Reading,  Wealth

The Psychology Behind Long-Term Investing: Understanding the Cognitive Foundations of Compound Growth

It is easy to believe that a financial background is not required to enter the financial industry, that is, the so-called professional background is not necessarily better than the semi-monk.The rationale is persuasive and even lethal-because a large number of successful people in the financial industry have no financial professional background.
It is indisputable that there are many star fund managers and investors who exist like gods and are always ready to fall from the altar, widely from physics, mathematics, electronics, machinery, chemical engineering and other basic disciplines and science and engineering majors.
On the financial road of no return, analysts from various non-financial professions seem to have “invisible wings”.It can be said that heroes do not ask where they come from. In addition, the financial industry “changes in the sunset every day”. The diversity of financial elite academic qualifications is probably rare in various industries.
A friend recently confirmed this myth by voting with money.In a famous enterprise, he once asked an economist: “What major is good for on-the-job graduate school?”The economist replied categorically: “Don’t read finance.”Therefore, he finally opened the blind box at a loss and chose to read a master’s degree in psychology.When I asked why, he relayed that the economist felt that finance was empty, or that other occupations could be transferred from finance in terms of skills, but finance itself lacked industrial accumulation.
If so, what’s the point of studying finance?
I think of one of the most senior and well-known financial practitioners, Warren Buffett, who is a finance professional.Buffett’s undergraduate major was finance at Colombia University, and his mentor was Benjamin Graham, known as the father of securities analysis.Graham’s major was not business, and his study and work never left economics and finance.Moreover, he also devoted himself to financial education and talent development. The famous CFA certificate was initiated by Graham in 1962.Like his pupil Buffett, they were both more famous and valuable than Graham himself.
But just as Stalin and Mao Zedong both wrote good poetry does not prove that the poet was a blessed revolutionary, the Graham and Buffett legend is still a little pale for the precarious sanctity of the financial profession.
Convinced and saved me, I decided that this was still promising professional evidence, not a traditional finance textbook or economics classic, but a popular financial book-Morgan Hauser’s Psychology of Money: The Eternal Truth about Wealth, Humanity, and Happiness, whose subtitle was somewhat cliche, but seemed to convey the hidden but distant mission of learning finance: the eternal truth about wealth, humanity, and happiness.
Irish writer Oscar Wilde said: “In fact, almost every pleasure and pleasure probably contains an element of schadenfreude.”On the dangerous road of pursuing wealth and freedom, after suffering the suffering and test of human nature, those who escaped from the tiger’s mouth and survived the disaster naturally dared not look back at Sodom City for fear of becoming a salt pillar or a clump of leeks.The faithful, who enjoyed it, could not tell whether it was a snowball rolling or a giant stone of Sisyphus.
Compassionate people like me recall another embarrassing fact for Chinese investors: “long-term ism” pulses every few years, and ultimately still can’t compete with all kinds of theme stocks.The core content of finance is trading, risk management and decision-making across time and space.The basic idea of “long-term doctrine” on this issue is to rely on the “compound interest” effect brought about by time to steadily and continuously accumulate wealth.Among them, Hillhouse Capital’s Zhang Lei statement is more representative, he said in the book “Value”:”Long-term doctrine is not only a methodology, but also a value.”Water doesn’t compete, but it competes.”One of the symbols of the era of knowledge payment: Luo Zhenyu’s annual New Year’s speech is also related to it, that is,”Only long-term believers can become friends of time.”
A time to follow the crowd, the words must be called secular quite fashionable.However, once any concept rises to slogan, it is likely to be simplified or even vulgar, and it is more likely to become an excuse for laziness and procrastination.Of course, advocacy of long-termism and shallowness about finance are like two sides of the same coin. They can exist at the same time absurdly and logically.
In fact, compound interest itself is a financial concept.The classic interpretation of chronism comes from Warren Buffett, who describes the power of compound interest as “snowballing,” and his partner Charlie Munger, who argues that “compound interest thinking is one of the most important models on earth.”However, their student and collaborator Li Lu went further, raising compound interest to a modern level, bluntly saying that “compound interest phenomenon appeared only after modern civilization, and its power is so strong that people cannot understand it”,”When we look at long-term capital returns, we often ignore the existence of compound interest.”Over the past 200 years, the inflation-adjusted average annual return has been about 7%. What is the total return of compound interest?750,000 times.”Modernization can be said to be rationalization, while compound interest thinking and the financial model behind it are counterintuitive.Morgan Hauser repeatedly stresses in his book: “This counterintuitive nature of compound interest leads the cleverest of us to ignore its power.”
