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Money—more accurately defined here as "currency"—is worthless no matter how much of it is printed if it cannot be exchanged for the things we desire.

So you see, what we want to earn is not money itself, but the things behind money—resources, products, and services.

Understanding this "natural resources + labor + technology" logical framework should give us a basic understanding of how money, or rather "wealth, is generated."

How money comes about is now clear to us. Humanity has created immense wealth by utilizing natural resources, investing wisdom and labor, and developing scientific and technological innovations, a significant portion of which is created at the company level.

The organizational structure of modern joint-stock companies, combined with the capital market system, allows ordinary people to participate in this wealth creation process—of course, while sharing in the benefits, each participant also bears corresponding risks, accepting the possibility that the money they invest could be wiped out by a large wave.

Nevertheless, creating wealth authentically, sharing it reasonably, and accumulating it steadily is a dividend of the times that each of us can enjoy today.

We want to earn not money itself, but the things behind money—resources, products, and services. On one hand, money represents these things behind it. What we actually want is not money, but the ability to pay for these products and services.

On the other hand, money is the medium of exchange that society provides us when we create this wealth, or in Naval's words, it is the IOU that society gives us: "Hey, you created something, here’s your IOU, and in the future, you can exchange it for what you need." If we summarize these terms—money, wealth, companies, and investment,

It would look like this: behind money are products, resources, and services, which constitute wealth; wealth is what people truly need; companies are more efficient organizational forms that allow us to create wealth more effectively; investment is the use of money in the form of capital to participate in the process of value creation in companies.

Where do the returns from investment come from?

One way is through plunder, taking others' mediums of exchange. Historical wars and plunder between nations, including some harvesting behaviors in the stock market, are examples of this; another way is through creation, treating our IOUs as capital invested in companies, participating in the overall wealth creation process of society. When the companies we are shareholders or creditors of create greater value and earn more income, we also receive corresponding returns based on prior agreements.

"Why do people want money?" Because money can be exchanged for the resources, products, and services that people need. Money is not the goal; it is a tool. "Why does money increase?"

Natural resources: the wisdom and labor already present in the environment; human thoughts and actions; scientific and technological tools and techniques produced to improve efficiency. The long-term development formed by the combination of these three creates underlying assets, leading to an increase in overall societal wealth. "Why is this money relevant to us?"

Wealth creation typically occurs at the company level because this form can share operational risks, save costs, and reduce competition. The organizational structure of modern joint-stock companies and the modern capital market system enable ordinary people to participate in wealth creation, share wealth, and accumulate wealth.

The act of investing is precisely participating in wealth creation. At the same time, since natural resources + wisdom and labor + scientific technology = an increase in overall societal wealth, it is not necessarily the case that someone loses money when others make money from investments. This is not a zero-sum game. "Where has the money gone?" Investment is not an abstract numerical concept. Investment means that we are putting our money into one or more companies, which then use this money to create more wealth. Wealth can only be obtained through the combination of existing resources in the real world, human wisdom and labor, and scientific technology (i.e., underlying assets). The real world also means that returns and risks coexist.

So what we should ultimately care about is: Which company are we putting our money into? Which industry? What is the source of its returns? Is this source reliable (i.e., does it meet the most basic common sense and axioms of the world)? The above can help investors avoid most scams and risks.

The questions are:

(1) What kind of money is being earned? (2) How much money can be earned? (3) How to earn this money? (4) How to spend this money?

Extensive research by predecessors indicates that the foundation has sources:

The basis for market fluctuations comes from multiple aspects, including macroeconomic factors, industry and regional information, news events, changes in market structure, technological advancements, and policy adjustments.

• Macroeconomic factors: Evidence shows that macroeconomic data releases, central bank announcements, bond auctions, and other macro events significantly impact the market. Additionally, changes in the real exchange rate are influenced by nominal shocks, while factors such as government spending, trade openness, and capital flows significantly affect the real effective exchange rate.

• Industry and regional information: In the Chinese securities market, industry information is more dominant in driving changes in securities prices than regional information. This indicates that industry and regional information are important factors influencing market fluctuations.

• News events: News events account for about 50% of all market fluctuations, including election results, sovereign rating downgrades, and natural disasters. These news events drive market price changes by affecting investor sentiment and expectations.

• Changes in market structure: Market entry and exit have significant impacts on market structure and performance. Additionally, market segmentation phenomena can lead to different responses from different markets when facing exchange rate fluctuations.

• Technological advancements: Big data is changing every corner of economics and finance, even though this data is largely excluded from macroeconomic and financial research. Technological advancements, especially in information technology, have profound impacts on market structure and function.

• Policy adjustments: Policy adjustments, including monetary and fiscal policies, have significant impacts on market stability. For example, monetary policy announcements can reduce market instability.

