Part Three: The Process of Regular Investing

Your final returns will match up with this equation:

p = δ + α - γ

In this equation, gamma (γ) will always be positive, because all people make mistakes, and they all make the same mistakes...

3.1 Winning Without Fighting

In his book, The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing, Michael J. Mauboussin shared the following image:

Activities on the far right, such as chess, depend 100% on skill, and there is essentially no luck involved. Activities on the far left, such as playing slot machines, depend 100% on luck, and there is essentially no skill involved. Most of the rest of the activities in the image depend on some mixture of luck and skill. So in most situations, if you want to be hugely successful, you have to be more skillful than others and also get lucky. Investing, however, is on the left side of the picture, implying that luck is more important than skill. In fact, luck is much more important than skill, which is why so many smart people end up being unsuccessful in the trading markets.

However, since there are many different types of investing, we need to slightly adjust Mauboussin's placement of investing in the image. For example, long-term holding and frequent trading are clearly completely different. Also, carefully selecting assets to hold over the long term is generally acknowledged to be a successful strategy. If someone doesn't believe this, just show them the chart of the S&P 500 over the past several decades. Regular investing is at its core simply an improvement to the strategy of carefully selecting assets to hold over the long term. Since it hardly depends on any luck, this type of investing should actually be on the right side of the image.

Regular investors only do one thing:

Buy.

Regular investing seems so simple that most people will initially doubt its effectiveness. They think that making money is so difficult that there must be some sort of advanced secret. They say, "That's impossible. How could it be so easy to make money?" When faced with the simple and the complicated, people always want to choose the complicated, because they mistakenly assume that if something is complicated it must be more advanced.

But please take note: the power of regular investing comes precisely from the fact that it only involves doing one thing. This is because doing only one thing means that regular investors have no room to make mistakes by doing other things, which ensures that gamma is 0. All you have to do is buy. In the future you will understand that doing other things is a mistake that may greatly increase gamma.

What about people who think they have all sorts of tricks? If we look at it logically, we will see where their weaknesses are.

For example, we know that regular investors only do one thing: buy. And those with lots of tricks? They want to carry out the well-known secret strategy of "buy low and sell high", so they need to buy when they should buy, and then sell when they should sell. The problem is, when should they really buy? They don't know for sure, and each time they buy it's only when they think they should.

To take it a step further, these frequent traders are missing a key point: in order for their strategy to work, being right just once isn't enough -- they have to be right twice. They must buy when the price is really low and sell when the price is really high. It's the combination of these two trades that will produce the result they're hoping for. If they only get one of the steps right, their effort was all for naught.

If they were able to be right every time, buying when they should and selling when they should across multiple trades, then that would be great! But without help from some higher being, they've basically got about a 50% chance of selling when they should buy and buying when they should sell. They just added one thing (trying to buy low and sell high), and their chances of success have dropped from 100% to 25%.

Regular investors are different. Each time they buy they are "buying low", because, if they eventually decide to sell after two or more full cycles, the price that they initially bought at will always seem cheap. See? That well-known secret of "buy low and sell high" is always working for regular investors.

Frequent traders are definitely not willing to concede this point. "How could I have a 50% chance of making a mistake?!" Alright, let's say you have an 80% chance of being right. Actually, you have to be right twice in a row, so your chances of success are only 80% x 80% = 64%. That's still much lower than 100%! Furthermore, if you have actually tried investing using your own money, you know that being right 80% of the time is incredibly unlikely. If you're right even 60% of the time you can be considered an expert! And if you're right 60% of the time, your chances of being right twice in a row drop to 36%. This explains why the vast majority of investors end up thinking that every action they took was wrong. Once you understand that short-term price movements are an unpredictable "random walk", you will understand why the chances of success are really 50% x 50% = 25%. No more no less.

But we're not done yet! Another hidden and serious detail has been left out. Frequent traders don't understand that what they are depending on is judgment after the fact. Putting aside whether their judgment is correct or not, by the time they realize something, and think, "Oh, this must be an upward trend", they've already missed a portion of the rise in price. And by the time they realize, "Oh, this looks like a downward trend", they can't avoid having participated in some of the drop in price.

This phenomenon is easy to see in the picture above. Even for the 25% of the time that they are right twice in a row, they actually only make about a third of the profit that they think they should. In their imagination, they buy at A and sell at B, but because their judgment of the short-term trend is actually made after the fact, they actually buy at A' and sell at B'.

Just as an aside, the core problem with momentum investing, which many people seem to fall in love with, is basically the same. Since you can only base decisions on judgments after the fact, even if you do everything right your gains are still smaller than you had imagined.

