult for me to become angry. There is nothing that is worth getting as angry as I used to get when I was younger. I have started to ponder the following phenomenon:
Why are some people able to succeed in even the harshest environments?
My choice to be a regular investor, and my eventual ability to explain regular investing in detail, all started from asking myself this question. Looking at things from a long-term perspective can lead you to the opposite of your previous conclusions; macro-observations can lead you to choices that will produce better results over the long term; and awareness of borders can help you avoid trouble and wasted efforts. I have no need to complain about a poor environment, and I don't want to complain about how society is unfair. Unfairness in society is like the markets: as long as you look at it from a long-term perspective it's pretty fair, but if you look at it minute-by-minute it's always unfair. Most importantly, I am increasingly able to accept always being underestimated. Just like in the stock market, you will only be very briefly overvalued, and it's probably a bubble, right?
Objectivity is very important. Not only objectivity about the world, but objectivity about yourself, and careful objectivity about the border of yourself. Furthermore, it's even more important to be objective over the long term. This is the secret of investing. Of course, it's an open secret.
Note:
* In July 2019, Xiaolai Li created the "BOX Regular Investing Practice Group" on the Mixin platform to lead thousands of people to practice the regular investing strategy, which was later renamed the "'Regular Investing for Life' class". The core purpose of this community is to provide members with long-term support for building their mentality and for investment education.
Although the entry of new members to the community is currently suspended indefinitely, the community is still operating normally.
To this day, Xiaolai Li still personally teaches a lesson every few weeks, and sometimes even once a week, to 6,000+ long-term practitioners in the community.
Except for the investment, the “class” also covers multiple fields such as logical thinking, writing training, fitness, reading, English, and programming, etc. These are all key skills for modern individuals to establish personal long-term value and achieve self-improvement.
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