The basis for market fluctuations arises from the combined effects of various factors, including macroeconomic factors, industry and regional information, news events, changes in market structure, technological advancements, and policy adjustments. These factors interact to influence market volatility and development.

The first two items involve changes in the target assets purchased by market participants, while the third item involves the game between market participants using corporate equity as chips, which is unrelated to the companies themselves. Let's discuss this categorically.

1. Corporate value addition

The economic performance of a country is generally measured by GDP. GDP stands for "Gross Domestic Product," which refers to the total value of newly added products and services in a country within a year. It is these newly added products and services that provide the necessities for people to eat, wear, use, live, and travel, as well as for social reproduction.

The survival and development of humanity and the continuous growth of its needs drive the sustained development of GDP. Looking at the history of human development, especially modern history, it is clear that the total amount of products and services created by human society has been continuously increasing.

The national economy is the result of human productive labor and is shared by people and their organizations. If we distinguish according to the entities participating in the creation and sharing of GDP, it consists of four parts:

Money—more accurately defined here as "currency"—is worthless no matter how much of it is printed if it cannot be exchanged for the things we desire.

So you see, we want to earn not money itself, but the things behind money—resources, products, and services.

Understanding this "natural resources + labor + technology" logical framework should give us a basic understanding of how money, or rather "wealth, is generated."

How money comes about is now clear to us. Humanity has created immense wealth by utilizing natural resources, investing wisdom and labor, and developing scientific and technological innovations, a significant portion of which is created at the company level.

The organizational structure of modern joint-stock companies, combined with the capital market system, allows ordinary people to participate in this wealth creation process—of course, while sharing in the benefits, each participant also bears corresponding risks, accepting the possibility that the money they invest could be wiped out by a large wave.

Nevertheless, creating wealth authentically, sharing it reasonably, and accumulating it steadily is a dividend of the times that each of us can enjoy today.

We want to earn not money itself, but the things behind money—resources, products, and services. On one hand, money represents these things behind it. What we actually want is not money, but the ability to pay for these products and services.

On the other hand, money is the medium of exchange that society provides us when we create this wealth, or in Naval's words, it is the IOU that society gives us: "Hey, you created something, here’s your IOU, and in the future, you can exchange it for what you need." If we summarize these terms—money, wealth, companies, and investment,

It would look like this: behind money are products, resources, and services, which constitute wealth; wealth is what people truly need; companies are more efficient organizational forms that allow us to create wealth more effectively; investment is the use of money in the form of capital to participate in the process of value creation in companies.

Where do the returns from investment come from?

One way is through plunder, taking others' mediums of exchange. Historical wars and plunder between nations, including some harvesting behaviors in the stock market, are examples of this; another way is through creation, treating our IOUs as capital invested in companies, participating in the overall wealth creation process of society. When the companies we are shareholders or creditors of create greater value and earn more income, we also receive corresponding returns based on prior agreements.

"Why do people want money?" Because money can be exchanged for the resources, products, and services that people need. Money is not the goal; it is a tool. "Why does money increase?"

Natural resources: the wisdom and labor already present in the environment; human thoughts and actions; scientific and technological tools and techniques produced to improve efficiency. The long-term development formed by the combination of these three creates underlying assets, leading to an increase in overall societal wealth. "Why is this money relevant to us?"

Wealth creation typically occurs at the company level because this form can share operational risks, save costs, and reduce competition. The organizational structure of modern joint-stock companies and the modern capital market system enable ordinary people to participate in wealth creation, share wealth, and accumulate wealth.

The act of investing is precisely participating in wealth creation. At the same time, since natural resources + wisdom and labor + scientific technology = an increase in overall societal wealth, it is not necessarily the case that someone loses money when others make money from investments. This is not a zero-sum game. "Where has the money gone?" Investment is not an abstract numerical concept. Investment means that we are putting our money into one or more companies, which then use this money to create more wealth. Wealth can only be obtained through the combination of existing resources in the real world, human wisdom and labor, and scientific technology (i.e., underlying assets). The real world also means that returns and risks coexist.

So what we should ultimately care about is: Which company are we putting our money into? Which industry? What is the source of its returns? Is this source reliable (i.e., does it meet the most basic common sense and axioms of the world)? The above can help investors avoid most scams and risks.

The questions are:

(1) What kind of money is being earned? (2) How much money can be earned? (3) How to earn this money? (4) How to spend this money?

Extensive research by predecessors indicates that the foundation has sources:

The basis for market fluctuations comes from multiple aspects, including macroeconomic factors, industry and regional information, news events, changes in market structure, technological advancements, and policy adjustments.

• Macroeconomic factors: Evidence shows that macroeconomic data releases, central bank announcements, bond auctions, and other macro events significantly impact the market. Additionally, changes in the real exchange rate are influenced by nominal shocks, while factors such as government spending, trade openness, and capital flows significantly affect the real effective exchange rate.