But there's still more! Another detail that must be considered is that the chance of guessing right is actually much lower than 50%, because in addition to going up or going down, the price could stay the same. So our odds of guessing correctly are actually 1/3 instead of 1/2, and our chances of guessing correctly twice in a row are even more startling: 1/3 x 1/3 = 11.11%...

Even worse, these traders don't just have one more thing that they do, they have tons of things that they try to do! For instance, not only do they trade frequently over the short term, they also switch between different investments. It's already very unlikely to make one correct decision to switch from one investment to another, and yet they switch frequently! Even if they're likely to be right 80% of the time, if they switch four or five times their chances of being successful drop below 40%.

Those who constantly research all kinds of investment tactics are even worse off. They read a random investment guide or listen to an investment lecture and are as excited as if they'd reached enlightenment. They can't wait to try out each new strategy. In other fields, this eagerness to find and try new tactics can be an asset, but in investing it can be deadly. Most investors end up being defeated by this sort of behavior, because the price of experiments in investing is so high!

This is why most investors who are truly able to reflect on their behavior after some time in the market resign themselves to accepting the following fact:

Everything I tried to do was wrong.

Their conclusion is not incorrect, because the more things they did the more likely they were to be wrong, and it all happened without their being aware of it. They didn't know that all of their short-term trading strategies depended on luck; they didn't know whether their strategies were really effective; they didn't know that they had to be right twice in a row to be successful; they didn't know that they were missing two thirds of their potential profits because they were making judgments after the fact; and they definitely didn't know that there is a cost to turning even correct knowledge into action. In the face of these factors, even the fees that Warren Buffett has called "vampires" -- because they can kill your returns -- don't seem so scary.

Behavioral economist Meir Statman once referred to a Swedish study which showed, based on figures from 19 stock exchanges, that accounts which traded frequently lost an average of 1.9%-4% per year. A paper by Brad Barber and Terrance Odean showed that men traded 45% more frequently than women, and that men had 1.4% lower yearly returns. Single men traded 67% more frequently than women, and had 2.3% lower returns. A study by Vanguard discovered that the returns of accounts that frequently changed strategies lagged far behind those of accounts that never changed strategies (see Chapter 2 of Daniel Crosby's The Behavioral Investor).

Based on the figures above, frequent traders will likely have a gamma of at least 2%, whereas, had they just bought and held, their gamma would have been 0. Don't underestimate this 2%, because over 30 years a gamma of 2% will cost you 45% of your returns! So we can see that regular investing is the best strategy for winning without fighting.

3.2 Don't Miss It!

October 19th, 1987, is known as "Black Monday". On that day the Dow Jones Industrial Average suddenly crashed. It had risen 38% since the beginning of the year, but that day it dropped 22.6%, and people around the world went into a panic as they watched the crash live on television. Before this, never had so many people watched such a disaster unfold on live television.

The Black Monday crash, which started in Hong Kong and spread to the rest of the world, reminded people of the stock market drop of October 28th, 1929, which also happened to be a Monday. More than twenty years after Black Monday, on September 29th, 2008, following the popping of the housing bubble, the stock market crashed again, setting off the 2008-2009 financial crisis. It was also a Monday.

If there is a heaven there is also a hell. Or, to put it another way, without the existence of such a terrible hell, people wouldn't have such a yearning for heaven.

People can't help but think, "Wouldn't it be great if I could successfully avoid the worst days of the stock market?" It wouldn't just be great, it would be fantastic! In his 2009 paper "Black swans, market timing and the Dow", IESE Professor Javier Estrada calculated that, if you had been able to avoid the ten worst days in the market from 1900 to 2006, your returns would have increased by 206%!

Of course, I hope you've also realized the following fact: there is no way to successfully avoid all of the worst days. It's just like how there will always be some rainy days when you forget to bring an umbrella.

Even if you actually were able to avoid all of the worst days, you would be faced with another uncomfortable fact:

The best days often fall very close to the worst days.

If you really avoided all of the worst days, then you would almost certainly also "avoid" some of the best days. In the following chart from The Irrelevant Investor, the red dots mark the worst days, and the green dots mark the best days.

According to statistics from JP Morgan, six of the ten best days in the stock market occurred within two weeks of the worst ten days. Now, if you missed the best ten days of a ten year period, what would the influence on your returns be?

If you missed the best ten days, you would lose 66% of your returns, which is to say that your gamma would be 66%. If you hadn't made mistakes, that 66% would be yours! Missing the best days has very serious consequences! As we can see in the following chart, if you started investing in 1990, but missed the best 25 days, your returns would be worse than a five-year treasury bond.

So, what should we do? We should do nothing! Never underestimate the power of the Daoist concept of "doing nothing". Actually, it's hard to find a better example than the trading markets to illustrate its power.

