Perspective on Buffett’s investment psychology: Tactics target human weaknesses
The Buffett Rule is the only rule that Warren Buffett has adhered to in his 42-year successful investment career. The core essence includes value investing, Investors who adhere to the principles of marginal safety, concentrated investment portfolios, long-term equity holdings, etc., such as Keynesian and Monger, who adhere to Buffett's rules, have achieved investment returns that exceed the market. Considering that the U.S. stock market has grown 10 times in the past 20 years against the background of the bull market, there are still 90% of investors who have failed to make a profit. It is almost an impossible task to obtain investment returns that exceed the market in the long term. History has proven that Buffett's Law is The golden rule of investing.
However, although Buffett's Law is well known to the majority of people in the investment community, there are still very few people who have successfully applied Buffett's Law to achieve success. What is the reason?
The biggest difficulty in implementing Buffett’s Rule lies in two aspects. One is the understanding and transcendence of human nature, and the other is the professionalism of investment value judgment. The former involves the mysteries of human psychology, and the latter involves insights into the business operations behind stocks (discussed in another article). Behind any investment market are real people, so the study of their psychology is a unique perspective to gain insight into the investment market.
Intuitive Judgment and the Four Illusions of Thinking
“Charlie and I have not yet learned how to solve the company’s problems. Our success lies in concentrating on the one-foot fence we can cross. , instead of discovering a way to cross the seven-foot fence."
Buffett also insists on investing in industries he is familiar with. He admits that the reason why he does not invest in high-tech companies is that he does not have the ability to understand and evaluate them.
A major discovery in psychology is human intuition. As the French philosopher Pascal said: "Mental activities have their own reasons, but reason cannot know them." Human thinking, memory, and attitudes are all is operating on two levels simultaneously, one is conscious and intentional, the other is unconscious and automatic. We know more than we know we know.
Intuition is the result of genetic optimization during the long-term evolution of human beings. It is a psychological shortcut for human beings to react and deal with problems. Emotions such as fear, greed, optimism, and pessimism in the stock market are all unconscious and automatic intuitive reflections and are human nature. Why do people madly chase the rise (greed) and kill the fall (fear)? Why does the stock market keep repeating the cycle of irrational prosperity and irrational depression? Just because of intuition and nature.
Everything has two sides. On the one hand, intuitive judgment saves human mental resources, and on the other hand, it also brings delusional thinking to humans. Due to the characteristics of intuition such as sensitivity, immediacy, and established pattern responses, intuition has obvious limitations in making judgments and decisions, which leads to hindsight bias, over-sensitivity effect, belief fixation, and overconfidence tendencies. Thinking, which is fully reflected in stock market investment decisions.
1. Hindsight bias
The so-called hindsight bias means that people tend to use the results after an event occurs to understand the cause and process of the event. "Hindsight" refers to this phenomenon. People tend to ignore the natural advantages of hindsight understanding and further belittle the complexity and difficulty of decision-making beforehand. Hindsight bias is ubiquitous and part of human nature. This illusory thinking causes people to tend to overestimate their own abilities and underestimate the abilities of others.
Buffett tries to avoid making such mistakes in his investments. In fact, his investment in Berkshire Hathaway in the 1960s (mainly in the textile industry at that time) taught Buffett a very big lesson. , in the 1980s he was forced to close down his textile business, which continued to lose money. This forms Buffett's very important investment criteria, which is to invest in companies that maintain consistent operating principles and avoid companies that are in trouble. Don't overestimate yourself and expect that you can do better than the company's operators and turn losses into profits.
"Charlie and I haven't learned how to solve the company's problems," Buffett admits, "but we have learned how to avoid them. Our success lies in concentrating on the one-foot fence we can cross rather than discovering the seven-foot fence we can cross. The "foot fence method."
2. Oversensitivity effect
The oversensitivity effect refers to the psychological tendency of people to overestimate and exaggerate the influencing factors of events that have just occurred, and to underestimate them. The role of other factors that affect the overall system, resulting in incorrect judgments and excessive behavioral responses. Sensitivity can enable people to detect abnormal phenomena in time and speed up the response to it, but it can also increase the magnitude of the reaction and make the reaction excessive.