• Industry and regional information: In the Chinese securities market, industry information is more dominant in driving changes in securities prices than regional information. This indicates that industry and regional information are important factors influencing market fluctuations.

• News events: News events account for about 50% of all market fluctuations, including election results, sovereign rating downgrades, and natural disasters. These news events drive market price changes by affecting investor sentiment and expectations.

• Changes in market structure: Market entry and exit have significant impacts on market structure and performance. Additionally, market segmentation phenomena can lead to different responses from different markets when facing exchange rate fluctuations.

• Technological advancements: Big data is changing every corner of economics and finance, even though this data is largely excluded from macroeconomic and financial research. Technological advancements, especially in information technology, have profound impacts on market structure and function.

• Policy adjustments: Policy adjustments, including monetary and fiscal policies, have significant impacts on market stability. For example, monetary policy announcements can reduce market instability.

The basis for market fluctuations arises from the combined effects of various factors, including macroeconomic factors, industry and regional information, news events, changes in market structure, technological advancements, and policy adjustments. These factors interact to influence market volatility and development.

The first two items involve changes in the target assets purchased by market participants, while the third item involves the game between market participants using corporate equity as chips, which is unrelated to the companies themselves. Let's discuss this categorically.

1. Corporate value addition

The economic performance of a country is generally measured by GDP. GDP stands for "Gross Domestic Product," which refers to the total value of newly added products and services in a country within a year. It is these newly added products and services that provide the necessities for people to eat, wear, use, live, and travel, as well as for social reproduction.

The survival and development of humanity and the continuous growth of its needs drive the sustained development of GDP. Looking at the history of human development, especially modern history, it is clear that the total amount of products and services created by human society has been continuously increasing.

The national economy is the result of human productive labor and is shared by people and their organizations. If we distinguish according to the entities participating in the creation and sharing of GDP, it consists of four parts:

First, the taxes and fees taken by the central and local governments; second, the personal income from participating in GDP creation; third, the donations received by the non-profit sector and the intermediary service fees provided by the service sector; fourth, the profits of enterprises.

"How to Pay for War" mobilizes the economy from a production perspective, so war actually has a significant impact on the economy, stimulating America's production potential. The expenditure method of accounting is used to illustrate this production potential.

Dr. Wang Han states that from the perspective of the balance sheet, if the country = enterprise, then money is capital, and GDP is akin to profit. Using asset market value/GDP = national price-earnings ratio. (So in a situation of monetary easing, if GDP does not increase proportionately, it means that the overall capital return rate of society declines.)

National statistical data is calculated using the production method, while analysis uses the expenditure method (i.e., the three drivers of growth), which is straightforward but can reverse cause and effect.

After the reform and opening up, new statistical indicators such as GDP replaced the original material balance sheet indicators.

1. Assessing economic prosperity (overall economy) to judge economic prosperity

Three methods of calculating GDP:

1: Income method: wages + taxes + depreciation + corporate profits

2: Expenditure method: household consumption + corporate investment + government procurement + net exports

3: Production method (value-added method): total output - intermediate input. Nominal GDP is the market value of all final products and services calculated using current year prices. Real GDP is the market value of all final products and services calculated using prices from a base year (constant prices). The GDP deflator = nominal GDP/real GDP * 100% reflects the overall inflation level.

Clearly, all enterprises in a country, as a whole, can not only share profits but also the profits shared are continuously increasing. In modern economies, about 70% of a country's GDP is created by enterprises, and the profitability of enterprises is higher than that of individuals and intermediary organizations.

Keynes' "How to Pay for War" mobilizes the economy from a production perspective, so war significantly impacts the economy, stimulating America's production potential. The expenditure method of accounting is used to illustrate this production potential.

From the balance sheet perspective, if the country = enterprise, then money is capital, and GDP is akin to profit. Using asset market value/GDP = national price-earnings ratio. (So in a situation of monetary easing, if GDP does not increase proportionately, it means that the overall capital return rate of society declines.)

GDP (Gross Domestic Product) reflects the total economic volume but does not reflect economic quality, and there are three statistical methods:

1. GDP (income method) = wages (income of workers) + taxes (government revenue) + corporate profits (enterprise income) + depreciation (enterprise income), which cannot reflect production.

2. GDP (expenditure method) = household consumption + corporate investment + government purchases + net exports, with government purchases largely distributed among consumption and investment, thus decomposing into the three drivers of GDP = consumption + investment + net exports.

3. GDP (production method) = value-added method = total output - intermediate input.

PMI: A barometer for the manufacturing industry

GDP: Primarily measures the results of production

To put it simply, PMI might be like preparing ingredients for cooking, while GDP refers to how many dishes are served. PMI can inform us about economic conditions in advance based on the production environment.