Scary headlines attract more eyeballs, so the media makes a bigger deal of large price drops than it does of large increases. The media always prefers to report bad news instead of good news. Aside from the fact that bad news attracts more viewers and readership, reporting bad news is also a better fit for the media's self image. After all, if the media reports good news about a person or company, people tend to suspect that they are kissing up to someone. The April 2017 event on the United Airlines flight (bad news) was widely reported, and stories about Warren Buffett losing $20 million on his United stock (bad news) were all over the place, but no one wrote an article about how Warren Buffett's overall airline stock holdings rose by more than $140 million that day.

Frequent traders always seem to make a big deal out of nothing. This is understandable, because they are always looking at price fluctuations, so their mood fluctuations are much more extreme than long-term holders. Whenever prices go down, you will see them in chat groups and forums all over the Internet screaming, "It's crashing!" But when the price goes back up just as much, they seem to have disappeared. Why is this?

Behavioral psychologists would explain it this way: people hate loss, and the pain of losing a dollar is much greater than the pleasure of gaining a dollar, so even when the price goes up just as much, those people don't get as excited. This explanation makes sense, but I also have another more realistic explanation:

The people running around screaming "crash!" can't handle the price dropping. They were almost certainly so terrified that they sold all of their holdings after the price dropped. When the price went back up, they'd either lost all of their money or exited the market, so they didn't have anything to get excited about. Just like in a ghost story, it's as if they were screaming in another world, and the people in this world had no way to hear them.

The vast majority of people who jump into the market for the first time don't understand investing strategy. Actually, they don't have any strategy, and their reason for entering the market is that they have seen the good days that others have had. But the core reason why most people end up quietly leaving the market is that there are always more bad days than good. The reason why the market still goes up in the long term, despite having more bad days than good, is that, in aggregate, the gains of the good days greatly exceed the losses of the bad days. The problem is that most people have a natural tendency to want to make decisions based on current events, and it's only the few people who have received good education about investing and practiced it over the long term who are able to truly gain the skill of macro observation based on a long-term perspective.

Success in regular investing depends primarily on the following factors:

• the careful choice of an investment;
• the complete execution of the regular investing plan.

Regular investing is an excellent strategy. It's simple, direct, brutal and effective. However, it's rare to see people become successful by using it. One reason is that novices who have just entered the market are often unable to choose the best investment, so in most situations the best they can do is blindly follow the advice of truly successful investors who have shown excellent returns over the long term. They know that this is the only way for them to get more alpha. Unfortunately, those who choose to do this also have an inherent weakness, which is that, because they are actually ignorant, they can't be resolute. It's just like when someone is driving and always feels like their own lane is moving too slowly, so they switch to the other lane, but then find out that their original lane was actually the fastest.

Since all that regular investors do is buy, they definitely experience all of the bad days, including the worst days. However, precisely because of this, they also don't miss any of the good days. Again, the reason regular investing is effective is that it is naturally 100% in accordance with reality.

3.3 Investing is Not Normal Business

Most investors do not realize until very late in the game that investing is vastly different from other types of business. Most investors, like normal businesspeople, love to use the concept of "cost". Every day they compare the present value of their assets to their "cost", and determine their gains or rate of return. Doing this has a strong effect on the fluctuations of their mood.

Most businesses that we see in daily life do calculate their gains in this way. For instance, when starting a restaurant you have your setup costs and your daily expenses. Your setup costs must be amortized over time, and those costs and your daily expenses must be subtracted from your daily revenue to determine your profit. If your business does better and better, one day you will have accumulated enough profits to open up a new restaurant, and you will be very excited, because if things keep going that way you will be able to continue to expand.

The subtle difference between investing and normal business is that investing doesn't have setup costs, and it doesn't have daily expenses, unless you trade multiple times each day and incur a lot of commissions.

The money that you use to invest should not be considered to have a cost. It's okay to borrow money to do business, but borrowing money to start investing is definitely a mistake. People who borrow money to start investing are asking to fail. In fact, they've already failed, they just don't know it. Stay away from them.

Money that has a cost can turn any good investment into a grave. The most common example is borrowing money to buy a house. Real estate can often be a good investment. For example, if you already have enough money and don't need to borrow money from a bank. The problem is that 99% of people don't have enough money to buy such a large asset with cash, which gives banks an opportunity to make money. Please be aware that real estate really isn't an opportunity for the average person to make money. The banks hire the best actuaries, and they design terms under which they can only make money, so people end up spending twenty or thirty years and the price of two houses to buy one house. Why is it always twice the price? Why are the terms basically the same around the world? Because the actuaries set them up so that when a person buys one house the bank earns the price of the house! Real estate is very illiquid, partially because most people live in their house, and if they sell it they won't have anywhere to live. Even if the price looks like it's always going up, it can't go up forever, and when it finally crashes (for instance, dropping over 25% in one year during the mortgage term), the "investment" will have become a "noose".

