An acquaintance of mine went bankrupt. The bankruptcy in this case is that his short-term liabilities exceeded his assets and he went bankrupt because he invested in stocks. This was really unexpected.
What kind of a persona was the bankrupt guy?
My impression of him was basically that of a proper, rational, uninteresting career person. That's why I was shocked that he was the one who went bankrupt on the stock market, even though I like to think of things as complicated.
For this native himself, the most important thing is to maintain a normal family life to the maximum extent possible under the existing circumstances. And for more investors, figuring out how he brought his balance sheet down between years seems more valuable. Here's a little bit about that.
First, he borrowed money to invest in stocks.
In fact, the probability of losing money in stock speculation is generally not low, but it's not easy to go broke. In China's securities operation system, it is not easy to go bankrupt by borrowing money on the market - this is because those brokerage firms will be very careful to do this kind of thing, they are not particularly concerned about the investor's life after the loss is not affected, but worried about which unlucky person can not pay back because of losses, they will be very passive. Because speculation losses far exceed the cost of people generally borrowed money that should not be borrowed. This acquaintance of mine, in order to invest in stocks, started by borrowing money from brokerage firms, and then experienced the fall in 2018, but he was not willing to admit losses and leave the market, so he started to borrow money from various platforms. Later, then borrowing money has nothing to do with stocks, just to repay the money previously borrowed to get out of the interest.
Stock investment itself is not gambling, but if you borrow money to buy stocks, the leverage is high to a certain extent, buying stocks becomes a complete gamble. Because the more money you borrow, the more unbearable the interest pressure will become as time lengthens. In this case, the investor will definitely go from being a friend of time to an enemy of time. The time pressure will make the investor's stock return level worse and then have to pay more interest than the average investor. Very often, the only thought in the head of such investors is to try again and never buy stocks again if the capital is returned to pay back the interest. But very few people actually make it to the bank.
My column used to strongly advise against high frequency trading, because that does not affect the average rate of return for investors, even if the transaction costs make people like carrying a pig in a race with others. If this analogy holds, then borrowing money to buy stocks at high leverage is carrying a wolf on your back. You have to run to the finish line before the wolf bites you - never have I seen a runner in such a race win.
Most people are "rational" when it comes to investment planning. As described in my diet plan - what a disciplined and hardworking person - but not when it comes down to it.
In fact, whenever there are ups and downs in the market, losses are painful and profits are crazy, the hysterical side of these guys will be revealed.
Another reason why this acquaintance of mine, who has been borrowing money instead of selling shares to repay it, is that he, as an industry insider, is very bullish on a company in their industry and believes that the company is definitely undervalued.
This is a fault that science guys tend to make. They sometimes mistakenly believe that they have an information advantage and come to a different conclusion, which, by chance, is praised in their environment. So he probably thought he had reaped the secret of martial arts similar to the Sunflower Code - and praised himself, "Gee, I'm so smart!" We can call this symptom "scene-fitting mania" (don't look it up in a medical book, I made up the name).
If a guy with this tendency is quick enough to look it up on the Internet, he can find a mountain of supporters for his idea, all of whom think that discovery is an opportunity that can't be missed - after which the scenario-fit manic may rush to buy stocks that relate to the logic they came up with.
The odds of such a spur-of-the-moment idea actually yielding a superb return are actually very low. More likely, the secret sauce they insist on identifying is actually a wrong idea generated very early on. The probability of these judgments being truly superb is probably only 3%.
Why does such a large probability of error still get so many positive responses on the Internet? The reason is very simple, there is too much information on the Internet, check 100 positive touting, does not prove how brilliant your judgment, because further down, there will be 1000 "just this" and "laugh my ass off" ambush in the back.
Just give me an example you can appreciate what I'm talking about. For example, if you search "shit is delicious" on Baidu, you will not only find countless supporters, but also more detailed ones, such as the comparison between the taste of shit and cat shit, the way to cook shit - there are dozens of screens for this part alone.
So with so many fellow travelers, shouldn't shit fans be preparing an index fund of shit stocks?
But, wait! He should search for the other side of shit, the common sense explanation that people can't eat shit is 1,000 times more than the recommended entry on the practice of shit - of course, I'm using the example of shit to make the issue a little more clear with hyperbole, and I believe we all have common sense in dietary hygiene.
In fact, I think it is another emotion that is more damaging to investors - boredom. The worst thing about boredom is that it makes people actively magnify risk. That is, as we say, people tend to "do nothing" because they are bored.
Let's go back to the man who went bankrupt. In fact, if he did not do "loan sharks" to speculate on such things, life is quite normal and uneventful. But it is because life is too boring, people will have a variety of "flying wisdom".
Why do people hate boredom?
This is because human beings instinctively pay attention to what is changing, and this attention will stimulate the human brain to secrete more pleasure hormones - such as dopamine and endorphins.
If the part of the brain responsible for anticipation (the frontal lobe) realizes that things are too stable, the anticipation curve will be a smooth straight line. With such an expectation curve, people feel bored.
It is probably a human instinct to change the state of boredom, and the way to do that is to expand the expected difficulty of what you are doing, to make the expectation curve jitter, and to focus on the points that cause the jitter. But if you're dealing with something like investing, the odds are that getting rid of boredom is doing something stupid.
Why do people's instincts go in the opposite direction of proper investment decisions?
It's because human civilization is evolving so fast that it's far outpacing the speed of human evolution. Not only when faced with boredom, but all the other qualities that investors need are counter-instinctive as well.
It is for this reason that speaking about financial intelligence and investing with teenage children whose brains are not yet fully developed is likely to have very bad consequences.
Sometimes the investment market is characterized by a collective movement of participants away from boredom, which often breeds crisis.
The most dangerous aspect of boredom is that it is difficult to make an effective defense against the damage caused by this emotion. There are even times when people know they are making the wrong decisions, but will go down the wrong path anyway in order to get more endorphins.
Malkiel, who wrote "A Walk Down Wall Street," was once asked by a reporter, "Didn't you say that index investing is the best investment? Why do you pick stocks to buy yourself." Malkiel's answer was: Index investing is so boring that I can't help myself.
How can you prevent boredom from hurting your investments?
First, of course, do not make investment decisions when you are bored, which is often when your IQ level is at its lowest.
Also, if you think you are too bored to invest with such a small rate of return each year, you may want to spend $10 on a street corner to buy a few lottery tickets and then muse about how to spend it when you suddenly have an extra $8 million in cash. That might make you feel a lot better, and also much safer than borrowing money to use on stock investments.