2. Assessing the economic engine: the three drivers of growth (real economy)

One cannot rely solely on the M2 growth indicator to determine whether the money on hand is depreciating. A simple way is to subtract the GDP growth rate from the M2 growth rate to see if this value aligns with the observed CPI increase. This result approximates the target value for outpacing inflation to prevent wealth depreciation.

4. Assessing whether there is inflation (individual living)

CPI is an important indicator for measuring inflation in our lives (this indicator includes housing prices).

CPI pertains to the consumption phase, while PPI reflects the factory prices after production and processing before consumption, which can also indicate inflation. This indicator can assist in assessing inflation.

Data and other potentially useful information can be found on the following websites:

National Bureau of Statistics website www.stats.gov.cn
People's Bank of China website www.pbc.gov.cn

Economic fluctuations are like the changing of seasons; however, economic fluctuations sometimes do not go through the entire cycle, possibly skipping certain stages or continuously experiencing the same stage.

Investment and financial management are like the seasons we experience. In different seasons, we may have different routines and preparations; for instance, wearing more clothes in winter and fewer in summer. In the night market of investment and financial management, we also have different strategies and asset allocations in different stages of economic fluctuations.

Although not every listed company is an excellent enterprise, due to various conditions such as profits, profitability, potential for future financing, and listing costs, overall, listed companies have higher return levels than the average of all enterprises in society. Both the 20-plus years of operation of the Chinese securities market and the longer practices of developed countries have proven this.

Research shows that from 1995 to 2014, the net asset return rate (ROE) of all Chinese enterprises maintained an average level of nearly 10% per year, while during the same period, the net asset return rate of listed companies exceeded 12% on average (do not underestimate the 2% return rate difference; over 20 years, the profits earned from a 12% return asset are more than 150% of those earned from a 10% asset). This means that if one were to buy all listed companies, they would be able to achieve operational returns that surpass the average return level of all enterprises in society.

The next reasoning is simpler: among all listed companies, those with a net asset return rate higher than 12% will have profitability exceeding the average of listed companies.

This is actually a trivial statement but often overlooked. This trivial statement implies that if one were to buy all enterprises with ROE > 12% at net asset value, in the long run, these companies will earn profits higher than the overall average of listed companies and even higher than the overall average of society—this is essentially the entire secret of Warren Buffett's investment framework.

Buffett's thoughts have been overly mystified by many. It simply means:

(1) An excellent enterprise can outperform the average growth rate of societal wealth. Just as the top three students in a class will have scores higher than the class average;

(2) If one can invest in these excellent enterprises at a reasonable or even low price, in the long run, the wealth growth rate will also exceed the average growth rate of society. Countless successful businessmen throughout history have done this; it is neither mysterious nor difficult to understand;

(3) He finds Mr. Market, who often provides better trading prices as a foolish opponent;

(4) He discovered and utilized the leverage of insurance companies early on. Thus, the stock god was born. For us, the fourth point may have few opportunities, but understanding the first three points and focusing on finding excellent enterprises while waiting for reasonable or low prices may not make you Buffett, but you won't end up poor either. The end.

The Purchasing Managers' Index (PMI) is an index compiled from the monthly survey results of purchasing managers in enterprises. It encompasses various aspects of enterprise procurement, production, and circulation, including both manufacturing and non-manufacturing sectors, and is one of the internationally recognized leading indicators for monitoring macroeconomic trends, possessing strong predictive and warning functions.

Industrial added value is defined as the added value of industrial enterprises above a certain scale, referring to those with annual main business income of 20 million or more. Like the actual GDP calculation method, it is a "quantitative" indicator. The cyclicality of agriculture and services is not as strong as that of industry. Industry is an important variable reflecting the economic cycle and the degree of economic heat.

Industrial added value most accurately reflects short-term economic growth. There are three statistical principles for industrial added value. The trend of industrial added value aligns with the yield trend of 10-year government bonds and precedes it.

1: PMI 50 is the line of prosperity and decline. Above the line indicates economic expansion, while below indicates economic contraction.

2: PMI is divided into official PMI and Caixin PMI; official PMI focuses more on the economic prosperity of large state-owned enterprises, while Caixin PMI emphasizes small and medium-sized enterprises.

3: When analyzing PMI data, seasonal factors need to be excluded. PMI is a month-on-month indicator.

4: Among the sub-indices, focus on the new orders index and the raw material inventory and finished product inventory indices.

5: The PMI index is generally positively correlated with GDP, the Shanghai Composite Index, and the bond index.

How to calculate?#

Industrial added value and profits of industrial enterprises

PMI (Purchasing Manager's Index) is based on the responses of purchasing managers to a questionnaire, comparing month-on-month performance as good, average, or bad, and is divided into two types:

1. Official PMI: Jointly released by the National Bureau of Statistics and the China Federation of Logistics and Purchasing, published monthly.