In 2018, during the long bear market in the blockchain asset market, there was a depressing phenomenon:

The more serious a team was, the earlier they went bankrupt...

A year is certainly short term, but in just a year these serious teams had two bad things happen at once. Speculators had already sold their tokens at a good price, and scam projects had not only done this, they also had no daily expenses, so they were sitting on a beach somewhere enjoying their ill-gotten gains. Meanwhile, serious projects saw themselves as long-term holders, so they hadn't sold their tokens except to pay expenses, and they also were working hard on their projects, so they had to pay a steady and perhaps growing amount of expenses. Prices continued to decline in the bear market, and at the end of 2018 they were again cut in half. But these projects still had to pay fixed expenses, and they had to sell more and more tokens to do so. Many serious projects had the same fate -- they worked incredibly hard to keep things going but eventually ran out of resources.

Money that comes with a cost is scary, but it's just like a small ghost. Money that has a limited term of use is terrifying, like the grim reaper. In Chapter 4 of Part One I wrote this:

The riskiest job in the world is President of South Korea, and right after that is the fund manager who guarantees immediate redemption of capital.

Immediate redemption means that at any given point in time, you must be able to access a certain amount of money immediately. People die because of this. I'm not exaggerating or using a metaphor -- when I say die here I mean die. It's cruel to use people who have lost their lives as an example, so I won't give examples here, but whenever there are extreme movements in the market, you will see this sort of news story.

For regular investors, investing is even more different than normal business. If we must calculate the cost of their investments, their true cost, relatively speaking, is their time, because the time that they invest is much more important than the money that they invest. In the previous chapter we saw how overall time invested is more important than choosing the right time. You must be invested every day, not missing the bad days and definitely not missing the good days.

The greater and more important cost is time. This concept can change how investors feel, and thus change their decisions and results. When you think that your only cost is money, it's hard to resist the impulse to "get your costs out". But once you know that your main cost is time, you will understand that you can't get back the time you have already invested.

More importantly, this understanding will get rid of your impulse to "take profits", because you know that doing so will greatly reduce the impact of your future time! The main cost for regular investors is the time required to be in the market for two or more full cycles. In traditional stock markets, this is around twenty to thirty years. In blockchain digital asset markets, this is around five to eight years. As a regular investor, you know that your results depend on your overall time in the market, so your thinking is quite different from most investors. You know that giving up your time, even if it seems like just a little today, has a huge impact when viewed from the perspective of having been invested for two or more full cycles. It's hard for you to be so cruel to yourself.

There is another important thing to remember:

Many people underestimate or ignore the possibility of something unexpected happening in their lives.

But life is actually full of unexpected events, so your living costs are always much higher than your worst estimates. How much money should you use to invest? People often ask, "Is it enough if I invest 10% of my income?" For this question, though, often using percentages won't help us reach a meaningful conclusion.

Imagine that your money is an egg.

• The yolk represents your daily expenses.
• The egg white represents the savings you have prepared to deal with risk.
• The shell represents the money you have to invest, which can stay in the market no matter what over the next two full cycles.

A lot of people fail at investing not because of their intellect, confidence, or resolve, but because they underestimate the cost of unexpected events in their lives. That is to say, they fail to imagine that the egg white is so thick. For instance, their tooth falls out, a relative comes down with a terminal illness, they are in a car accident, or their child makes an expensive mistake. There are countless examples, but suffice it to say that unexpected events come in many shapes and sizes, and they can be very expensive.

This explains why it doesn't help to talk in percentages. For example, you have $100,000, and you invest 10%. Then, before one full cycle has even passed, you have an unexpected expense of $200,000, and your $10,000 has already shrunk. What do you do?

After being in the market for a period of time, all investors come to the same deep understanding:

Every time you want to sell an investment for cash the price will always fall.

What is the cause of this counterintuitive phenomenon? One cause is that bear markets are always longer than bull markets. Also, when you really need money it's usually when it's hard to make money outside of the market, which implies a weaker economy, so it's natural for the market to fall. Another factor at work is that when the price is rising you're less willing to sell. At times like that, longer-term holders don't have a strong impulse to spend. So the greatest losses always come when you "can't help but sell".

You should now have a better understanding of the following piece of advice, which you have probably heard countless times:

Only invest money that you can afford to lose.

Money that regular investors invest should have no cost and no term. You must be able to invest it for at least two full cycles, and you must have enough money set aside to deal with unexpected events.

