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Understanding Money

The application of knowledge in society mainly elaborates on

I. Knowledge can generally be divided into two categories:#

1. Scientific knowledge and principles

2. Knowledge of specific situations at specific times and places.

Hayek explains that whenever we talk about knowledge, we often naturally think of scientific knowledge, the lofty knowledge found in books. In fact, this is only a small part of knowledge. More and more important knowledge concerns who needs what, where, what qualities are required, what quantities are needed, and what price they are willing to pay to obtain these things—this specific information, which Hayek also refers to as "knowledge."

In different industries, mastery of skills, understanding of people, knowledge of the local environment, and understanding of special situations are equally important. However, the "tacit knowledge" that is not organized cannot generally be considered scientific knowledge. This knowledge is dispersed in the minds of countless individuals, and no one person can grasp all the information. Yet, precisely because of this, each person actually possesses a relative advantage, as everyone holds unique information that can be utilized to create wealth.

Decisions based on this information can only be made by each individual or through their active participation; only then can this information be utilized. For example, a stock trader who acts based on market fluctuations, or a real estate agent who knows of an immediate opportunity, or those who profit from price differences of goods from different places, all rely on timely knowledge of information that others do not know, playing a role in society. They learn "abstract rules" to help themselves acquire "specific information" more quickly.

By immersing themselves in the situation, continuously utilizing specific information, and through constant summarization, they feed back to the abstract rules, thus correcting or fine-tuning their understanding of the abstract rules, better guiding the future process of acquiring specific knowledge.

What we want to earn is not money itself, but the things behind money—resources, products, and services.

Due to knowledge barriers, central planning often fails to make effective decisions; only decentralized planning can ensure that knowledge of special situations is quickly utilized. At the same time, social and economic issues always arise from changes, and decentralized planning cannot make decisions based solely on limited knowledge of direct situations, which leads to the problem of how to convey information from others.

Hayek believes that dispersed information is transmitted through the price mechanism. The price system serves as a medium for information transmission, and through the transmission effect of the price system, social division of labor and resource coordination become possible.

To clarify the role of the price system, let’s use a simple and common example.

Suppose there is a recent shortage of oil in the market. The price of raw materials rises, and there will be a chain reaction in upstream and downstream industries. Suppliers begin to seek new sources of crude oil imports. As long as some people learn about the new shortage that arises from this, they will seek other sources to fill this gap, and the impact will quickly spread throughout the entire economic system. The extra money comes mainly from three factors: natural resources, labor, and technology. Humanity has created immense wealth by utilizing natural resources, investing wisdom and labor, and developing and creating scientific technology, a significant portion of which is created by companies.

"Where does the money ultimately go?" Investment and financial management is not an abstract matter; investing is throwing money into a very real organization, hoping to create more wealth with it. Regardless of how a product is packaged, how nice its name sounds, or which big brand company produces or sells it, we should care about where the money ultimately goes, what the source of its returns is, and whether it meets the most basic common sense and axioms of this world.

In the article "The Nature of the Firm," it is argued that transaction costs are the costs of utilizing the market price mechanism, which includes two main components:

Discovering prices, the cost of obtaining accurate market information; the costs of negotiation, bargaining, and contract execution between transacting parties.

Transaction costs, also known as transaction expenses, refer to the various costs incurred by both parties in a transaction before and after the sale, including the costs of disseminating information, advertising, transportation related to the market, as well as the costs of negotiating, consulting, signing contracts, and supervising contract execution.

According to Coase, the market transaction process incurs costs; prices are uncertain and unknown, and converting them into known quantities incurs costs. At the same time, the market transaction process is not always smooth, as conflicts often arise between transacting parties, necessitating negotiation and compliance, which also incurs certain transaction costs.

For example, when renovating a house, I need to go to the home improvement market to find suitable flooring. After finding a satisfactory product, I need to compare prices among three vendors and bargain. After signing the contract and paying the deposit, I still need to verify the authenticity of the product. If there are issues with the installation, I need to contact them for resolution, which may lead to disputes. Throughout this process, I not only incur the cost of purchasing the flooring but also significant time costs, communication costs, transportation costs, trust costs, etc. These costs arise from the transaction and are the transaction costs. Transaction costs are a very fundamental and universal concept; they influence our behavior and exist in all aspects of the economy, warranting deep reflection.

I. The economy is the sum of transactions; transactions are the smallest units of the economy.#

The economy consists of individual transactions, and all transactions constitute our economy. Society is filled with transactions: shopping is a transaction, working for money is a transaction, studying and training is a transaction, going to the hospital for treatment is a transaction, buying books is a transaction, going to the cinema is a transaction, starting a business and selling products to customers is a transaction, raising funds from investors is a transaction, and going public in the capital market is also a transaction. It can be said that life is full of transactions. Understanding transactions helps us comprehend the operation of society and the economy from the ground up.

II. The inevitability of transaction costs.#

Transaction costs deserve our attention primarily because of their inevitability. Due to the nature of transactions themselves, every transaction inevitably incurs transaction costs. Each transaction includes two types of costs: production costs and transaction costs. Production costs refer to the costs of producing products and services, which relate to the relationship between humans and the natural world; transaction costs refer to the costs incurred by people willingly interacting and cooperating to reach a transaction within a certain social relationship, which is the cost of relationships between people.

Essentially, where there are human exchange activities, there will be transaction costs. Overall, the reasons for the generation of transaction costs can be viewed from four dimensions:

The specificity of transaction assets, the bounded rationality and opportunism of the transacting parties, information asymmetry, and the uncertainty and complexity of the transaction process.

1. The specificity of transaction assets refers to the fact that the assets being transacted do not possess market liquidity, or once the contract ends, the costs invested in the assets are difficult to recover or convert for other uses. Just like that flooring, once it is laid in my house, it cannot be sold to others.

2. The bounded rationality of the transacting parties refers to the limitations that participants in a transaction face due to physical, mental, and emotional constraints, which produce restrictions when pursuing maximum efficiency. For example, when I talk to a vendor about flooring, if I am particularly speculative, I may be more inclined to accept a higher price that they falsely report.

3. The opportunism in transactions refers to the fraudulent methods adopted by the parties involved in the transaction to seek their own interests, which simultaneously increases mutual distrust and suspicion, thereby leading to increased supervision costs in the transaction process and reducing economic efficiency. For example, after I buy the flooring, if I hear that the vendor's integrity is questionable, I may doubt that the product delivered matches what was displayed, so I will verify the product again, or even take time off to supervise them laying the flooring.

4. Information asymmetry in transactions refers to the fact that the transacting parties often hold different levels of information, making it easier for the party with more favorable information to benefit. As a buyer, I may only buy flooring a few times in my life, and my understanding of flooring is certainly not as good as that of the vendor. To reduce the possibility of being taken advantage of, I must obtain relevant information about flooring in advance and then visit different stores to check products and inquire about prices. Even so, information about non-standard products like flooring is still very opaque, and the price I pay is still likely to be higher than its average selling price.

5. The uncertainty and complexity of the transaction process refers to the possibility of various risks arising during the transaction process. For instance, regarding that flooring, after I pay, if the vendor suddenly says that the stock of that flooring is insufficient to cover my house and production will take another month, then whether to stop the renovation team and wait or to go back and choose new flooring will incur additional costs. It can be seen that transaction costs are like friction in economic activities, omnipresent. From a physics perspective, transaction costs are like the entropy generated in motion; they are part of the motion.

III. Transaction costs are also a source of business innovation.#

Transaction costs contain a wealth of business innovation opportunities. Business innovation manifests in three aspects: creating new functions or improving functions, reducing production costs, and reducing transaction costs. Creating new functions and improving functions from nothing to something is certainly innovation; reducing transaction or production costs through different methods is also innovation.

The first two types of innovation are the game between humans and nature, while reducing transaction costs is the game between humans, solving various obstacles in the transaction process through technology, processes, and other means. The internet has reduced transaction costs by lowering information asymmetry, and brand promotion reduces transaction costs by being seen and trusted. Therefore, companies should strive to build their brands and cultivate good reputations, as under good reputations, the transaction costs of their products are relatively low.