Take the "9?11" incident in the United States as an example. After the "9?11" incident, the scene of terrorists hijacking planes and crashing into the Twin Towers of the World Trade Center in New York greatly stimulated the nerves of the American public. As a result, people greatly overestimated the dangers of air travel and tended to choose other travel methods. American Airlines The industry then entered the Great Depression. However, statistics show that even taking into account the aviation disaster of the "9?11" incident, air travel is the safest of all modes of travel, with an accident rate one-third that of train travel. The over-sensitivity effect is most vividly reflected in stock market investment. When the stock market rises, people are often overly optimistic and tend to believe that the bull market is endless, thus pushing up stock prices excessively; while when the stock market falls, people are often overly pessimistic. , tend to believe that the big bear market is inevitable, so they excessively suppress the stock price. Buffett believes that it is people's irrational behavior that causes stock prices to fluctuate excessively around their value, creating opportunities for investment. He believes that good investors should take advantage of this phenomenon, be fearful when others are greedy (in 1969, when Buffett discovered that people in the stock market had gone crazy, he decisively sold all stocks and dissolved investment funds), and be greedy when others are fearful ( After the U.S. stock market fell sharply and entered a bear market in 1973 and 1974, Buffett opened positions in batches on dips and successfully bought the bottom). Buffett believes that "the decline of the stock market is not a bad thing under certain circumstances. Investment opportunities emerge from the ebb of investment."
3. The phenomenon of fixed beliefs
The phenomenon of fixed beliefs is It means that once people have established a certain belief in something, especially a theoretical support system for it, it is difficult to break people's view. Even when contrary evidence and information appear, they often turn a blind eye. From a psychological perspective, the more people try to prove that their theories and explanations are correct, the more they are closed to information that challenges their beliefs.
The phenomenon of belief fixation is a very important psychological phenomenon in stock investment. Stock investors tend to predict the rise and fall of the stock market and the fluctuations of stock prices. Various securities analysis institutions also gain profits by predicting stock price fluctuations. However, people tend to fall into the thinking trap of fixed beliefs, ignoring the emergence of downward signals when the position is full, and ignoring the accumulation of rising factors when the position is short. Buffett saw through this misunderstanding, advocated understanding the difference between investment and speculation, and believed that investment should be rational rather than irrational speculation. It should be said that this is the essence of Buffett's law - value investing.
Keynes, Graham and Buffett have all explained the difference between investment and speculation. Keynes believed: “Investment is an activity that predicts the future returns of assets, while speculation is an activity that predicts market psychology.” For Graham, “Investment operations are based on thorough analysis to ensure the safety of principal and obtain satisfactory returns. . Operations that fail to meet this requirement are speculation. "Buffett believes: "If you are an investor, what you focus on is the future development and changes of the asset - in our case, the company. The forecast is independent of the company's price changes. "Judging from the above standards, the Chinese stock market is still a market with a strong speculative atmosphere.
4. Overconfidence tendency
Overconfidence tendency refers to the phenomenon of intellectual arrogance when people judge past knowledge. This phenomenon will affect the evaluation of current knowledge and future behavior. prediction. Although we know we have made mistakes in the past, our expectations for the future remain quite optimistic.
The main reason for the tendency to overconfidence is that people tend to recall their misjudgments at moments when they were absolutely right, thus believing that it was just an incident that happened by chance and had nothing to do with a flaw in their abilities. The tendency of overconfidence affects almost everyone. Johnson's overconfidence caused the United States to fall into the quagmire of the Vietnam War in the 1960s, and Nick Leeson's overconfidence caused the collapse of Barings Bank. It can be said that the tendency of overconfidence is the biggest enemy of human rational decision-making. This tendency can also easily cause people to have the illusion of control. Just like a gambler, once he wins, he attributes it to his own gambling skills and foresight. Once he loses, he thinks " It almost happened, or it happened by accident." From a rational point of view, gambling and buying lottery tickets are a game that must be lost in terms of probability. However, there are still countless gamblers and lottery players who are addicted to it due to the illusion of control.
It is not easy to truly get rid of the tendency of overconfidence and surpass yourself. The vast majority of stock investors firmly believe that they can judge the rising and falling trends of the market and obtain profits by "buying on lows and selling on highs". Their profits will far exceed the increase of the market index. However, the irony is that according to statistics, 90% of investors (including institutional investors) have lagged behind the growth of the market index. Although this statistic is such clear evidence, people still believe that they have the ability to be among those 10%. Investors refuse to accept fool-like stock index fund portfolios, thinking it is an insult to their own intelligence. Buffett is clearly aware of his limitations and believes that the market is unpredictable. What can be grasped is the evaluation of the company's value behind the stock and the prediction of future earnings. Therefore, he never expects to benefit from predicting the market.
In addition, Buffett also insists on investing in industries that he is familiar with. He admits that the reason why he does not invest in high-tech companies is that he does not have the ability to understand and evaluate them. At the 1998 Berkshire Hathaway annual meeting, he said: "I admire Andy Grove and Bill Gates very much, and I hope to turn this admiration into action through financial support for them. But when it comes to Microsoft vs. Intel, I don't know what the world will be like in ten years, and I don't like playing the game of one another's dominance. I spend all my time thinking about technology, but I'm still probably the 100th person to analyze this industry. , the 1,000th or even the 10,000th smart person. There are indeed people who can analyze this industry, but I can’t.”