This upgrade in thinking is the core reason why regular investors have a relative gamma of 0 or close to 0. If money has a cost, gamma will naturally rise, and if money has a term, then the potential for gamma is unlimited. If preparations for unexpected events are not made, then the potential for gamma is not only large, it also cannot be avoided.

3.4 The Ability to Continuously Earn Money Outside of the Market

The core of regular investing is the ability of practitioners to make money outside of the market. Regular investors must be able to continuously invest over the long term, which means they need to have the ability to consistently earn money outside of the market over the long term. The money that they earn outside of the market must be able to cover all of their daily expenses and also expenses from any unexpected events. Above and beyond this, the more they can consistently earn over the long term the better. This is the part that is truly difficult. Regular investing itself is so easy that it can be summarized in just one word: buy.

Selling the same bit of time repeatedly is the most important upgrade of a person's personal business model, because it's the most basic way to effectively make money while you sleep. In an average lifespan of 78 years, a person only has 10.5 years of work time that they can sell. But if they can make money while they sleep (28.3 years), make use of their nine years of free time, and also use their time in such a way that they are selling it repeatedly, then they actually have income every second of every day. No matter whether they are riding in a car, getting dressed, or spending time with their children, they are always making money. Not only are they making money with at least three times the amount of time as a normal person, they are selling their time repeatedly, so the difference can be huge!

However, most people aren't able to complete this kind of upgrade, and it's true that there aren't many ways to achieve it. Aside from publishing books and teaching online, I haven't been able to find any other feasible methods for myself. Of course, in this Information Age, writing a popular software program is probably an even better way. All of these effective methods are extremely competitive, but that is to be expected given the potential payoff.

Actually, if you can't be the best, it's fine to try to come in second. So, is there an easier way?

The answer is: sales. Because, at its core...

Sales is buying other people's time and then selling it repeatedly.

This is the ultimate reason why people who work in sales often seem to have a higher income than those who work in other sectors. They aren't able to use their time to create a popular product, so they can't sell their time more than once, but they are able to repeatedly sell products created by others, and with the help of Internet tools they are able to ensure that the sales process continues even while they sleep.

As long as you observe carefully, you will come to the same conclusion:

No matter the company, salaries in the sales department are always high.

In addition to sales being important, there is another hidden reason for this: sales is the easiest work to quantify, so salespeople are the most likely to be paid based on performance.

A key similarity between sales and regular investing is that the choices of what to sell and what to invest in are both very important. What is the best thing to sell? It must be something that people need, and something that requires continuous communication to complete the sale. We can observe that the highest paid salespeople often sell things like real estate, cars, courses, or insurance. Why is this? First of all, it's because these are all things that people need. But even more importantly, these items require repeated communication in order to complete the sale.

In fact, everyone should focus on their ability to sell, because at the core of successful selling is one of life's most important skills: effective communication. Isn't every successful sale an example of effective communication? For a child, convincing their classmate to keep a secret from the teacher is a successful sale. For an adult, convincing someone to fall in love with them is a successful sale, and so is securing a promotion or a raise. The ability to sell is the ultimate skill.

After I graduated from university, my first job was in sales. Actually, even though I've had many different jobs since then, in my view they all had sales at their core. For instance, being a teacher was a sales job, because if the students didn't like me, no matter how correct everything I told them was they still wouldn't pay attention. Writing and publishing books is a sales job, because if my titles don't attract readers they won't even give me a second look. As an angel investor, what is the difference between my money and the money of others? There is none, so why should an entrepreneur take my money and not somebody else's? Because I am better at sales.

What is the core of selling? Trust.

Please never think that sales is based on tricking people. People who think like this lack the ability to think long term. Short-term trust can perhaps be gained through trickery, but long-term trust must be built up slowly over time. Trust is valuable because it is so fragile. Just a little bit of carelessness can destroy it. Warren Buffett understands it this way:

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.

If a client is willing to buy a house, a car, a course, or insurance from you, in addition to the product being truly worth buying, it also depends on their trust in you. At its core, trust is much more important than the product being sold. Without trust, no sale will take place. But trust is so important that excellent salespeople will not be willing to sell bad products. They often ask themselves, would I buy this? Would I sell it to a member of my family? Would I sell it to an old friend? People who lack a long-term perspective find this hard to believe, and they may even think that this attitude is fake, but actually salespeople who have excellent performance over the long term take these questions very seriously, and they benefit enormously from this type of thinking.

Train your ability to sell. It's so important, and can be extremely useful in every aspect of your life. Furthermore, everyone has the chance to train themself to be a good salesperson. The most important thing is that it's an upgrade of your personal business model.