IV. Transaction costs contain enormous business opportunities.#

The second reason we should pay attention to transaction costs is that they occupy a significant proportion in the economy. Due to the inevitability of transaction costs, they contain enormous business opportunities.

Alibaba grew by solving the problem of transaction costs. Taobao connects merchants and buyers, reducing the cost of information collection for buyers and alleviating information asymmetry; to reduce the cost of information verification for merchants, it later launched Tmall, allowing customers to purchase products with more confidence. To address the supervision costs of transaction fulfillment, it launched Alipay, originally used for e-commerce transactions, which significantly reduced transaction costs in offline transactions (cash and change), and quickly applied to various offline transaction scenarios. Meanwhile, online banks, having obtained the operational data of merchants, reduced information asymmetry and could provide merchants with lower loans than banks. By reducing various transaction costs in commercial transactions, Alibaba's business flourished, devastating traditional industries.

Renting a house used to be a painful experience, with various fake listings online. After finding a suitable place, calling the agency always resulted in the response that the house had just been rented out, but there were a few good options they could show me. Photos were completely unreliable, so I had to follow the agent around. At that time, the transaction costs in the rental market were enormous, and the entire industry operated very inefficiently. In 2011, Lianjia was the first to launch genuine listings nationwide, requiring all agents to upload listings that strictly adhered to the four standards of "real existence, real price, real sale, and real pictures." Lianjia later introduced VR viewing to further reduce transaction costs.

Lianjia single-handedly promoted the reform of the entire real estate intermediary industry and is indeed a company worth respecting. Deciding where to eat is a question many people need to spend time thinking about every day. In the past, when going to a place to eat, I would just randomly choose a restaurant, and whether it was good or not was a matter of luck. At that time, the cost of information collection and verification was very high. Now, I just need to open a popular review app to see the must-try restaurants nearby, and I basically won't fall into a pit.

V. Finding entrepreneurial opportunities in transaction costs.#

If we break down transactions by process, they can be divided into

information collection, information verification, communication and negotiation, decision-making, contract signing, supervision and execution, and operational maintenance.

Information is dispersed like islands in society. The emergence of the internet has significantly alleviated information asymmetry, reducing the cost of information collection for users.

Search engines like Baidu, local life service platforms like Meituan and Dianping, classified information websites like 58.com, e-commerce platforms like Tmall, JD.com, and Pinduoduo, as well as various vertical industry trading platforms, all utilize internet technology to reduce information collection costs in specific fields.

The fruits hanging low in this process have already been picked, and what remains are more areas where products and services are difficult to quantify. Advertising is another way; regardless of the method you use, the greater the probability your product appears in front of customers, the easier it is for them to obtain this information, and being seen is very important.

The cost of information verification: If all the information in the market were true, things would be much simpler. However, the market is filled with noise, and the authenticity of information is uncertain, so it requires a lot of additional costs to verify. Generally speaking, transaction platforms will internalize this work; otherwise, the platform will be unsustainable due to the high cost of information verification for users.

The cost of communication and negotiation: The transaction process is not always smooth and often requires repeated communication and negotiation. Communication requires timeliness; in certain fields, users still prefer face-to-face communication, but such transportation and time costs are actually very high. With the popularity of video interaction, compared to the previous exhausting visits to clients, people can obtain similar amounts of information with much less energy and time consumption.

The cost of decision-making: Many e-commerce platforms strive to provide a richer variety of products, but this may increase users' decision-making costs. One of the hottest trends in the past two years has been live-streaming sales, where countless people have emptied their wallets in response to Li Jiaqi's "Oh my god! Buy it!" The explosion of live-streaming sales has its reasons; the closed purchasing decisions and trust in the host reduce users' information acquisition costs and comparison costs, facilitating transactions more quickly.

The cost of contract signing: When both parties reach a consensus to conduct a transaction, signing a contract also incurs costs. Compared to the high costs and low efficiency of traditional paper contracts, paperless, digital, and online electronic contracts are gaining attention and have received government support.

The cost of supervision and execution: After a contract is signed, it is necessary to supervise whether the other party executes according to the agreement. If the platform can easily supervise, it will reduce the relevant costs for users themselves.

In the past, various black taxis roamed the market, charging exorbitant prices and often taking longer routes, but after platforms like Didi emerged, the experience of travel improved significantly due to easier complaint processes and the ability to upload driving data to the backend.

Conversion costs: Many transactions are ongoing and repeated, and switching partners incurs costs. To retain customers better, more effort can be put into this aspect. Data, user habits, network relationships, capital accumulation, brand recognition, etc., are all areas worth pondering.

What do companies use to improve efficiency and replace the market?#

Companies establish organizational hierarchies and allocate resources through excellent management, achieving more efficient production (providing goods or services) than the market. Although corporate decision-making can save transaction costs compared to the market, internal division of labor and collaboration also bring about communication costs between departments and individuals, which can be understood as organizational costs within the company. (In addition to communication costs, another major organizational cost is that arising from opportunism.)

These organizational costs limit the boundaries of companies, meaning that companies cannot expand indefinitely; their boundaries can only expand until the organizational costs caused by increasing internal hierarchies equal the external market transaction costs. To some extent, the fundamental purpose of a company's existence is to reduce transaction costs. To obtain information about goods or services outside the market, one must pay not only the price of the goods or services themselves but also other costs.

For example, the costs of searching for information, negotiation costs, supervision and management costs, implementation costs, etc. The most important factor is the asymmetry and incompleteness of market information, which makes transaction costs very high. The purpose of a company's existence is to use scale and specialized division of labor to integrate forces to reduce costs in the transaction process, maximizing benefits.

Two extremely valuable things: "User perspective" and "Innovative vision." In the financial industry, practitioners generally pay more attention to asset management rather than understanding users. Having knowledge and action is very important for understanding users; cross-industry partners can bring more "user perspectives." At the same time, the first is "cultural compatibility." When recruiting, we also pay attention to whether what knowledge and action are doing is something everyone internally loves. It’s like liking a person but not recognizing their lifestyle and interests; it’s hard for the two to stay together for long, and work is the same.

The second point is "Curiosity." Curiosity is a valuable quality for an innovative company. We can never be satisfied with the current solutions, always seeking better solutions to provide better services to users, and then achieving personal growth in the process.

The third point is "Self-motivation." In the entrepreneurial stage, one will face many difficulties and challenges, and many problems that need to be faced alone at work do not have standard answers. Therefore, whether one can continuously drive oneself forward becomes very important.

To give a simple example. For instance, humans have always needed wood throughout history. In the beginning, we found it very difficult to chop down trees, but some clever people polished stones into stone axes, thus improving everyone's efficiency in chopping trees. In this process, people, through their wisdom and labor, utilized natural resources (that is, stones), improved technology (which did not exist before), and raised the level of chopping trees from 20 trees a year to 200 trees a year. The extra resources can then be used to further improve life. Gradually, everyone's lives became better, and thus the overall wealth of society increased.

Accumulation of human wealth. Of course, this is a simplified example; the real world is far more complex than just making axes to chop trees. But if you think back a little, the accumulation of wealth by humanity is basically such a process. Yuan Longping allowed us to plant more crops on the same acre of land, feeding more people, and more people also means more labor; telephones, WeChat, and various video conferencing systems allow people to communicate more efficiently, generating more consensus and wisdom; antibiotics and surgical knives allow us to live healthier lives and extend the lifespan of the entire race. All these changes are brought about by our utilization of natural resources, while applying various labors and creating various new technologies.

What are the investment methods? Investment methods can be mainly divided into two types: stocks and bonds. Bonds refer to the loans that companies take from creditors, promising to repay the principal and interest within a certain period. Creditors are usually banks and investors who purchase corporate bonds. When a company cannot repay, creditors have the right to demand that the company repay the debt by selling assets. This means that creditors only receive interest as a return, and the company's profitability or loss during its operation is almost irrelevant to the creditors.