What’s the point of studying finance?Compound interest is just one example of what is essentially a rational cognitive exercise in finance that helps people get out of linear, instinctive intuitive patterns and establish scientific thinking about money and markets.Munger has repeatedly said that life requires models, and preferably multiple thinking models, which is another expression of the scientific spirit.One key to perpetuism is repeatability.This is one of the characteristics of scientific research and why chronism requires freedom from arbitrage or speculative temptations and superstitious conformity.
The Psychology of Money offers a rare insight: “But good investments don’t necessarily mean the highest returns.Because high-return investments tend to be one-off, they are difficult to repeat.Good investments are investments that consistently yield good returns and are repeated over time–and that’s where compounding comes into play.”
Long-termism is a value that conforms to the scientific spirit.Excessive short-term returns are exactly the options that can be ignored or eliminated.One word is popular today: algorithm.Long-termism is more about maximizing the total return based on compound interest by keeping the algorithm valid for as long as possible, rather than being the opposite of “time’s friend” as in the case of carving a boat for a sword or bragging about one’s father’s day.In other words, it is precisely because human beings have entered a modern society that advocates science that the values governing resource allocation and its economic and financial system can continue to bring compound interest, and short-term catching up dreams such as the “collective farm movement” and the “Great Leap Forward” can be gradually abandoned by history.
The first revolution in finance was to move from the mean to the variance of returns. The second revolution was to try to determine, based on known asset prices, the prices of other related assets.As Buffett says, if he goes to business school for an investment class, he only talks about two aspects: how to think about stock price volatility and how to evaluate business value.
But those who delve deeper into what finance is all about often question buffett’s failure to follow portfolio theory, instead concentrating on holdings and denouncing derivatives such as options as “weapons of mass destruction.”But these people ignore Buffett’s Berkshire Hathaway often holds huge cash reserves, the latest public figure is close to $150 billion; they also don’t know that Buffett is a master of derivatives trading_he has repeatedly used call options in investment and merger cases to greatly amplify returns, and has long invested in selling credit default protection products and selling European stock index put options.It should be noted that his derivatives often have a starting period of either 15 or 20 years, which still conforms to the principle of long-term ism.
How to correctly view learning and practice, just as how to distinguish between the words and deeds of big men, is likely to be a lesson that investors need to learn throughout their lives.Morgan Hauser’s advice is persuasive to ordinary people.He uses the example of fever therapy to show us that people are better off choosing “rational than irrational” strategies.Malaria fever therapy has been so effective in helping people fight infectious diseases that it even won a Nobel Prize for its contribution, but it can only be used as an adjunct to treatment because people can’t stand the pain of fever.
Markowitz, by contrast, won the Nobel Prize for economics for portfolio theory, but this balancing of risk and return was not aimed at maximizing returns, but because risk diversification helped to achieve long-term prosperity by enabling people to avoid feverish pain.Thus, this financial theory seems to be a distraction, but humanly feasible.
The micro-foundations of chronism include not only finance in the traditional sense, but also psychology. The resulting behavioral finance has also become a discipline of finance, and many economists have won Nobel Prizes for their research.
Munger’s emphasis on studying the psychology of human misjudgment is similar to behavioral finance.The problem both need to solve is how to avoid interrupting the process of continuous compound interest because of mistakes.It’s hard for ordinary people not to make mistakes.Based on this point, this book emphasizes fault tolerance space, and there are two specific methods.The first is structural thinking or dumbbell planning.Taleb makes this abundantly clear in Black Swan, Antifragility, and Asymmetric Risk.The specific operation can leave enough cash like Buffett, or it can allocate more conservative assets at the same time as some radical operations.
More importantly, the second rule is to avoid “single point failure”.How to improve your fault tolerance?Therefore, like data backup and emergency power systems, set up a plan and establish a buffer mechanism to ensure that you will not be thrown out of the arena because of mistakes.This resilience is enough to “make compound interest work wonders for you in the long river of time.”
Morgan Hauser’s biggest lesson is that chronism requires a micro-foundation at the cognitive level, and financial training implies a personal psychological mechanism that is implicit in it.Rockefeller famously said,”Those who work all day do not make money.”Wealth is a compensation for knowledge, not a reward for diligence.”Of course, this kind of “money psychology” does not have to be pursued diligently in the classroom. It can still be achieved by persisting in self-study and trial and error in practice.This in turn explains why successful financial practitioners tend to love lifelong learning more.Because learning and cognition have self-energizing compound interest, this is the deeper micro-foundation of chronism.

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