Unfortunately, sales still isn't something that everyone is able to do well. So, taking another step back, is there anything else to do? Of course there is. You can improve your ability to cooperate. Since people rarely take this concept seriously, let's make up a new word to describe it: cooperability. Being good at cooperating with others is actually also a small upgrade to your personal business model. It's not an easy thing to do, because increasing your "cooperability" also requires strong communication skills, trust, and being really good at something.

Lots of people are very bad at cooperating. They get quite frustrated, but they always blame their lack of cooperability on the wrong thing: a strong personality, or a bad temper. That's all a mirage, because there is only one reason for poor cooperability: they are not able to do their part well enough. A strong personality or a bad temper is not the reason they can't cooperate well with others. If they were able to do their part well, then others would be willing to cooperate with them even if they had a bad temper. The other party would focus on doing their part of the cooperation well.

You must have a special skill that makes others want to cooperate with you. If you try to cooperate with someone but they are unwilling, the most probable reason isn't that they don't understand your value, it's that you don't have enough special skills to make them want to cooperate with you. It's sad that so many people don't discover that they have no skills until they're over thirty.

What's most important at this stage? The correct answer seems too obvious: honesty. People with no skills are all dishonest in many ways. They are dishonest to other people, and only get by through various guises. They are dishonest with themselves, and their guises sometimes trick themselves. They treat the learning of knowledge in a dishonest way, and never fully believe in the utility of knowledge, so in their studies they always miss a lot of details and end up knowing nothing. All of this leads to the most serious defect, which is that, because they can't help but put all of their attention on the gains and losses and opportunities of the moment, it's impossible for them to have the ability to make macro observations from a long-term perspective.

Another way to improve cooperability is by not complaining. The best people to cooperate with are those who never complain. The reason is simple: complaining is useless. People with poor cooperability complain about everything. They complain about the broader environment, they complain about the quality of their partners, they complain about luck, they complain that others aren't being fair, they complain that their family doesn't give enough support... Consciously or not, they are in the habit of using these complaints to cover up an obvious fact: they didn't do their part well enough. If someone is able to truly reject all complaining, then it will definitely cause them to put all of their energy into doing their part, which naturally improves their cooperability.

Life is at its core a trading market. Every principle that works in trading markets also works on the stage of life.

When I look back on my choices from many years ago, the strategies I used to make my major choices were identical to the strategies for choosing investments that I have outlined in Parts One and Two of this book. First, I wanted to go to a place that was developing more rapidly, so I moved from a small border town to Beijing. Which sector was developing the fastest? To be frank, I didn't see clearly enough, because I chose education instead of tech. I had one choice left, and I chose New Oriental, at the time the fastest growing company in the education sector. Afterwards, I followed the steps in this chapter. I worked there for seven years, honestly doing my part and cooperating with others as best I could. I had a strong personality and a bad temper, but I improved my ability to sell, my ability to lecture, and my ability to write. By the time I left, I had upgraded my personal business model, and I was getting better and better at selling my time repeatedly. Once I'd grown my egg white to a large enough size, I started investing. I become a regular investor, and all of my success in the market has been due to one secret: I've been constantly working hard and honestly to make money outside of the market.

3.5 The Stages of Regular Investing

Almost all traders have fallen victim to the following curse:

As soon as I bought the price fell...

This isn't just a joke or a case of them being unlucky. It's a fact. The reason is simple: if even an outsider like you has been enticed into the market, then the bull market must be almost over. The vast majority of the time, people enter the market because the price is rising, so "as soon as I bought the price fell" isn't a curse, and it's not just bad luck, it's a common and inevitable phenomenon that almost everybody runs into.

So no matter whether or not you regularly invest, when you first enter the market you'll almost inevitably be faced with a long slump.

I like to read instruction manuals. If you give me something new, I'll be extra happy if it has an instruction manual. Reading instruction manuals can teach us about new features and new ways of using things. It's a great feeling to be able to quickly and fully grasp all of the ways to use a new thing.

Unfortunately, there's no instruction manual for investing. In fact, none of the important things we encounter in our lives have instruction manuals. No one gives us a marriage instruction manual when we get married, and no one gives us a parenting manual when we have children. Of course, when we were born no one gave our parents a manual either, and now that we are grown up our parents are just like us: they still don't have an instruction manual for life.

But humans are different than other animals. Most importantly, we have spoken and written language, so we don't start from scratch when we are born. Once we learn to read, we are "standing on the shoulders of giants".

But if we are able to stand on the shoulders of giants, why do most of us end up living under the heel of giants? The best explanation is that, very early on, most of us gave up on the best strategy, blindly following, which we talked about in detail in Part Two. Independent thinking early on may sometimes be a good thing, but more often than not it's bad. This is because independent thinking doesn't have any value in and of itself; it's only truly effective when it's based on broad experience and knowledge. The problem is that early on we lack knowledge and experience! Without knowledge and experience, independent thinking is severely limiting.