Stocks refer to the ownership of a portion of a company that investors can acquire by using money, becoming one of the company's owners (shareholders). Unlike creditors, the profitability and loss status of the company during its operation is closely related to shareholders. Shareholders primarily receive returns in two ways:

1. If the company makes money each year, it will distribute dividends based on the proportion of stocks held by different shareholders as a return.
2. If the company is sold, the shares held by investors will also be sold, thus obtaining a one-time profit. The premise of these two ways of obtaining returns is that the company itself operates well.

Why is the long-term return rate of stocks the highest? The long-term return of stocks is mainly due to the following three reasons:

1. Compound interest.
2. Advantages brought by scaling.
3. The "active" value.

• The compound interest formula is as follows: Compound interest = Principal * (1 + Rate of Return) ^ Time.

• The expansion of the company's scale and improvement of efficiency can effectively reduce costs, allowing the company's growth rate to exceed the overall growth rate of society through operating leverage.

• Most importantly: Excellent listed companies can rely on human wisdom, diligence, and courage to "actively" acquire a lot of value and create more wealth.

According to the knowledge and action investment system, we should believe in stocks, that is, believe that good companies will definitely bring returns exceeding the average in the long term. Holding this concept as the foundation of the investment system.

How do investors lose money? According to statistics, most stockholders/fund holders redeem when the market just starts to rise (after much difficulty breaking even) and then purchase a lot near the peak of the bull market. Investors who enter the market near the peak of the bull market, regardless of whether they choose to sell or hold, will incur losses.

Why do investors behave this way? Stock price = intrinsic value * valuation. The intrinsic value is objective, reflected in the company's ability to acquire a lot of value through human wisdom, diligence, and courage, resulting in the slow increase of the company's profits and net assets. This part of intrinsic value is very difficult for investors to see.

Valuation, on the other hand, is subjective and relatively visible, reflected in whether investors' expectations improve or worsen, and whether their emotions are positive or negative. From the perspective of valuation, we can determine that one of the main reasons investors lose money is that people do not have the ability to directly perceive the prices of things, and the judgment of the price of something is easily influenced by external factors.

When we determine the selling price of products in non-professional fields, we usually use the logic of "comparison" and "reference" to the prices of similar products, and cannot directly determine the absolute price of this thing, especially for some things that are inherently difficult to price, such as financial assets with relatively vague pricing. Therefore, the vast majority of people cannot accurately value the market, companies, or stocks.

Furthermore, emotions can be influenced by other market participants, which further affects investors' behavior.

What should we do? A sound investment knowledge system + controlling one's emotions = a pricing basis for valuing companies and markets.

What should the expected annualized return rate of stocks be? We usually use "annualized return" to measure, as the return on an investment is obtained over time. Referring to the data on macroeconomic development over the past few years, we can conservatively believe that an annual growth rate of 5% to 6% is a basic guarantee for our return rate.

Therefore, since investing in companies with higher operational levels will yield some excess returns, a long-term annualized return rate of 8% to 10% is expected.

What do 8% to 10% represent? These two numbers represent the net asset and profit growth of the company. ROE = Net Profit / Net Assets. It measures how much return shareholders can generate from every dollar they invest in the company. As long as the company operates well, net assets will gradually increase.

Charlie Munger once said that the long-term return rate of a stock is basically aligned with the long-term ROE achieved by the company.

How to improve long-term annualized return rates? There are two ways to improve our long-term returns.

Identifying companies with better long-term performance among listed companies can achieve expected returns of 10% to 12%. Utilizing market price fluctuations, buying more at low points and holding or selling at high points will also increase long-term returns. The "Knowledge and Action Thermometer" can help everyone measure market sentiment, and consistently sticking to buying low and selling high may raise expected return rates to 12% to 15%. It is worth noting that Buffett's actual long-term return rate is only about 12.5%.

It is important to emphasize: having 12% to 15% in the long term does not mean there will be 12% to 15% every year. Therefore, sticking to long-term investment is key.

In modern corporate systems, creditors' rights to claim debts take precedence over shareholders' rights to profit distribution. Therefore, when a company makes money, it must first repay creditors, pay taxes on the remaining money, and then distribute dividends and retain profits.

1. Due to the existence of operating leverage, changes in income lead to disproportionate changes in operating profit (total income - total costs).
   Fixed costs do not increase with income, and if the company has a certain scale effect, the income growth rate > cost growth rate, leading to a change in operating profit % > change in income %—this is operating leverage.

2. Due to the existence of financial leverage, mainly influenced by interest, it causes disproportionate changes in earnings before interest and taxes (operating profit + interest) and net profit (attributable to shareholders, what we commonly refer to as "net profit").

As mentioned at the beginning, debts are repaid first, which reduces pre-tax profits, so taxes paid are less, and shareholders' net profits instead increase.

What determines stock prices?

At this point, we can summarize stock prices into a formula:
Stock Price = Value × Valuation.

Stock prices are determined by two factors: one is the intrinsic value of the company, and the other is the valuation. Valuation is the fundamental reason for the significant fluctuations in stock prices in the short term.

If the price of the stock you purchased rises, this increase may be caused by two factors: the first factor is the improvement of intrinsic value, which may be due to the company earning more money during the process of business growth, or it may be due to financing, issuance of new shares, etc., causing a sudden increase in intrinsic value. The second factor is that investors' expectations have improved, and their emotions have become more positive.

The intrinsic value of a company is difficult for investors to see. It is hidden within the company and the economy. Entrepreneurs and employees work together to meet customer needs and increase profits, manufacturing product by product, writing code line by line, accumulating orders one by one; these gradual improvements lead to increases in company profits and net assets.

Intrinsic value is objective, but the expectations and emotions behind valuation are subjective. As we mentioned earlier, facing the same company, the same market, and the same information, it is also very difficult for us to make accurate valuations. At the same time, our emotions can also be influenced by other market participants, switching between greed and fear, which further affects our behavior.

Investment master Warren Buffett once wrote in the preface to Benjamin Graham's book "The Intelligent Investor":

• To achieve investment success in a lifetime, one does not need top-notch IQ, extraordinary business acumen, or secret information, but rather a sound knowledge system as the basis for decision-making and the ability to control one's emotions so that they do not erode this system.
• What he refers to as "knowledge system" and "emotional control" are precisely what we will discuss in the next few lectures—"cognition" and "emotion," which are the basis for valuing companies and markets.

The change in net profit % > change in earnings before interest and taxes %. This is financial leverage.

1. Therefore, changes in income indicators representing GDP do not vary much, yet they often cause huge fluctuations in net profit = operating leverage * financial leverage. For companies, increasing the debt ratio within a certain range is a lower-cost financing method, which can also increase shareholders' equity.

2. Stock-debt ratio: Regarding passive investors (cautious/conservative investors): the stock-debt ratio is 2:8, the maximum ratio: 5:5. "If he acts according to his ability and limits his business activities to the strict safety range of standard defensive investments, achieving satisfactory investment results is simpler than most people imagine; achieving very good results is harder than people think." For someone like me, spending a certain amount of time and effort to learn and understand basic investment knowledge, hoping to achieve above-average results is good enough. To surpass the vast majority of people requires too much effort. In life, I generally follow the "2:8" rule.

3. The ability of stocks to resist inflation is greater than that of "bonds"—having money allows for investment. "We cannot say for certain that investors should generally wait until market prices are at their lowest to buy, as this may take a long time, potentially causing income losses, and may also miss investment opportunities. Overall, a better approach for investors is to invest in stocks whenever they have money, without delaying purchases—unless the overall market level is too high and does not meet the long-term value standards used." "Long-term investment does not require timing; as long as one lays out a strategy against the market, the pendulum theory suggests that while you may not buy at the lowest point, as long as it is 'not expensive'—coming from 'two birds.'"

4. Margin of safety: Choosing an investment advisor does not need much elaboration, but for me, it can only be "professionals do professional things." Choose an investment advisor you trust and then "hold steady, hold on" to your buying strategy.