(1) Includes:

Manufacturing PMI: A total of 13 survey items, of which 5 (new orders index 30%, production index 25%, employment index 20%, supplier delivery time index 15%, raw material inventory index 10%) are used to calculate PMI, while the remaining 8 are not included in the PMI calculation.

Non-manufacturing PMI (Non-manufacturing Business Activity Index):

Composite PMI Output Index:

(2) The sample mainly includes large and medium-sized enterprises, particularly state-owned enterprises, reflecting the economic prosperity of state-owned and large enterprises.

(3) Data is affected by quarterly fluctuations, with adjustments made quarterly, but the adjustment effect is poor.

2. Caixin PMI: Compiled by Markit Financial Information Services and authorized for release by Caixin, published monthly.

(1) Includes: Manufacturing PMI, Services PMI.

(2) The sample mainly includes small and medium-sized enterprises, particularly private enterprises, reflecting the economic prosperity of small and medium-sized and private enterprises.

(3) Data is affected by quarterly fluctuations, with adjustments made quarterly, but the adjustment effect is poor.

Manufacturing PMI is positively correlated with nominal year-on-year GDP growth, stock market (Shanghai Composite), and bond market (10-year bonds), except for the water buffalo period from 2014 to 2014.

2. Financing value addition

Holding stocks of listed companies provides an additional source of profit, which is the financing rights of listed companies. When listed companies issue new shares to other shareholders at prices above net asset value or split off certain assets for independent listing and financing at prices above net asset value, these actions are commonly referred to as "raising money." If we are shareholders, it means we are raising others' money to increase our own company's net assets.

CCI (Consumer Confidence Index)

If PMI measures the economy from the production side, then CCI approaches it from the consumption side.

As the name suggests, CCI is an indicator used to reflect the strength of consumer confidence. According to encyclopedic definitions, the Consumer Confidence Index indicates that when the economy can ensure more job opportunities, higher wages, and lower interest rates, consumer confidence and purchasing power will increase.

M2 (Money Supply)

Previously, I mentioned that CPI (Consumer Price Index) is an indicator for measuring inflation, but since it does not consider housing prices, it is not very suitable for measuring inflation in China.

Therefore, it is generally believed that the increase in the money supply minus the increase in wealth represents the amount of inflation, meaning:

Inflation rate = M2 growth rate - GDP growth rate.

However, it is essential to add that while financing above net asset value increases the company's net assets, it does not necessarily mean that financing above net asset value is beneficial for existing shareholders. I opposed Guotou Power's (hereinafter referred to as "Guotou") issuance of new shares at 7.95 yuan to major shareholders (at that time, the stock price was about 7 yuan). Guotou's net asset value was just over 4 yuan per share; the 7.95 yuan issuance indeed increased the company's net assets, but it did not increase the interests of other shareholders. This is because the value corresponding to that 4 yuan in profitability is higher than 7.95 yuan. If the major shareholder wanted 7.95 yuan, they could easily buy shares from the market from those who valued Guotou at less than 7.95 yuan, thus not forcing other shareholders to relinquish their equity.

Perhaps the Guotou case is not sufficiently clear; let’s assume a contrasting example to illustrate. When Kweichow Moutai (hereinafter referred to as "Moutai") had a market price of 100 yuan in 2013, its net asset value was about 40 yuan, with a total share capital of 1.038 billion. If Moutai intended to issue 300 million new shares at 120 yuan each to a new shareholder (the new shareholder would invest 36 billion, and total share capital would become 1.338 billion), this would not only be three times the net asset value but also 20% higher than the market price. If viewed in isolation from the perspective of increasing net assets, it seems that a 120 yuan directed issuance is quite advantageous, and one should vote in favor.

However, from the perspective of company ownership, existing shareholders would be relinquishing about 22.5% of the company's ownership to the new shareholder; from the perspective of net profit, from 2013 to 2016, Moutai's total net profit was nearly 63 billion, of which the new shareholder would own about 14.2 billion; from the perspective of dividends, over four years, the new shareholder would have received a total cash dividend of about 5.8 billion (assuming a dividend of 8.5 billion in 2016, the total cash dividends over four years would be nearly 26 billion); from the perspective of market value, today, with a market value of over 400 billion, the new shareholder occupies over 90 billion of that... No matter from which angle, the returns for the new shareholder are astonishingly high. These returns should have belonged to existing shareholders but were taken away by the "high" price issuance trick.

The above is a side note to illustrate a principle: financing above net asset value increases the company's net assets, but it does not necessarily benefit existing shareholders. Only financing that is significantly above the intrinsic value of the enterprise will increase the interests of existing shareholders.