Blindly following is particularly difficult for adults, because they've been fighting to think independently for a long time, and it's difficult for them to go back. In this case, a simple trick can be helpful:

You can think independently, but you must leave your actions on paper. That is to say, you can use a notebook to record your independent thinking, but in your actions you blindly follow.

Outside of investing, you don't necessarily need to do this. But when it comes to investing, you must do this! Investing isn't an area in which you can try things out and make mistakes, because each mistake will lead to the loss of your valuable money and even more valuable time. If it's just an untested, stupid new investing strategy, it's not worth using your money and your life to test it out.

This simple trick is even more powerful when combined with another trick:

Carefully observe the decisions and results of others, learn necessary lessons and experience from their mistakes, and write them down on paper.

Observe the mistakes of others, see the financial price that they pay, and see how they use their precious lives to test things out. It almost seems like cheating, but there is no better way to broaden your knowledge and experience. One of my favorite pastimes is reading the different points of view that people share on online forums and in chat groups. I take notes and periodically review them. It's been indispensable for my personal development.

The fact that we are likely to enter the market at a bad time, coupled with the fact that slumps tend to last for a long time, challenges one of our stronger inclinations: when we are faced with a loss we have a strong desire to make a change. Our mind isn't designed for investing; it was designed over millions of years to struggle to survive. So at this stage there is only one way to resist the overpowering desire to struggle:

Cultivate a long-term perspective.

There was a news story in 2017 about a dispute twenty years prior between two British women. Valerie Vivian wanted to build a new building on her land, but Betty Kelley and her family organized the neighbors to stop her. Their reason for doing so was that the new building would block the view from the Kelley's window. The two families went to court, and Vivian was unable to secure a permit for the new structure.

What did Vivian do after returning from court? She quietly planted a row of saplings on the border between the two properties. After five years, the saplings had grown into a row of small trees. After fifteen years, the fast-growing trees that Vivian had chosen had grown into a twenty to thirty-meter-high wall of trees! The picture above shows Vivian leaving court, this time victorious and smiling, twenty years after the initial dispute. How did she win? She had won twenty years earlier, it's just that the Kelley family had to wait a long time before they realized that they had lost, and lost thoroughly. Vivian, on the other hand, knew every day of those twenty years that she was winning, and it must have brought her more happiness than the average person.

Weather reports are always wrong, but there are some events in the future of which we can be 100% sure. For instance, if you plant a tree it will grow. Regular investors are like this. Their investments are like planting a tree. You might not see much after four or five years, but after twenty or thirty years (or two full cycles), the seeds they planted will have grown into giant trees.

After a long slump passes, a new stage will begin: the first harvest.

This stage will be extremely short, but it is actually the hardest to pass through. First, you will discover that your world becomes noisier. In addition to external distractions, you will start to have all sorts of delusions. The most common delusion is that you will feel like you've gotten smarter! Not only that, your perceived intellect will continue to rise along with the price! You will start to speak more loudly, your intonation will become sharper, and everyone around you will agree with whatever you say. You will become more and more confident.

It's good to have a certain amount of confidence, but if you have even a little bit too much your IQ will drop to zero. As you become more overconfident, your IQ will become negative, and you will start to do all sorts of stupid things. Of course your living expenditures will increase, but the most subtle stupid thing you will do is give up your previous long-term investments. Even more insidiously, you will give up your future long-term investments, as you will forget that the investments you give up at this point would have appreciated substantially over the next full cycle. At this stage, people pay the price of an island to buy a luxury car. They think they are throwing away a thousand dollars, but they are actually throwing away ten thousand! Your stupidity at this stage can cause you to lose future earnings that you couldn't get back even if you worked for a thousand years.

When compared with another type of stupidity, however, the stupidity mentioned above hardly counts. At this stage, the few people who have ambition are led by that ambition to make an even stupider mistake: they start to invest like crazy. Their intentions are positive. They just want to make progress, and investment is of course a good thing that can help them do better. Actually, very few people have such a positive attitude. The problem is that their intellect didn't really improve, and even if they have expanded their knowledge it's still not enough, so they end up losing through "skill" all of the money that they made through "luck".

There is a psychological phenomenon that acts as a catalyst here called the House Money Effect. In a casino, gamblers can't help but not see their winnings as real money, and they are likely to be more careless with it. They see the money they brought to the casino as money that they really earned, but they see their winnings as not really theirs, so they have no compunctions about spending it. Sometimes they even feel like they have to spend it. The majority of people, who have no ambition, just spend lavishly, and the few who have ambition make irresponsible investments.