5. Market fluctuations and mean reversion: The general understanding is that stock market prices deviate from their true prices (during bull markets), and eventually, they must return to their actual value, meaning that both speculators and stock investors must prepare to endure significant shrinkage of their stock market value or even long-term being trapped; conversely, the same applies. After reading the book, I firmly believe in the value investment philosophy, and within the margin of safety, there must be wisdom (believing in value investment) and the ability (investing with spare money) to "hold on."

6. Human nature and emotions: The meaning of "avoiding" refers to the feelings we often harbor: disgust, jealousy, suspicion, concern... "Without concern" means being free from these feelings. Humans are indeed too complex, with psychological states changing constantly, cognition rising and falling, and the external environment changing rapidly. In this case, one can only be grateful for a 50% understanding. I am compassionate, good, good; perhaps humans can only save themselves. It is said that "knowing enough brings happiness," but how can one say such a thing? Isn't that a joke? A common person! "A person who has attained enlightenment must have a clumsy heart; if you are too clever, how can you be enlightened! An enlightened person must have a clear mind; you are not clear at all, so what enlightenment! You cannot obtain it; you can only temporarily comfort your own heart." In martial arts novels, it is often seen that monks, usually from Shaolin Temple, appear, and no matter what happens, they always start like this: "Good! Good! Benefactor... Do you know where this phrase comes from? It comes from the words spoken by the Buddha during his travels: in Pali, there was a time when the Buddha said to Shariputra, 'Good! Good!'"

Economic cycles, corporate profit cycles, market sentiment cycles, fluctuations amplify step by step, but eventually converge back to the long-term trend itself. This long-term trend is also a growth in national economy and corporate profits that we continuously emphasize in our courses. However, these three cycles, along with various other cycles (such as credit cycles) and factors, cause the entire market to fluctuate, and the role of human hearts in this is especially significant.

When the economic situation is good, entrepreneurs blindly invest in reproduction, and financial institutions like banks also facilitate this behavior during the credit easing of the economic upturn (easy loans). These further amplify corporate profits during good economic times.

Reflected in the market cycle—media reports are all good news, corporate profits frequently exceed expectations, and everything is flourishing. At this time, investors' psychology and emotions take over. "Such a scene must continue; a golden decade is not a dream," and thus stock prices soar. At some point, some factor causes corporate profits to fall short of expectations, and by this time, the last buyer has already entered the market, and thus the stock market begins to decline.

The operational and financial leverage during good economic conditions becomes a burden for companies, and corporate profits quickly decrease or even incur losses. The stock market continues to decline, and the media is filled with bad news. Investors believe that such a scene will surely continue, and the economy is doomed, so they sell stocks. Companies lay off workers, investors' assets shrink, and everyone tightens their belts, reducing unnecessary consumption, leading to a further decline in corporate income and profits... until the next cycle begins.

Value investing is not about never selling; it is about daring to reduce positions when the market is severely overvalued, realizing profits and avoiding the systemic risks brought about by future mean reversion characteristics. When the market is significantly below intrinsic value for some reason, we believe it has a margin of safety, and value investors will buy at market lows. The social security fund can achieve stable and good investment returns because it decisively reduced the proportion of equity assets when the market was severely overvalued in 2007, cashing out the returns of that year, and dared to increase positions when the market was at lows in 2005, 2008, and 2010.

After the global financial crisis in 2008, many asset management institutions suffered huge losses, and we reflected that simply adhering to the "buy and hold strategy" might make it impossible for investors to avoid systemic risks. During the post-financial crisis period, a dynamic asset allocation concept should gradually be established. The dynamic asset allocation of the social security fund is based on the basic ideas of value investment and long-term investment, adjusting the allocation of assets when the market significantly deviates from the value center in either direction. Practice shows that external managers' specialization often reflects in security selection, while their grasp of market timing tends to be short-term. For example, whether it is stock-type, equity-type, or mixed public funds, the annual average turnover rate is generally between 200% and 500%, and the stock portfolio of the social security fund also exceeds 100%. For large-scale investment institutions, considering transaction costs, the "buy high and sell low" strategy we mentioned is based on medium to long-term judgments, and the market must have a considerable degree of fluctuation, rather than making short-term trades. Implementing dynamic allocation strategies in small fluctuation ranges leads to frequent trading and high transaction costs, and based on short-term emotional judgments, it is easy to make mistakes. Continuous short-term errors may lead to significant directional losses, often resulting in a loss that outweighs the gains in allocation. "Grasping the big and letting go of the small" is the only way for investment institutions like the social security fund to actively allocate.

Looking back, the excess returns generated by the social security fund through high buy and low sell are almost equivalent to the market beta returns. In the turbulent capital market, being able to ride the waves relies on rationality and patience, as well as the ability to assess the situation.

The core goal of regulation is "to protect the legitimate rights and interests of investors." Under such a value system, first, everyone will not do anything that harms user interests; in addition, it will drive oneself to improve in the next practical operation, providing good service for users. Moreover, we pay great attention to professionalism in investment research and compliance work directly related to investment.

1. Stability#

Stability does not mean casually following the tide into the market; one must have a clear understanding and conduct serious analysis of the larger trend, having one's own way of thinking rather than going with the flow. Stability also requires constantly adjusting one's estimates in conjunction with market trends to achieve success.

When investors step into the stock market, they should carefully learn and understand the details of each link, simulate trading, invest as much as they can, and not be impatient. Investments should not exceed one's ability. It is important to know that securities investment carries a high risk, and coupled with the pressure of insufficient funds, during times of anxiety, it is naturally impossible to exert high wisdom, and the chances of winning are relatively small. In other words, speculators need to combine flexible thinking with objective situation analysis; only in this way can they remain undefeated.

2. Patience

The fluctuations in the stock market do not form overnight; they develop slowly. The formation of a bull market is like this, and so is the formation of a bear market. Therefore, do not act impulsively before it forms, to avoid the impulsive investments caused by rushing in and out; learn to practice the word "patience." A small lack of patience can disrupt a major plan; a step of patience can lead to vast opportunities.

3. Precision

Precision means being decisive and resolute. If one is always hesitant, investment opportunities often vanish in an instant; the result of hesitation is often the loss of investment opportunities. If one thinks about it and ponders, dragging out the time too long will certainly make it difficult to talk about "precision." Of course, what we refer to as precision is not completely absolute accuracy; there is nothing in the world that is 100% certain. If the trend is favorable, do not short against the trend; at the same time, when the price level in mind is reached, enter the market to go long; otherwise, if one hesitates too long and loses a better opportunity, one can only watch and sigh.

4. Ruthlessness

Ruthlessness has two meanings. On one hand, when the direction is wrong, one must have the courage to cut losses and exit. On the other hand, when the direction is right, one can consider adding positions appropriately and pursuing victory. In the early stages of a stock price rise, if you have already made a significant profit, it is advisable to hold the stock a little longer instead of easily cashing out; you can earn another significant profit. For example, in Taiwan, if you bought stocks at the beginning of 1977 and made a 30% profit by July, if you sold at that time, two months later when it rose over 100%, you would regret it!

5. Rolling

In stock market investments, earn a good profit and then leave; when the stock price reverses, you can use the filter principle to withdraw troops immediately. At the initial stage of a price drop, do not linger; be decisive and cut losses.

When a bear market arrives, one should reduce holdings of stock chips as much as possible; it is best to stay away from the stock market and wait for the bull market to arrive before entering at the right time.

Regarding the psychological principles of stability, patience, precision, ruthlessness, and rolling, in the overall strategy, precision is secondary; stability is the most important. Because in any skill, precision relies on talent, while stability relies on strategy and capital, and can be achieved through management means.

Assessing one's risk profile.

Xiao Wang, Xiao Li, and Xiao Ding all go to buy funds. Xiao Wang is a low-risk preference person, Xiao Li is a medium-risk preference person, and Xiao Ding is a high-risk preference person.