In the A-share market, issuing new shares at high prices or increasing share issuance is relatively common, with the extreme form being IPO listings, which bring enormous wealth to original shareholders. Splitting off subsidiary assets or independently listing them, although still relatively rare domestically, essentially involves extracting a piece of an asset and selling part of the equity at a high price. These are easy to understand.

Three, the chaotic fluctuations of stock prices in the short term

What is most enticing about the stock market is precisely this chaotic fluctuation in the short term. It is termed "chaotic" because for hundreds of years since the stock market's inception, countless top minds have invested effort to find the 规律 of stock price fluctuations. If one could find a method to grasp stock price fluctuations, even the ability to profit 10% from high selling and low buying once a month could turn a principal of 100,000 into approximately 10 billion in net assets over ten years, landing them in the top 100 of the Chinese Forbes list. However, countless theories and practices have proven that humans lack the ability to master short-term stock price fluctuations—at least not up to now.

Among the three sources of profit mentioned above, the first two factors generally yield profits, and due to the second factor, the profit rate will be higher than the average net asset return rate of listed companies, which is certain. The third item, those chasing short-term fluctuations, due to stamp duty and commissions, overall incur losses, which is also certain: based on the 254 trillion transaction volume in 2015, with a 0.1% stamp duty and a 0.025% commission, the net loss was 317.5 billion. According to the China Securities Depository and Clearing Corporation's disclosure, by the end of 2015, there were a total of 50.77 million holders (one ID card counts as one in the clearing system, regardless of how many accounts), with an average loss exceeding 6,000 yuan. Of course, among them, there will inevitably be a small number of people who, due to luck, insider information, or other factors, achieve returns above the average, resulting in profits or even windfalls.

Therefore, to target the first two sources of profit, you are in a pond where the water level is continuously rising. If your IQ and knowledge are at the average level, you can reliably obtain a return slightly above GDP growth; if you are slightly above average, you can achieve excess returns; even if you are slightly below average (as long as it is not too far off), you can still maintain positive returns; only if your IQ and knowledge level are significantly below average can you incur losses.

In contrast, aiming for the third source of profit requires you to be above average in ability, knowledge, and luck compared to all participants in the game to avoid losses. Conversely, whether you are at or below average, it spells disaster—death! I wonder if you are confident that your ability, knowledge, and luck are all above average; as for me, I am not—though I cannot say I never was; 20 years ago, I had been. Later, I found that no matter how hard I tried to stay up late and work hard, I was merely swayed by luck and trends, unable to secure reliable returns. Given a slightly longer time frame, the outcome always led to losses and bankruptcy, and thus I lost that confidence.

Additionally, the emotional fluctuations in the game often bring unexpected surprises to those aiming for the first two sources of profit—emotional stock price drops often provide opportunities for those aiming for corporate value addition to buy in at prices far below intrinsic value, which can be another bonus.

In this market, those chasing short-term fluctuations likely account for over 90%. Whether they realize it or not, this action reflects a belief that they are above average and can obtain short-term fluctuation profits, preparing to rob money from opponents (who might be your friends, teachers, predecessors, colleagues, bosses, or neighbors).

With such intentions, daily fluctuations represent successful robberies or being robbed. A day or two of fluctuations, one or two limit ups or downs, represent victories or failures in robbery and being robbed, naturally leading to excitement, pride, or distress, anxiety, and confusion as stock prices fluctuate.

If you are here for corporate value addition and to take advantage of new shareholders, you will inevitably hold with a long-term mindset and buy at favorable prices. Because corporate value addition relies on production and sales personnel accumulating day by day, order by order; it is impossible to dig up a gold ingot with one stroke; waiting is a natural virtue. Similarly, good fortune such as high-price issuance or spin-offs does not happen every two weeks; it often occurs over years or even decades.

With such mental preparation, the random value of chaotic fluctuations (buying far below intrinsic value and selling far above intrinsic value) can naturally be seen as a bonus, a chance to take advantage. If you can take advantage, do so; if not, let others with the same investment system take advantage—though you may not know who they are.

Credit

1. RMB loans include:

(1) Household loans: short-term consumer loans, credit card overdrafts; medium to long-term mainly refers to housing loans.

(2) Corporate loans: including bill financing, short-term financing for enterprises (to supplement working capital), and medium to long-term financing (the most substantial, reflecting investment demand).

(3) Loans from non-bank financial institutions: financial institutions other than commercial banks and specialized banks, including public funds, private funds, trusts, insurance, securities, financing leases, financial companies, etc.

2. Social financing scale includes:

(1) Funds provided to the real economy through on-balance sheet business by financial institutions: including RMB loans and foreign currency loans.

(2) Funds provided to the real economy through off-balance sheet business by financial institutions: including entrusted loans, trust loans, and unendorsed bank acceptance bills.