Conformity and group polarization
He not only insists on independence in investment decisions. Think about it and reuse managers who resist industry inertia in invested companies
Herd refers to people changing their behaviors and beliefs under the influence of others. Lemming action is a classic case of herd behavior. This small animal that grows in the Arctic will collectively jump into the sea and commit suicide whenever its population reaches a certain level. In herd research experiments conducted by social psychologists, humans also show a strong tendency to conform.
Conformity can trigger a group polarization effect, that is, the mutual influence of group members can strengthen the initial opinions and beliefs of group members. There are two reasons for the group polarization effect. First, group members tend to maintain behaviors and beliefs consistent with other members in order to gain recognition from the group and a sense of belonging to the group; second, group members tend to make decisions about events that require decision-making. When in doubt, it is often safe to imitate and conform to the behaviors and beliefs of others.
The herd and group polarization effects are fully reflected in human investment activities. People's investment behavior is often influenced by others. When most investors fall into the madness of greed and desperately chase the rise, few investors can calmly and rationally resist the temptation to buy; When prices fall out of fear, few investors can resist the urge to sell. This kind of pressure to follow the herd is very huge. However, wise investment decisions are often "unexpected but reasonable" decisions. The investment value of the hot sectors that everyone is optimistic about has usually been overdrawn in advance, and smart investment Investors will generally continue to observe and track stocks with investment value, and when their stock prices fall within a reasonable range (ignored by most investors), they will decisively buy in.
Obviously, doing so requires not only professional value assessment, but also the firm will to resist the pressure of conformity and the great courage to be the first in the world. Buffett's teacher Graham once taught him to pull out of the emotional whirlpool of the stock market and discover the irrational behavior of most investors. They buy stocks not based on logic, but based on emotion. If you reach a logical conclusion based on correct judgment, don't give up because others disagree with you. "You are not right or wrong because others are inconsistent with you. You are right because of your own opinions." Data and logical reasoning are correct." Buffett followed the teacher's instructions. He not only insisted on independent thinking in investment decisions, but also used managers who resisted industry inertia in the invested companies, and regarded resisting industry inertia as the 12 most important things he summarized. One of the important investment principles. In a speech to Notre Dame Business School students, he summarized the reasons for the failure of 37 investment banks: "Why did they end up like this? Let me tell you, it was stupid imitation of their peers."
Rational judgment based on reasonable data and logic, never swayed by other people's opinions; he only invests in industries and companies he understands, conducts company research himself, and never relies on other people's judgments . He compared investment activities to playing baseball. He believed that investing is easier than playing baseball. Playing baseball means hitting every ball thrown without any choice, while investing only needs to choose to hit the most confident ones. Just hit the ball and you just need to lie down and rest until the right ball comes. It can be said that Buffett is one of the few people who has the rationality and courage to climb out of the cave of false information and gain rational light.
Information cave and the truth
He never reads the so-called authoritative securities analysis on Wall Street, nor is he keen on collecting gossip that affects the stock market
Some foreign research Experts on Iraq pointed out that former Iraqi President Saddam Hussein was born as a civilian, was shrewd and capable, and seized the country's highest power through struggle. But he made two critical and major decision-making mistakes, which cost him his life. The first time was the invasion of Kuwait, which was based on the judgment that the United States would not intervene with force; the second time was the tough stance taken on the nuclear weapons issue, which was based on an overestimation of its own armed strength. Why would a man as smart as Saddam make such a mistake? Experts analyze that Saddam was actually an information cave man. The information he came into contact with was monopolized by senior Iraqi officials, and these officials often distorted, processed and blocked information based on their own interests, or otherwise suited their own needs. , report good news but not bad news, in order to keep your official position. So Saddam stayed in the cave of false information, unable to see the truth outside the cave, and it was natural for him to make wrong judgments and decisions based on wrong information.
Investors are typical information cavers. The investment market is active in exchanges, major shareholders and management of listed companies, public and private funds, securities companies, ordinary shareholders, investment consulting agencies, media, and banks. , lawyers, audit firms and other entities constitute a huge ecosystem. Each individual is in a certain link in the food chain. For their own vital interests, they often publish, create, exaggerate and distort information consciously or subconsciously. Because information publishers "cut" the content of information, many people are manipulated by false or one-sided information and make wrong investment decisions. A typical example is that executives of listed companies collude with market makers and cooperate with the market makers to manipulate stock prices to produce financial data and publish false news. In the end, ordinary retail investors are harmed. In addition, ordinary investors lack professional knowledge to identify complex information and are more likely to be fooled. For example, in the previous stage, the tightening effect of my country's planned issuance of 1.55 trillion special government bonds was overestimated, and my country's seemingly low CPI index (3.2 percentage points) in the first half of this year caused ordinary investors to underestimate the possibility of inflation. This is mainly because This is due to the unreasonable composition ratio of my country's CPI index.