At this time, three types of funds are newly launched:

Individuals' conditions and personalities exhibit three basic attitudes toward risk: aggressive, stable, and conservative. Aggressive individuals are willing to accept high risks in pursuit of high profits; stable individuals are willing to bear some risks, aiming for profits above the market average; conservative individuals prefer safety and immediate benefits, willing to give up potentially higher-than-average returns, seeking only to preserve capital and interest. Human personality and behavioral patterns often influence each other; for example, impatient people walk faster and talk like a machine gun that cannot stop; while slow people tend to procrastinate and find it difficult to make decisions. In investment, timid individuals fear losing money, so they appear conservative and cautious; bold individuals want to earn more, so they become adventurous; while moderate individuals adopt a stable approach, pursuing steady growth.

For a long time, many people who do not understand their investment attributes have used the wrong investment methods and chosen the wrong investment tools, leading to very tragic outcomes, either losing all their capital or being forced to exit.

You must first understand yourself to gain wealth in the process of financial management. Personal financial management should follow these six principles:
(1) Understand the purpose of your financial management: making money and how much to earn.
(2) Without clear financial goals, one will certainly lose direction in financial management.
(3) Do not overestimate returns.
(4) Do not underestimate risks.
(5) Set profit satisfaction points and loss stop points.
(6) Refuse to drift in the sea of stocks.

Regular savings refer to customers agreeing with banks on a savings term when depositing, either once or in installments during the term, to withdraw principal and interest in a lump sum or in installments. Regular savings can be further divided into seven types based on different deposit and withdrawal methods and interest payment methods: zero deposit and full withdrawal regular savings, full deposit and full withdrawal regular savings, principal deposit and interest withdrawal regular savings, discount regular savings, full deposit and zero withdrawal regular savings, large transferable time deposits, and special savings.

Based on people's savings needs, we can choose different types of savings. Below, we will briefly list a few savings methods.

1. Principal deposit and interest withdrawal regular savings
   The interest calculation method for flexible savings is as follows: savings within three months are calculated at the current rate; savings over three months are calculated at 60% of the interest rate of the same level of full deposit and full withdrawal regular savings; for savings with a term of one year or more (including one year), regardless of the length of the term, the entire term is calculated at 60% of the one-year full deposit and full withdrawal regular savings interest rate. The formula is:
   Interest = Principal × Term × Interest Rate × 60%.

Due to the non-fixed term of flexible savings, there may be fractional days when withdrawing, and in such cases, daily interest rates apply. Below is an example to illustrate the calculation method for flexible savings:
Example: Ms. Liu deposited 10,000 yuan in flexible savings on February 1, 2008, and withdrew on June 21, 2008. How much interest should she receive? First, we calculate the actual term of this deposit as 140 days, which should be calculated at 60% of the three-month interest rate (annual interest 2.88%).
Interest earned = 10,000 yuan × 140 days × 0.8% (daily interest rate) × 60% = 67.2 yuan.

Because of its flexibility, convenience, and confidentiality, the flexible savings method has a wide range of applicability. Specifically, it is suitable for some funds whose term and purpose have not yet been determined but have high requirements for interest and confidentiality, and it can also meet the needs of savings investors for universal deposits and withdrawals. Currently, some banks have begun to offer named savings; if lost, users can report the loss with identification documents to prove their legal identity.

3. Zero deposit and full withdrawal regular savings
   Zero deposit and full withdrawal regular savings, abbreviated as "zero full," is a type of regular savings where deposits are made monthly, and the principal and interest are withdrawn in a lump sum upon maturity. Zero deposit and full withdrawal have the characteristic of "accumulating small amounts into a whole, using small money to accomplish big things," and the monthly deposit is not much.

4. Notice savings deposits
   Notice savings refer to deposits where the depositor does not agree on a term but must notify the bank in advance when withdrawing, agreeing on the withdrawal date and amount to obtain the deposit.

5. The withdrawal amount does not meet the minimum withdrawal amount stipulated by the deposit.

If you plan to save more than 50,000 yuan, then "notice savings" is definitely your best choice, as choosing this savings type can yield the most interest. It is also worth reminding you that if the expected deposit term exceeds three months, it is advisable to choose other deposits besides notice savings. In addition, notice savings allow multiple withdrawals, but the amount of a single withdrawal and the account balance must not be less than 50,000 yuan or 6,250 US dollars, meaning it must meet the minimum account balance requirement. After withdrawal, the bank will issue a new deposit notice to the customer, and the interest on the remaining balance will be calculated from the original deposit date, continuing to use the original deposit interest rate.

5. Educational savings
   Educational savings refer to individuals opening accounts at designated banks according to national regulations, depositing a specified amount of funds within a specified period, specifically for educational purposes. It is a special savings plan specifically for students to pay for non-compulsory education expenses. All students in primary and secondary schools (from the fourth grade of primary school) can participate in educational savings with the help of their parents to prepare for future expenses for high school or university education.

The entire economic expenditure of a family can be divided into five major categories.

1. Daily living expenses
   In the process of financial management, every family knows that establishing a household will incur some daily expenses, including rent, utilities, coal gas, insurance, food, transportation, and any expenses related to children, etc. These are unavoidable every month. Based on the family's income level, when implementing savings, the family can establish a public account, where each person contributes a fair share every month to cover the family's daily living expenses.

2. Large consumer goods expenditure
   Household construction funds are mainly used to purchase durable consumer goods such as refrigerators, color TVs, and other large items, as well as to prepare financially for future housing purchases and renovations.

3. Cultural and entertainment expenses
   Modern family life inevitably incurs entertainment expenses. This part of the expenditure is mainly used for family members' sports, entertainment, and cultural consumption. The main purpose of setting it is to add a touch of interest to the family's mundane life amidst the pressures of work.

4. Financial project investment
   Family investment is a necessary means for every family to achieve capital growth. There are many ways to invest, with relatively safe options like savings and bonds, and higher-risk options like funds and stocks. Additionally, collectibles can also be considered as a form of investment, including stamps, coins, and artworks. We believe that allocating 20% of the family's fixed income as investment funds is relatively appropriate for ordinary families.

Knowledge about loans.

1. Types of personal loans
   (1) Personal housing loans. Personal housing loans are loans provided by banks to support individuals in purchasing or renovating houses. Currently, it mainly refers to mortgage loans, which are usually called "personal housing mortgage loans." The maximum loan amount is 80% of the total price or appraised value of the purchased (renovated) house (whichever is lower), and the term generally does not exceed 30 years.

(2) Personal car loans. Personal car loans are loans provided by banks to support individuals in purchasing cars. If the purchased vehicle is for personal use, the loan amount cannot exceed 80% of the car price, and the term cannot exceed 5 years.

(3) Personal consumer goods loans. Generally refers to durable goods loans in daily life. That is, loans provided by banks to support individuals in purchasing durable consumer goods in daily life. Durable goods refer to household durable goods with a unit price of over 3,000 yuan (including 3,000 yuan) and a normal service life of over 2 years, such as household appliances, computers, furniture, fitness equipment, etc., with a term generally of 5 years.

In addition to the above, various banks may also offer different services, such as personal business loans from construction banks.

2. General loan process
   (1) Submit a loan application to the bank. Personal loans generally require the following items: household registration book, marriage status proof, ID card, income proof, real estate ownership certificate, and relevant proof from the guarantor, etc. Additionally, a series of related fees must be paid.

(2) After the bank accepts the application, it will investigate and evaluate the relevant materials. After receiving the relevant materials, the bank will conduct a preliminary review, perform a credit investigation on the borrower, and evaluate the customer. For customers who meet the loan conditions, the application will be approved; for those who do not meet the conditions, it will not be approved, and reasons will be explained.

(3) Sign the loan contract and open an account. Once the bank approves the application, the relevant loan contract can be signed, and the individual can open an account at the bank, thus everything is ready.

(4) The bank disburses the loan. The last step is for the bank to issue the loan to the applicant.