(3) Direct financing in the financial market: including corporate bonds, non-financial corporate stock financing, and local government special bonds.

(4) Other means of providing funds to the real economy: insurance company compensation, investment real estate, deposit-type financial institution ABS, loan write-offs.

Money

1. Different measures of money

M0 = currency issued by the central bank - cash held by commercial banks.

M1 = M0 + unit current deposits.

M2 = M1 + personal savings + unit time deposits + other deposits.

M1 mainly consists of corporate current deposits; in the past, unit current deposits were primarily for the liquidity needs of expanded reproduction. Therefore, it can be simply understood that M1 is the liquidity capital for real estate and infrastructure. If real estate and infrastructure investment decrease, M1 will decrease.

M2 mainly consists of residents' medium to long-term deposits; if residents withdraw medium to long-term deposits to convert them into housing loans, M2 will decrease.

2. The M1-M2 scissors difference:

High M1 indicates a fast money circulation speed. If enterprises are optimistic about the future, they will convert deposits into current accounts, narrowing the M1-M2 gap.

However, since residents, local governments, and real estate developers are currently focused on repairing balance sheets, the M1-M2 data is affected by deleveraging, masking the borrowing situation of prosperous sectors, and thus one cannot simply conclude the economic situation based on the size of the difference.

3. M2/GDP

Approximates the leverage ratio of the real economy.

As the social leverage ratio increases, social financing and money gradually fail to reflect the good or bad of the economic fundamentals. During the deleveraging phase, these indicators become ineffective, failing to reflect the economic fundamentals and decoupling from the stock market. The reason is:

1. In social financing, the borrowing entities are local governments, developers, etc., who borrow money for infrastructure and real estate, driving economic growth. Now these borrowing entities are busy repaying debts and using funds to fill gaps (government operations, debt repayment, etc.), unable to invest to generate GDP. Therefore, social financing and credit indicators cannot reflect positive changes in the economic structure. However, economic growth cannot collapse; otherwise, it would lead to deflation and unemployment. China has the central government issuing bonds to support the original leverage created by real estate and local governments, stabilizing the investment portion of the economy.

1. Is it necessary to diversify allocation with a small amount of funds?

This depends on each person's investment ability. For those with genuine investment capabilities, a small amount of funds can be a significant advantage. There are indeed some excess return opportunities in the market that can only accommodate a small amount of capital. If the capital is small, one can participate fully.

However, the paradox is that those with genuine investment capabilities typically do not have small amounts of capital; while the vast majority of ordinary people lack professional investment abilities.

Therefore, for the vast majority of ordinary people, regardless of the amount of capital, it is necessary to consider diversified asset allocation. Specific models of asset allocation that have been proven effective can be referenced.

The simplest asset allocation model is the dynamic rebalancing model of stocks and bonds. Investors can set their holding ratios of stocks and bonds based on their risk preferences, such as 5/5, 2/8, 3/7, etc., and then rebalance based on deviation or adjustment cycles.

For example, in the initial state, the ratio of stock assets to bond assets is each 50%. If you set a deviation of more than 20%, you will rebalance. When the stock market rises sharply, and the proportion of stock assets reaches 60% of the total position, you should sell stock assets and buy bond assets to restore the allocation ratio back to 5/5; when the stock market falls sharply, the operation is similar but in the opposite direction.

2. How to view diversified asset allocation?

The number of asset types you allocate depends on how many types of assets you can understand. The primary principle of investment is "do not invest in what you do not understand." When we rashly invest in a field we completely do not understand, the risks are infinite.

"Do not put all your eggs in one basket," this viewpoint holds true only if you are very familiar with these "baskets" and have thoroughly checked them, ensuring that the "eggs" will not fall out.

Surely some friends will ask, how do we define "understanding"? Personally, I believe that to understand an asset, one must at least accomplish the following three things.

First, understand the development history of the asset, especially historical crisis events.

Investing is about the future performance of the asset, but as Winston Churchill said, "The farther back you can look, the farther forward you are likely to see." After understanding history, you can roughly grasp your current position and the various situations that may arise in the future.

Second, clarify the sources of returns and risks for this asset.

The essence of asset allocation is to seek the highest long-term returns while minimizing the correlation of holdings. Only by understanding the sources can we truly comprehend the correlations between assets, while merely looking at historical data backtesting will overlook many pitfalls.

Third, conduct a stress test for yourself.

Assuming you buy this asset and its price drops by 50%, would you feel anxious? If not, you probably understand it; otherwise, you likely do not. I remind you: people tend to overestimate their risk tolerance, so when conducting such stress tests, be honest with yourself.

Do not allocate just for the sake of allocation. While I have always advised everyone to do a good job of asset allocation, I never suggest doing so merely for the sake of allocation.

