How to build a personal sustainable investment system? The secret lies in the ability circle, the standard of good investment, and the portfolio structure.
1) What is the ability circle?
When it comes to the ability circle, everyone must be familiar with it. Ability circle refers to investing in areas that you know well. So why are investment masters urging you to "set the ability circle"? Let’s see the following example.
Mary is an investor with rich experience in the field of real estate. Her masterpiece is to buy two apartments that are not favored by everyone. At that time, the price of these two apartments more than doubled, as well as the problems of legal litigation, internal strife and capital depletion. However, Mary, who has been in the industry for many years, believed that the problem that led to the low price of apartments would sooner or later be solved in one way or another, and finally obtained the expected return. But when Mary attended the investment party, she couldn't help being moved when she saw other investors talking about opportunities in the pharmaceutical field.
Buffett once said, "Since the stock market is so simple, why should I buy real estate?" For Mary, the question should be "Since real estate is so simple, why should I buy stocks?" It can be easily seen from the example, setting the capability circle is the key to achieving higher returns. We have the opportunity to obtain excess returns on investment within the capability circle; while beyond the ability circle, we fail.
2) What are good investment standards?
the standards of "good investment" vary from different investment philosophy and ability circles.
For Buffett, the cheaper the company is, the better. His goal is to buy something of $1 at a price of $0.1;
For Soros, if the future trend is consistent with his expected progress, he can benefit from the fluctuation of Market;
For technical analysts, when the market averages and volume price indicators meet the entry criteria, it is a "good investment";
For "undervalued" enthusiasts, this standard can be that the "P/E ratio", "P/B ratio" and other indicators of the investment index are at historical lows for many years.
Although it seems that different good standards will “fight” with each other, these standards are in fact perfectly matched with the personality and philosophy of investors.
3) What is the portfolio structure?
Within the capability circle, we can set up our own portfolio structure after determining the criteria for good investment.
Buffett's holding has two very important characteristics: high concentration and long-term holding.
Soros is more "radical”. He once said, "What matters is not whether you are right about the market, but how much money you earn when you are right, and how much money you lose when you are wrong."
It seems that the "centralization" way from investment masters conflicts with the "decentralization" we usually hear about. In fact, it depends on everyone's ability to identify opportunities. With their business analysis skills, once they decide to take action, the probability of failure is very small, so they dare to make heavy bets.
It is better to obtain the average return of assets through allocation and decentralization to avoid making mistakes.