3. The knowledge of loans
   Loans are not just about filling out a form to apply to the bank; there are many contents involved. If you do not want to become a "house slave" or a "debtor," you must study the knowledge within loans.

4. The knowledge of self-assessment
   Before taking out a loan, the first thing you need to learn is to assess your financial strength. Then, based on the comprehensive assessment data, determine the down payment amount and ratio. Financial strength generally includes two major parts: real estate and movable property.

5. The knowledge of income and expenditure budgeting
   To better and faster repay the loan in the future, you must make reasonable expectations of the family's future income and expenditures. This must consider various possible influencing factors. Generally speaking, young people with higher education have higher personal income expectations, allowing for a faster repayment schedule.

6. The knowledge of calculating the loan amount
   To determine your loan amount and avoid overburdening your repayment pressure, you should calculate your loan amount based on your income and expenditure situation, according to the monthly balance of family income and expenditure. Moreover, during the calculation process, you should also consider changes in family income and expenditure situations to avoid financial vacuums.

7. The knowledge of determining the loan term
   The reason banks are willing to lend to homebuyers is mainly because real estate investments are safe and reliable. If you want to invest in other types of projects besides real estate, it may not be so easy to borrow money from banks, as banks tend to be more cautious with projects that do not guarantee returns.

(2) Regarding loan repayment and interest, many investors easily solve this issue through renting. Generally speaking, the debts of property investors are borne by tenants. After investors take out loans to purchase real estate, the vast majority earn income by renting out the property, then using rental income to pay the bank's loan interest and principal.

(3) Real estate is an investment related to people's basic survival, so countries always provide the most favorable conditions for financing in real estate. Not only are the loan terms long, but the interest rates are also much lower than other consumer loans. If, in real estate investment, one can reasonably and maximally utilize the advantage of real estate loans, it is equivalent to turning real estate into one's private bank, providing considerable funds for real estate investment and other consumption, but only paying very low interest.

(4) Another significant characteristic of real estate investment is its substantial appreciation potential. With the continuous advancement of social and economic development and urbanization, a large amount of effective land in urban areas has been fully developed and utilized, while more and more people flock to cities, leading to a continuous increase in demand for real estate, which will result in a supply-demand imbalance, thus driving further appreciation of real estate.

(5) The long cycle of real estate investment allows for a larger profit space and a longer profit time. Generally speaking, a house has a lifespan of about 100 years, with the shortest being over 60 years. From the perspective of borrowing to buy a house, investing in real estate not only obtains property rights but also guarantees at least 40 years of profit time. The appreciation potential of real estate also effectively offsets the negative impacts of inflation.

Real estate investment is based on the price difference of real estate at different times, buying low and selling high to obtain profits. In real life, we find that on one hand, experts and the public lament the serious real estate bubble, while on the other hand, real estate prices continue to rise. In fact, this is closely related to the characteristics of real estate itself. So, when purchasing real estate, what kind of properties have the most appreciation potential?

First, the geographical location of real estate, as immovable property, is the most crucial condition for appreciation potential. Generally, properties located near subways, large commercial areas, and transportation hubs have greater appreciation potential.

Second, the surrounding basic supporting facilities and government comprehensive urban planning, such as convenient transportation and primary and secondary schools, will also promote the appreciation of the property.

Third, the overall level of the community where the property is located, property facilities, security guarantees, public environment, and the inherent value of the house itself are all criteria for evaluating property appreciation.

Finally, one should look at the rental rate and rental situation of the property. The sales data of real estate in a region may sometimes be distorted, but the rental situation reflects the direct usage of end users, so rental income and occupancy rates can more accurately inform you of the true value of the property in that area. At the same time, rental income and occupancy rates are also one of the indicators for measuring short-term returns on real estate.

1. Macroeconomic and political environment#

This is the most important factor affecting housing prices. Economic growth generally leads to rising housing prices; economic recession generally leads to falling housing prices. If economic growth tends to stabilize, housing prices will naturally not fluctuate too much. If the economy is in a mess, expecting housing prices to continue rising is undoubtedly a pipe dream.

2. Monetary policy#

Generally speaking, interest rate hikes may suppress housing prices, while interest rate cuts may promote housing price increases; currency appreciation promotes rising housing prices, while currency depreciation lowers housing prices.

3. Real estate policies#

Because real estate is a major issue concerning the lives of ordinary people, the state attaches great importance to regulating the real estate market through corresponding policies. If the aim is to support and promote the development of the real estate industry, positive policies will generally be introduced, which may lead to rising housing prices; if it is felt that the real estate market is overheating and needs to cool down, policies to curb the rapid development of the real estate industry will be introduced, such as increasing the difficulty of obtaining housing loans. The state has introduced policies to vigorously develop affordable housing and self-owned housing, which will naturally impact the commodity housing market. Of course, the effects of different policies will vary in the long and short term.

4. Real estate costs#

Real estate costs generally include land costs, actual construction costs, and demolition costs. In China, land is state-owned, so how much land the government provides and how it is provided will affect land costs. Currently, urban land costs are rising sharply, with "land kings" appearing everywhere, which has become a driving force behind rising housing prices. Construction costs refer to the costs of building materials and labor, which generally do not fluctuate significantly. As for demolition costs, they should be continuously rising in the long term.

6. Real estate bubbles#

Real estate bubbles refer to the artificial inflation of property prices. How high can real estate prices go? People have no idea, and the more prices rise, the stronger this psychological feeling becomes. In reality, it is difficult for people to distinguish between normal price increases and real estate bubbles; more often than not, the two are mixed together. So how can we distinguish whether housing prices have bubbles? We can use the following methods to judge.

(1) The number of times a house is resold. Generally speaking, the more times a property is resold, the larger the bubble. Speculators generally adopt three forms: flipping pre-sales, renting, and transferring ownership. Among these three forms of speculation, flipping pre-sales is particularly harmful, as it has been considered a significant cause of real estate market crashes in many countries.

(2) The speed of housing price increases. In a relatively sound real estate market, the increase in housing prices should not exceed the increase in residents' income. If it does, it indicates a larger bubble, leading to more people being unable to afford housing, and eventually, housing prices will drop.

(3) The vacancy situation of houses. Vacancy refers to inventory; any product in the market has a reasonable inventory. Maintaining a moderate number of vacant houses plays a positive role in balancing market supply and demand and regulating housing prices. Internationally, the inventory of houses generally does not exceed 15%. If there is no vacancy rate, it indicates that the real estate market is overheated and there is a real estate bubble.

The so-called "using a house to support another house" has two situations: one is renting out an old house, using the rental income to pay off the bank loan for purchasing a new house; the other is investment property, renting it out to repay the loan. Many people buy a new house for themselves and then buy another house with high rental prices and appreciation potential to rent out, using the stable rental income each month to repay the loans for both houses. The method of "using a house to support another house" is indeed more cost-effective for consumers, but it also places higher demands on the buyers themselves, as there are many complexities that need to be mastered.

1. Long-term investment remains optimistic.#

Some investors believe that housing prices may fluctuate in the short term, but in the long run, after the adjustment cycle, prices will still be rigid. As long as they can afford it, real estate remains a good investment. Others express that the current evaluations of rental prices by intermediaries are calculated based on a certain ratio of loan repayment amounts. As long as the quality of the property is not too poor and the financial pressure is not too great, in the current situation with many renters, it is still possible to choose "using a house to support another house." Some people say that while they are still employed, they should acquire several small houses, forcing themselves to repay loans each month, so that when they get older, they will not fear unemployment or retirement.

2. Control the repayment ratio.#

Since it is an investment, there will be risks, and "using a house to support another house" is no exception. Financial planners believe that under normal circumstances, rental income + other family income (such as wages, savings interest, etc.) should exceed the repayment amount + normal family expenses. Under unchanged family income and normal expenses, the higher the rental income, the lower the repayment amount, making family finances safer.

For properties that "support themselves through rent," one should have a thorough understanding of the rental market around them, including whether there are stable tenants, surrounding municipal planning, etc.