The reason we invest in certain assets is that their returns and risks have a cost-performance ratio that is beneficial to us.

Common misconceptions include two points:

Allocating assets that one does not understand and following the trend to allocate overheated short-term assets. No asset is indispensable. There are many ways to make money in the world; making money does not necessarily have to rely on investment.

Summarizing the thoughts surrounding these eight words serves as an explanation for myself and hopefully provides some help to everyone.

In my view, these eight words convey:

Do the right thing; the result is a byproduct;

The result is not under our control;

Let go of attachment and entanglement;

Focus wholeheartedly and dedicate yourself fully.

Doing the right thing; the result is a byproduct.

This world is particularly interesting; sometimes, the more straightforwardly you pursue results, especially when you are eager for short-term results, the less you obtain.

However, when you calm down, slow down, and think clearly about what you truly want, doing what you love and focusing on creating value while continuously pushing your limits, what you originally wanted often arrives unexpectedly.

This applies to investing, running a business, and living.

Take investing as an example. The fruit of investment is performance; the cause of investment is the path and mindset, the investor's understanding of the world.

Warren Buffett's partner, Charlie Munger, believes that successful investing is merely a byproduct of our careful planning and focused actions.

Ray Dalio, in "Principles," also believes that great achievers never prioritize making money as their primary goal.

Dalio believes: Success is a byproduct, an extra reward you gain by being true to yourself and pursuing your inner desires.

Dalio implements principles throughout every corner of Bridgewater Associates, aiming to reduce decision-making costs for himself and his employees, allowing everyone to focus more, thus reaping the byproduct of success in the process of pursuing their inner desires.

It is often said that "high risk leads to high returns," but investment masters and experts also tell us that "low risk is necessary to achieve high returns." Are these two statements contradictory?

Actually, they are not contradictory.

"High risk leads to high returns" does not mean that high risk necessarily brings high returns; rather, it indicates that high risk leads to more uncertain outcomes—perhaps higher returns, perhaps lower, or even losses. We need to use our knowledge to assess the likelihood of various situations and make decisions on whether to invest and how much to invest.

On the other hand, masters like Buffett say that "low risk is necessary to achieve high returns," which tells us from the perspective of margin of safety that we need to control our buying costs. If we buy too expensively, it is impossible to achieve high returns.

You see, these few words contain a lot of understanding about risk. Only by truly understanding the concept of "risk" can we distinguish between these two statements and avoid confusion.

This content is excerpted from "The Most Important Thing in Investing," where Howard Marks explains in detail what risk is. Understanding risk is essential for identifying and controlling it.

Investment is all about one thing: dealing with the future. No one can predict the future with certainty, so risk is unavoidable. Therefore, dealing with risk is an essential (I believe fundamental) element of investing. Finding investments with potential for appreciation is not difficult. If you can find enough of them, you may be heading in the right direction. However, if you cannot properly deal with risk, your success cannot be long-lasting.

The first step is:

Why is risk assessment an essential element in the investment process? There are three compelling reasons.

First, risk is a bad thing, and most clear-headed individuals wish to avoid or minimize it. A fundamental assumption in financial theory is that human nature is to avoid risk, meaning they prefer to bear lower risks rather than higher ones. Therefore, when investors consider an investment, they must first assess its riskiness and their tolerance for absolute risk.

Second, when considering an investment, investment decisions should take into account both risk and potential returns. Due to risk aversion, investors must be enticed with higher expected returns to take on additional risk. In simple terms, if both U.S. government mid-term bonds and small business stocks have the potential to achieve a 7% annual return, everyone would rush to buy the former (thus raising its price and lowering expected returns) while selling the latter (thus lowering its price and increasing returns). This relative price adjustment process is known as "equilibrium," which aligns expected returns with risk.

Thus, in addition to determining whether they can tolerate the absolute risks associated with an investment, the second task for investors is to ascertain whether the expected returns are commensurate with the risks taken. Clearly, returns are just one aspect to consider when investing, while risk assessment is another essential aspect.

Third, when considering investment outcomes, returns merely represent gains; assessing the risks taken is necessary. Were the returns achieved through safe or risky investment tools? Were they obtained through fixed-income securities or stocks? Were they derived from investments in large, mature companies or small, unstable enterprises? Were they obtained through liquid stocks and bonds or illiquid private equity? Were they achieved using leverage or without leverage? Were they obtained through concentrated portfolios or diversified portfolios?

When investors receive reports and find that their accounts earned a 10% return that year, they likely cannot determine whether the investment manager's performance is good or bad. To make a judgment, they must have some understanding of the risks the investment manager undertook. In other words, they must be clear about the concept of "risk-adjusted returns."

Understanding risk. The second step is to identify risks. The final critical step is to control risks.