Buffett clearly realizes this. He never reads the so-called authoritative securities analysis on Wall Street, nor is he keen on collecting gossip that affects the stock market. He also does not nervously stare at the changes in the market every day. This makes His investment work was very relaxing. Sometimes he even enjoyed family time and work at home. On the day when the U.S. stock market crashed in the late 1980s, he didn't even have time to pay attention to the stock market. Buffett only believes in himself
How to deal with the weaknesses of human nature
Delay the time of investment decisions when possible and avoid all impulsive decision-making actions. You should remain rational and wise. Effective methods
Objectively speaking, human nature such as intuition and herdity are not absolute shortcomings. Our subjective experience is the material that constitutes human nature. It is the human being's response to art and music, friendship and love, mystery and The sensory source of religious experience. However, it must be admitted that the above-mentioned human nature will lead to delusional thinking, wrong judgment and wrong behavior, which is fully reflected in investment activities. The core of Buffett's Law is not the 12 investment rules he created. Any so-called investment mantra will fail with the passage of time. Only the real principles and laws behind it will be eternal. Buffett's understanding of the psychological weaknesses of human nature in investment activities Overcoming and utilizing is this eternal law and logic. The reason why human nature is called human nature is that it originates from oneself and is difficult to overcome. However, there are still ways to deal with it. People can cultivate themselves from the four dimensions of attitude, reflection, trial and error, and time, overcome the weaknesses of human nature, and obtain satisfaction. investment income.
First of all, the correct attitude is the basis for overcoming psychological weaknesses.
We should face up to and acknowledge the fact that human beings have limitations. This self-effacement and doubt about human abilities is the core of science and religion. Social psychologist David Myers puts it brilliantly, “Science also involves the interplay of intuition and rigorous testing. Finding reality among illusions requires open curiosity and a cool head. The following ideas have been proven to treat The right attitude in life: be critical without being cynical, be curious without being deceived, be open without being manipulated.” It is also crucial to establish this attitude in investment activities, which requires maintaining moderation and avoiding extremes. If you cannot maintain a curious and open mind, you will not be able to maximize the information related to investment decisions, you will not be able to detect changes in the environment and the formation of new laws early, and you will not be able to seize fleeting investment opportunities; and if you cannot If you treat all information with a critical attitude, you will be easily deceived and manipulated by others, and thus fall into countless investment traps.
Secondly, reflection is a way to overcome psychological weaknesses.
As Socrates’ famous saying goes: “A life without examination is not worth living.” Reflection and summary are the source of human progress and are also important for improving the success rate of investment activities and investment decisions. method. The French philosopher Pascal realized that "any single truth is insufficient, because the world is very complex. If any truth is separated from its complementary truth, it can only be regarded as a partial truth." There is no truth in the world. It is absolutely the right thing to do. Before making any investment decision, do not be preconceived and overconfident. Be sure to think from the perspective of opposing this investment decision, try to put forward the reasons and reasons for the objection, or consult other investors for their opinions. Pay special attention to it. The opinions of opponents, this kind of reflection and multiple thinking will greatly improve, enrich and modify your investment decisions, and improve the quality of investment decisions.
Again, trial and error is a means of overcoming psychological weaknesses.
Human beings are boundedly rational, and the investment market is complex and ever-changing. It is impossible for people to exhaust all the information and rules required for investment decisions. Therefore, the effective way to test the correctness of investment decisions is trial and error. , conduct trial investments in possible investment methods and objects, and put investment methods and methods into practice for testing. Criticisms of trial and error may lie in two points. One is that the cost of trial and error is too high, and the other is the timeliness of investment. When an investment opportunity is discovered, the opportunity has been lost.
The countermeasure to the first criticism is to reduce the stakes of trial and error, and make large investments only when the investment decision is confirmed to be effective; the countermeasure to the second criticism is to test the selection of trial and error objects, not the specific investment objects (such as specific investment targets). stocks), but a test of investment rules and philosophy (such as the investment rules of high-tech stocks).
Finally, mastering the timing of investment decisions is complementary to overcoming psychological weaknesses.
Human psychological nature is extremely time-sensitive. In the struggle between rationality and sensibility, as time goes by, sensibility often changes from strong to weak, and rationality often changes from weak to strong. Most of human mistakes occur in impulsive situations. People often do something impulsively and regret it later. This is mainly because people will exaggerate the factors that caused things to happen when they first happened, while ignoring the importance of other factors, resulting in biased thinking and errors in decision-making. This is also very common in human investment activities. Big rises and falls will greatly stimulate people's nerves when they occur, mobilize people's emotions, and make people have the impulse to buy and sell. Investments made on impulse Decisions are often unwise. Therefore, delaying investment decisions when possible and avoiding all impulsive decision-making actions should be an effective way to stay rational and wise.