In addition, mortgage loans must have stable repayment sources; rental income cannot be the primary source of repayment. Investors should choose suitable repayment methods based on their income situations.

Some buyers regard housing prices as the only judgment standard, believing that only when housing prices rise is there appreciation. This is actually an irrational manifestation of buyers: on one hand, housing prices may appear to rise, but that does not necessarily mean there is a market; on the other hand, whether a property appreciates is not necessarily reflected solely in housing prices.

Some experienced developers and buyers suggest that improvements in transportation, environment, supporting facilities, good property management, and community culture that enhance living quality are also manifestations of property appreciation.

1. Good living conditions

People living in society inevitably rely on the social environment. Whether transportation is convenient and whether living facilities are complete will directly affect the quality of people's lives. Imagine if homeowners have to take three or four buses every day to commute to work and spend half an hour on the road just to buy some daily necessities, then the quality of life cannot be discussed. For residential projects, providing residents with more convenient transportation, supporting facilities, and environmental improvements is also a manifestation of project appreciation. Additionally, capable developers will not only ensure the quality of the property but also improve the software, creating a good living environment for homeowners, allowing them to enjoy various pleasures in the community. Only when homeowners recognize the living quality of the project will they be willing to live in this community, which will give housing prices good psychological support, allowing the property to maintain or even increase its value.

2. High-quality software

Property projects are like a computer; good hardware facilities are certainly important, but without solid software, the entire system will collapse and become useless. Property management is like an operator, constantly maintaining the operation of this system, so an excellent property management team is also an important manifestation of high-quality real estate.

Transportation, supporting facilities, property management, and community culture are the inherent qualities of real estate, and the external manifestation of this quality is the appreciation potential of the property. During the purchasing process, it is essential to conduct a comprehensive assessment of both the hardware and software of the property. The transportation conditions, shopping environment, educational facilities, quality of property management, and community culture construction near the property should all be included as assessment criteria.

Insurable risks in insurance refer only to "pure risks." Pure risks mean that there is only a possibility of loss without any possibility of profit. For example, risks such as property theft or illness are pure risks, which only incur losses and cannot yield profits. Therefore, insurance companies generally do not insure stocks. Specifically, insurable risks must meet the following conditions:

(1) High degree of loss. If the potential loss is not significant, negligible, or easily bearable, there is no need to take out insurance for such risks. For example, you would not buy insurance just because you are worried about losing an apple.

(2) Low probability of loss. If the probability of loss occurring is already high, insuring such risks means expensive premiums, and it is not worth discussing transferring or diversifying the risk. For example, if the theft rate of new bicycles in a certain area is as high as 40%, if you insure a new bicycle, you would need to pay 40% of the pure premium, plus the insurance company’s charge for compensating for operating expenses (for example, 10%), making the total premium reach half the price of the bicycle! Clearly, insuring such risks is not cost-effective.

(3) Loss must have a definite probability distribution. When determining insurance premiums, insurance companies need to clarify how likely it is for this risk to occur and how much loss it would cause, so they can calculate the premiums accordingly. Therefore, insurance companies must grasp the probability distribution of risk losses and adjust these data in a timely manner according to changes in the external environment.

(4) There must be a large number of homogeneous insurance subjects. For any type of insurance, the number of insured subjects must be sufficiently large; otherwise, it will not serve the purpose of diversifying and transferring risk. Additionally, according to the "law of large numbers," the more people insured and the more insurance subjects there are, the more stable the probability of risk occurrence and the degree of loss will be, which is clearly more beneficial for insurance companies to assess risks and ensure stable operations.

(5) Loss occurrence must be accidental. If it is intentional, the insurance company will not pay compensation.

(6) Loss must be determinable and measurable. Once a loss occurs, the insurance company needs to clarify the value of the loss and provide compensation; if it cannot be determined and measured, insurance cannot proceed. Insurance is essentially a social arrangement for diversifying risks and concentrating burdens. For the entire social economy, insurance can play an important role in maintaining the continuity of economic development. In the event of significant catastrophic events, massive losses can severely impact the stable development of the social economy, even causing a break in the chain of social economic development, while insurance can buffer and remedy, helping society through difficult times. On September 11, 2001, the United States suffered a severe terrorist attack, the World Trade Center was hit and collapsed, and thousands of elites perished, resulting in massive losses. However, due to a sound insurance system, the global insurance industry paid out insurance claims amounting to hundreds of billions of dollars, and the U.S. economy did not experience severe turmoil as a result.

In addition to the wealthy needing to avoid losses from "halving their property in the blink of an eye," ordinary people need to transfer losses for "accidents, health, and retirement." These are the "three major risks" that must be insured in life.

1. Accidental risks#

Accidental events occur every day in the streets and alleys of cities. Risks are no longer rare events, and someone must pay for the losses caused by accidents.

For young people just starting their careers or those with varying income levels, purchasing high-value life insurance is unrealistic. Their economic capacity makes it unnecessary or unwilling to put all their money into the insurance company's pocket. However, accidental insurance is a necessary policy for them. Because when facing sudden accidents in life, accidental insurance can comprehensively build a safety line to protect the insured's interests.

Accidental insurance premiums are low; for an insurance policy with a coverage of 100,000 yuan, the insured only needs to pay over 100 yuan, which can be considered "small investment for great protection."

There are many types of accidental insurance, and people can choose the type that suits them based on their characteristics and needs. General accidental insurance has a broad coverage area, usually with a one-year coverage period and no restrictions on the place of occurrence. A policy with moderate coverage (100,000 to 200,000 yuan) is suitable for everyone to purchase as accidental protection; travel accidental insurance has a shorter term and strict restrictions on the place of occurrence, covering only accidents during travel; transportation accidental insurance is suitable for business people who frequently travel, where the insurance company compensates for accidents occurring on specific means of transportation, such as airplanes, trains, cars, and ships; aviation accidental insurance is suitable for people who fly infrequently, while those who fly frequently are more suited to purchase transportation accidental insurance.

In an era of low interest rates and low investment returns, purchasing accidental insurance and other pure protection insurance is very necessary.

2. Health risks#

Insurance must follow certain principles.

Insurance must adhere to certain principles, specifically including the following aspects:
(1) Principle of utmost good faith. What constitutes utmost good faith? It requires the parties to fully and accurately inform the other party of all important facts related to the insurance, prohibiting any hypocrisy, deception, or concealment. If one party conceals important facts, the other party has reason to declare the contract invalid or not fulfill the obligations or responsibilities stipulated in the contract.

Choosing an insurance company

There are many insurance companies that can provide the same insurance products, so what kind of insurance company should policyholders choose? How to evaluate an insurance company? You can refer to the following standards:

1. Company strength comes first. Insurance companies that have been established for a relatively long time are generally larger and financially stronger, thus having a higher reputation, and their employees are of high quality and capable, making them more worthy of selection for policyholders. In China's domestic insurance industry, due to its relatively short development time, the main reference standards are the company's total asset value, total premium income, business network, number of policies, number of employees, and past performance, etc. Consumers should not only consider the cost of premiums when choosing an insurance company; purchasing insurance is not like buying other goods. In addition to looking at prices, business capabilities are also important. Larger insurance companies generally have more mature claims processes and can provide timely services, and even if their premiums are higher, they can guarantee first-time claims, which is worth choosing.

2. The size of the company. As a financial service product, many policyholders hesitate between choosing a large company or a small company when purchasing insurance. In fact, it is essential to focus on the level and quality of service. Generally speaking, larger insurance companies tend to have higher claims standards and faster processing speeds, but the downside is that their premiums are usually higher than those of smaller companies; in contrast, smaller insurance companies may have shortcomings in this regard but offer lower premiums, providing a certain price competition advantage.

3. The variety of products should be tested. Choosing the right product type means choosing the right protection for oneself. Every insurance company has numerous products, and it is not easy to find good ones based solely on one's ability. However, finding a good insurance company is different. A good insurance company can provide relatively complete insurance products, allowing you to choose widely applicable finished products, thus saving you a lot of trouble. A good insurance company should generally meet several conditions: a complete range of products; high product flexibility; providing greater convenience for policyholders; and strong product competitiveness.

