Investing in stocks requires a multifaceted knowledge base, such as financial analysis, macroeconomics, and asset allocation, where it is best to have a basic understanding of each, and even to delve into psychology and philosophy. However, if one must select the most essential knowledge to learn, I believe it should be the knowledge of "how to understand the market."
Why is "understanding the market" so important? Because the market is the first thing we face in our investments, it is the most direct manifestation before our eyes, and its fluctuations are the most likely to lead us to misjudgments. If we have a wrong understanding of the market, then subsequent financial analysis, asset allocation, investment psychology, and other aspects will be misplaced in investment practice. Therefore, correctly understanding the market is the first threshold in our investment.
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For example, "Is the market an efficient market or an inefficient one?" The answer to this question can directly test your level of understanding of the stock market. If you believe that the market is always efficient and always right, you cannot engage in value investing. Because value investors believe that the market often makes mistakes, and that there are often a group of foolish people in the market who sell the stocks of good companies at low prices, giving them the opportunity to make a lot of money.
Technical analysts generally believe that "the market is always right." Therefore, they chase the rise and kill the fall to follow the so-called trend. Then the problem arises, if the market is always right, how can technical analysts have the opportunity to buy at a low price? If no one in the market makes mistakes, then no one can achieve excessive returns, and technical analysts themselves are certainly not making much money. Relying on technical analysis to achieve financial freedom will become a wishful thinking.
I personally believe that the market is mostly inefficient most of the time. Most people in the market often do the wrong things and foolish things, which is why there are always many people cutting their losses at the bottom of the market and many people bravely buying at the top of the market.
Why can't many people hold on to stocks or funds? The reason is that they believe the market is always right. They think the price the market gives them now is correct, and it may be lower in the future. On the contrary, value investors think the market is a group of mob, the market is a group of fools when they are stuck. They believe that the current market price is unreasonable and that the market will eventually correct its own wrong pricing.
I can hold my position when I am stuck, and it is basically the same idea. I think a group of ignorant people are leading the current price, and I don't need to follow their actions. If I have spare money, I would rather take the opportunity to buy, using the opportunity that these ignorant people make mistakes to make a lot of money from them!
This leads to the theory of "Mr. Market." The theory of "Mr. Market" was first proposed by Warren Buffett's mentor, Benjamin Graham. He said: "Imagine you are trading stocks with a person named Mr. Market. Every day, Mr. Market will definitely propose a price that he is willing to buy your stocks or sell his stocks to you. Mr. Market's mood is very unstable, so on some days, Mr. Market is very happy, only seeing the good days in front of him, and at this time, Mr. Market will quote a very high price. On other days, Mr. Market is quite frustrated, only seeing the difficulties in front of him, and quoting a very low price. In addition, Mr. Market also has a lovely characteristic, he doesn't mind being neglected, if what Mr. Market says is ignored, he will come back tomorrow and propose his new quote. What is useful to us about Mr. Market is the price in his pocket, not his wisdom. If Mr. Market seems a bit abnormal, you can ignore him or take advantage of his weakness. But if you are completely controlled by him, the consequences will be unimaginable."A comprehensive and profound understanding of Mr. Market theory is crucial for us to achieve value investing and financial freedom! I believe that everyone who is ambitious in investing should learn the Mr. Market theory.
Recently, when I mentioned in my articles that there will be a big bull market in A-shares in the future and cited the examples of A-share bull and bear markets that I have experienced in history, some friends expressed opposition. They said, "The past cannot represent the future. Past experience is outdated and meaningless for the future market."
I admit that each round of the market has its own characteristics, such as different hot concepts, different durations and increases in the market, and so on. But human nature never changes, and the Mr. Market theory is always applicable.
In 1634, the craze for buying and selling tulips spread to a national movement in the Netherlands. At that time, a tulip root that cost 1,000 yuan was appreciated to 20,000 yuan in less than a month. In 1636, a rare variety of tulip actually reached a value equivalent to a carriage and several horses. Faced with such huge profits, everyone was overwhelmed. They sold their property just to buy a tulip.
In 1637, the price of tulips had risen to an alarming level. Compared with the previous year, the total increase in tulip prices reached 5900%! In February 1637, a tulip named "Forever Augustus" was priced at 6,700 Dutch guilders, which was enough to buy a luxury house by the Amsterdam Canal.
Soon, a major collapse occurred. Due to the sudden large-scale selling by sellers, the public began to panic, leading to the sudden collapse of the tulip market on February 4, 1637. Overnight, the price of tulip bulbs plummeted. Although the Dutch government issued an emergency statement, believing that there was no reason for the price of tulip bulbs to fall, and advised citizens to stop selling and tried to settle all contracts at 10% of the contract price, these efforts were useless. A week later, the price of tulips had fallen by an average of 90%, and those ordinary varieties were not even as expensive as an onion.
Don't you see? How similar the tulip speculation wave hundreds of years ago is to the bull and bear markets of today's stock market in essence? After hundreds of years, it is still a group of Mr. Market who foolishly cut and sell at the low position of the stock market, and crazily chase the rise at the high position of the market. This manifestation of human nature was like this in the past, is like this now, and will definitely be like this in the future. The current A-share market is a group of foolish Mr. Market who continuously cut and sell at the bottom, leading to the low market.
In our investment, we should make full use of Mr. Market's greed and fear, so that we can correctly understand the market and do a good job in value investing.
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