This stage is the best for strengthening the ability of doing nothing. During times like these, doing nothing requires skill! This is easier for regular investors, because they have cultivated the ability to do nothing in the market but buy. Hopefully, it's a habit that they have already developed for a long time. Also, regular investors have something more important to do: make money outside of the market. Furthermore, since the price has risen, they need an even stronger ability to make money outside of the market, so they are working hard to truly improve themselves, and it's hard to have delusions. Actually, the ability to make money outside of the market is the best way to test if a person is truly improving, because outside of the market you are not being buttressed by trends. In the market you compete based on your choice of investment; outside of the market you compete based on your skills.

Once this short second stage passes, you will enter the third, most difficult-to-bear stage: the second slump. The pleasure of earning a dollar is much less than the pain of losing a dollar -- this is a bias that all of us naturally have. Like the first stage, this stage is very long, and it will perhaps be longer, since you will experience the second slump from its beginning to its end, whereas, if you were enticed to enter the market by a temporary price increase in the middle of the slump, you may have only caught part of the slump in the first stage.

In this stage your experience of losses will be different from the first stage, because in absolute terms the losses will be much larger. Furthermore, because the size of the losses will have increased, your imagination will also be stronger, and you will find your brain full of the following idea:

If only...

For instance, "If only I had sold everything in January, I could live in a house three times the size of my current house!" Or, "If I'd only sold last month, my wife wouldn't have anything to argue with me about!" And on and on... Even worse, you will always have other people to compare yourself with: "Look at them, they got out early!"

In fact, if you just change your perspective you can relax. It's as if you steered a boat from a small river into a bigger river. You need to experience again what you previously experienced, it's just that the waves are a little (or a lot!) bigger. You got motion sickness in the small river, and now you feel uncomfortable again. You'll probably vomit a few times in the big river, but you'll eventually get used to it, just like you got used to the small river. You just have to keep reminding yourself that, even if you still have a long way to go, you'll eventually make it to the ocean. The waves are even bigger there, but once again you'll eventually get used to it.

In this stage you must establish the following new worldview:

Every endpoint is also a new beginning. Until you die.

Taking the end as a beginning is a basic concept that all people who continuously develop over the long term must have. I was at New Oriental for seven years (from 2000 to 2007), and in 2006 the company went public on the New York Stock Exchange (NYSE:EDU). I experienced what is actually quite a common phenomenon. When a company goes public, many people decide to cash out as quickly as possible and leave, because they are like most people and see an ending as the ending. But what actually happened?

Not taking into account dividends, over the past thirteen years New Oriental has provided shareholders with yearly compounded returns of 26.2%! So those who sold right after the company went public missed out on those returns, and they almost certainly weren't able to match them elsewhere. Even though the stock fluctuated over the past thirteen years, and even "crashed" a few times, it still had better total returns than even Warren Buffett over the same period. And how many people can say they beat Warren Buffett?

Viewed from this perspective, Yu Minhong, my former boss, can be seen as a model. He took each end point as a new beginning and kept moving forward. Over the last thirteen years, and also during the six years before that, I've seen countless people criticize him from every angle that you can imagine. But in fact, from this perspective, none of the criticism had any merit.

Once you make it through this stage, you'll enter the next stage: another harvest. This time, you will be entering the ocean. You might feel surprised -- the wind and waves are stronger than both of the rivers -- but you feel calm. For me, at least, I was surprised at how calm I felt. But I quickly discovered that it was normal. If you're like me and what you see every day is people who are still in the rivers but act as if they are experiencing the violent storms of the ocean, you can't help but be calm.

At this stage, there will quite possibly be one thing that keeps you from feeling calm. You may not have found a goal that is worth your continued effort. Imagine that you have all the money you could ever need but you still haven't found what you are living for. It's terrible, isn't it? What I have been most lucky in is that, even before my egg white was prepared, I had found something that was worth doing for my whole life: learning and growing. Many reporters have looked at me funny during interviews and expressed that they find this hard to believe. But I hope you can understand the excitement and joy that can come to someone who clearly knows that they are not particularly gifted, but has been able to constantly improve through long-term, continuous learning.

Many years ago I discovered a simple principle:

Teaching is the best way to learn.

So I like to teach, and I have been teaching for twenty years. I've taught tests, writing, entrepreneurship, investment... Teaching is something that I can do until the day I die, and it's something that I love doing. I can always change what I'm teaching, because I always want to learn new things. It's that simple. In my experience, finding something that is worth doing for your whole life is the best armor a person can have. Now I teach thousands of students online, and in the future it will be even more. I wake up in the morning, teach for ten minutes, and I am happy. The bigger the projects you work on, the more trouble is involved, but for me there are no troubles that teaching for ten minutes won't fix.