4. Verify your own needs. Whether an insurance company is suitable ultimately depends on oneself. What are your needs? Does the service provided by the company meet your requirements? Which company do you think provides better service? Carefully comparing and verifying against your own situation is the most important question when making decisions.

How to save on premiums

Purchasing insurance for reasonable financial arrangement and planning can effectively prevent and avoid financial difficulties caused by illness or disaster, while also allowing assets to achieve ideal preservation and appreciation. However, under the current economic situation where saving money is the hard truth, how can one make their insurance purchases economical and cost-effective?

1. Clarify what you are buying. Many insurance companies require insurance advisors not to use the most straightforward language to tell potential customers what a certain insurance really means. For example, many insurance companies avoid directly saying "life insurance" when discussing life insurance, instead using euphemisms like "guarantee collateral," "retirement plan," or "tax avoidance plan." However, policyholders must clarify what they are purchasing. Insurance advisors always emphasize the advantages of insurance in reducing risks and avoiding taxes, but they tend to downplay another aspect of insurance: high handling fees, long-term regular payments, and the huge losses incurred if terminated early. Therefore, do not be tempted by the packaging of insurance; make sure to clarify whether a certain insurance plan truly suits you.

2. Consider additional insurance.

3. Choose a reasonable payment method. Premium payment methods can be divided into periodic payments and lump-sum payments. As the name suggests, periodic payments are paid in installments; lump-sum payments refer to paying the entire amount at once, after which there is no obligation to pay further while enjoying the rights to protection. Different insurances have different payment methods, and choosing a suitable payment method can not only save premiums but also affect personal financial habits.

Different payment terms lead to different total premium amounts. Due to interest influences, the shorter the payment period, the lower the interest cost, and the final total premium paid will be less; conversely, the longer the payment period, the more the total premium paid will be. Periodic payments can be monthly, quarterly, semi-annually, or annually, with annual payments further divided into 5-year, 10-year, 20-year, or 30-year payment methods. Most premiums will be automatically deducted from the account on a monthly or annual basis, which is very convenient. However, when reviewing the monthly or annual statements, you should still ask yourself whether this payment method is suitable and whether the money spent is worthwhile. Because sometimes, annual payments can be 15% to 20% cheaper than monthly payments. Therefore, do not unknowingly get "bitten" by a large amount.

How to choose the most suitable option among such a myriad of choices?#

(1) For protection purposes, choose a longer payment period. Generally speaking, if the policyholder's purpose for purchasing insurance is to prevent risks and for protection, then a longer payment method should be chosen. For example, life insurance and critical illness insurance.

(2) For savings purposes, choose a shorter payment period. If the main purpose of the policyholder's purchase is to ensure a comfortable retirement, and the insurance purchased is of a savings nature, such as whole life insurance or retirement insurance, then, within the limits of economic capacity, it is advisable to consider choosing a shorter payment period. Because for the same coverage or the same savings target, the total payment amount is less when the payment period is shorter.

Additionally, some policyholders may worry about the long payment requirements of two to three decades, fearing that they may not be able to continue paying on time, thus affecting the effectiveness of the policy. In this case, if income is relatively abundant or if the policyholder has a certain balance in the bank, they can choose to complete the premium payment obligation in a shorter time to avoid such concerns.

As young people are in the initial stage of investment, their priority needs should be accidental, health, protection, retirement, children, and investment (this order is arranged based on the characteristics of the age group). The health need is the most significant, and before purchasing insurance, one must first determine the medical expense risks that oneself or family members will face in the future.

Each person's risks are different, so the required insurance coverage also varies. Factors influencing risk include occupation, income, region, age, and family situation. For example, individuals with social medical insurance may need commercial insurance coverage when facing significant medical expenses. In contrast, those without social medical insurance will require comprehensive commercial medical insurance. People with good economic conditions have sufficient capacity to bear expenses when ill. In contrast, individuals with average economic conditions may fall into poverty due to a major illness. Those bearing family burdens may need additional allowances during illness. Meanwhile, single individuals may not face this issue. Therefore, one should selectively purchase insurance based on their actual needs rather than trying to cover everything.

Additionally, besides determining one's insurance compensation needs, various insurance companies' products have unique characteristics in terms of underwriting conditions, insurance periods, payment methods, exclusions, and claims methods. Consumers can choose insurance that aligns with their income characteristics, payment habits, and brand preferences. Individuals with unstable future income should choose insurance that can be paid off in a short time or has a policy loan function.

3. Attention when signing the policy#

Once the work preparation is complete, the next task is to understand what issues to pay attention to when filling out the policy to avoid affecting the effectiveness of the insurance product due to a small oversight. Industry insiders say that mastering five key steps can help you smoothly sign the insurance contract.

First, when the salesperson visits you, you have the right to ask the salesperson to show valid work credentials from their insurance company. Second, you should ask the salesperson to explain the relevant contents of the insurance type according to the insurance terms. When you decide to purchase insurance, to ensure your rights, you should carefully read the insurance terms again. Third, when filling out the policy, you must truthfully fill in the relevant contents and sign personally; the section for the insured's signature should be signed by the insured personally (except for minor insurance).

1. Clarify the purpose of insurance and choose the appropriate insurance type.

Before preparing to purchase insurance, the policyholder should first clarify their purpose for purchasing insurance. With a clear purpose, they can choose the appropriate insurance type. Do you need property insurance or personal insurance? Life insurance or accidental injury insurance? If you want to ensure a comfortable retirement, you should choose personal retirement insurance; if you want to provide better education for your children in the future, you should choose children's insurance, etc. Avoid situations where you buy insurance but do not receive the expected coverage due to choosing the wrong type.

When choosing the appropriate insurance type, the policyholder should consider three factors:

(1) Adaptability. The policyholder should consider their own or their family's need for coverage. For example, individuals without medical coverage can buy "critical illness insurance," so that if they are hospitalized due to a critical illness, the expenses will be borne by the insurance company, which is a clear adaptation.

(2) Economic affordability. Buying insurance is a long-term investment, requiring a certain premium to be paid annually. The annual premium expenditure must depend on the policyholder's income capacity; generally, 10% to 20% of the family's annual income is relatively appropriate. For most people, purchasing family property insurance is the most important matter. If property is damaged, they can receive financial compensation from the insurance company. To protect their interests, when purchasing family property insurance, they need to be more vigilant and attentive.

(1) They should be clear about which properties to insure. This must consider both their insurance needs and the role that property insurance can play, as well as the requirements of the insurance company. For example, not all properties can be insured; insurance companies have clear regulations on which properties can be insured and which cannot. Properties such as houses, furniture, household appliances, and cultural entertainment products can be insured, while valuables like cash, jewelry, paintings, and antiques have values that are difficult to determine and must be appraised by specialized appraisers before they can be insured, as agreed upon by the policyholder and the insurance company. Additionally, insurance companies typically do not cover certain household properties, including: properties whose specific value cannot be determined after a loss, such as tickets, cash, securities, stamps, etc.; daily consumables like food, medicine, cosmetics; and items that are legally prohibited for personal collection, such as firearms, ammunition, and drugs.

(2) Pay attention to the insurance responsibilities of family property insurance.

Generally, comprehensive family property insurance only covers losses caused by two situations: natural disasters and accidents. If property is stolen, this is not covered by comprehensive property insurance, and the insurance company will not compensate you, so it is advisable to purchase theft additional insurance for the property.

In addition to the aforementioned insurance coverage and responsibilities, you also need to understand exclusions, compensation ratios, compensation principles, insurance periods, payment methods, additional insurance types, and other content to clarify the protection you can receive in the future.

(3) Determine the insurance amount to avoid over-insurance and duplicate insurance. According to the compensation principles of insurance companies, if the actual loss of property exceeds the insurance amount, compensation can only be made up to the insurance amount; if the actual loss is less than the insurance amount, compensation will be based on the actual loss.