The Gamble of “Probability Rights”: Why Do You Always Lose “Wrong” Money on “Right” Things?
The Most Expensive Mistake in Investing — Buying “Bankruptcy” with “Correct” Logic
Hello friends. I am your old friend, the Financial Veteran of [FinSages].
At the beginning of this program, I don’t want to talk about theories or concepts first. I want to tell you a true story that happened around me, a story that still makes me sigh with regret today.
The protagonist of the story is an old brother I knew when I worked in the bank. Let’s call him Old Li. Old Li is a very smart person, diligent and eager to learn, and extremely sensitive to new things. Around the year of 2014 and 2015, when many people still didn’t understand what “Internet+” was, Old Li had already studied the government work report repeatedly.
He told me with great excitement at the time: “Brother, I figured it out. Everything in the future will be changed by the Internet. Traditional industries will die if they don’t embrace the Internet. This is a wave comparable to the Industrial Revolution, and the biggest opportunity for our generation is right here!”
Frankly speaking, his judgment at the time was more profound and forward-looking than the vast majority of experts in our bank. I still admire his vision today.
Then, he took the 2 million savings he had worked hard for all his life, plus the money from selling a small apartment, pooled about 3 million, and went “All-In” on a technology company that was in its heyday at the time. What did this company do? Simply put, it helped traditional enterprises transform to the Internet, perfectly stepping on the trend of “Internet+.” At that time, this company was the brightest star in the A-share market; brokerage reports praised it to the skies, and its stock price hit the daily limit every day.
Old Li’s mood at that time could be described as “Riding a swift horse in the spring breeze, seeing all the flowers of Chang’an in one day.” [1] He felt that he had not only grasped the pulse of the times but was also “Acting on behalf of Heaven,” [2] contributing to China’s industrial upgrading. His account once had a floating profit of over 50%.
However, the highlight moment was fleeting.
In the second half of 2015, the sudden stock market crash, superimposed with the market’s panic about the “Internet+” bubble, changed everything. The stock price of that star company plummeted like a kite with a broken string.
Old Li was firm at first. He told me: “This is a technical adjustment; good companies are not afraid of falling.” He even invested the family’s last emergency fund during the decline, trying to average down the cost.
But there was no end to the decline. When the stock price fell by 70% from its peak, when he watched helplessly as his life’s blood and sweat were reduced to less than 1 million, he collapsed. In that desperate late night, he called me and asked me a question with a hoarse voice, a question I can never forget.
He asked: “Brother, tell me, was I wrong? Isn’t the Internet the future? Don’t traditional enterprises need transformation? I clearly saw the whole world correctly; why did I lose my whole world in the end?”
Friends, this question is not just Old Li’s confusion alone. I believe that you in front of the screen may have asked yourself this countless times.
Why did I firmly believe in the incomparably correct logic that “Core Locations Will Always Rise” at the peak of housing prices, only to become a bag holder standing guard at a high position? Why did I firmly believe that “Carbon Neutrality is a Century-Long Plan” when new energy was hottest, bought leading stocks, only to be trapped at the peak? Why did we read so many books, study so many financial reports, and clearly every decision was full of the light of “Correctness,” but the final result was often loss, or even bankruptcy?
Could it be that in the world of investment, “Correctness” itself is a poison?
As a veteran who has watched the tide rise and fall for thirty years in a bank risk control post, I have seen too many smart minds like Old Li break their halberds in the investment market. They didn’t lose to IQ, nor did they lose to diligence. They lost to a more underlying thinking defect that is almost carved into our genes.
Today, I want to bring you a core concept that may feel strange to you, but is the secret of top Wall Street traders—”Probability Rights.”
Once you understand it, you will re-examine all your past investment decisions as if opening a third eye. You will understand that the essence of investment is never to “Predict the Future,” nor to “Prove You Are Right,” but to coldly “Buy Odds.”
This episode might be a bit brain-burning, but I promise, it will be the most important lesson in your investment career.
Part I: The Poison of “Correctness” and the Trap of “Good Companies”
I. The Curse of “Correctness”: Why Are Opportunities of “Consensus” More Dangerous?
The ancient Greek philosopher Heraclitus said: “No man ever steps in the same river twice.”
But in the investment market, the vast majority of people always drown in the same river named “Correctness” again and again.
Let’s do a thought experiment first.
If an investment opportunity appears in the market now, all financial media are advocating it, all brokerage reports give it a “Buy” rating, and even the auntie downstairs who usually only cares about square dancing is chatting with you about this “Golden Track.” Ask yourself, at this time, should you rush in, or should you run away quickly?
The first reaction of most people is: So many people are optimistic, it must be fine, get on board quickly!
But countless bloody histories tell us: When a view forms a “Consensus,” it is no longer an opportunity, but a trap.
Why?
Because the price in the financial market reflects not the present, but the “Future.” The reason an investment opportunity can make you money is because you discovered it while others haven’t; you laid it out in advance; you earn money from “Information Asymmetry” or “Cognitive Gap.”
However, when an opportunity becomes a “Consensus” known to everyone, all its potential benefits, growth space for the next ten years, and even the dreams of its grandchildren have been calculated into the current price in advance and excessively.
Rushing in now, you are no longer buying the future growth of this company. You are using an extremely expensive price to buy a story that “Everyone Thinks Is Good.” You are paying for your vanity of “I Also Understood This Opportunity.” You are acting as the last, stupidest “Bag Holder” for the success of those early layout players.
This is the curse of “Correctness.” In investment, truth is often in the hands of the few. That investment decision that makes you feel incomparably comfortable, incomparably certain, and feel incomparably correct will likely make you lose the most miserably.
II. The Illusion of “Good Company”: Confusing “Business Value” with “Investment Value”
The curse of “Correctness” also has a more hidden and deceptive variant, that is—the illusion of “Good Company.”
Many friends believe in value investing. They will say: “Veteran, I don’t chase hot spots, I don’t listen to rumors. I just buy those recognized good companies and hold them for a long time. That can’t be wrong, right?”
This idea is only half right.
As a veteran, I want to tell you an iron law that might overturn your worldview: A great company does not equal a great investment.
Let’s take an example. When mentioning Baijiu (Chinese liquor), what is the first brand that pops into everyone’s mind? I believe most people will think of that leading “Sauce-Aroma” brand. Is this company a good company? Of course. It has a brand moat of hundreds of years, its product is addictive, its gross profit margin is high like a money printing machine, and its business model is simply God’s masterpiece.
However, if you bought it when its stock price was highest and its P/E ratio reached 70 or 80 times, then sorry, even if you bought the best liquor company in the world, you might not make money for the next five or even ten years.
Why?
Because you confused two crucial concepts: “Business Value” and “Investment Value.”
“Business Value” is an evaluation of the company’s own operating ability. It answers the question “Is this company awesome?”
And “Investment Value” is an evaluation of the company’s current price. It answers the question “Is it worth buying now?”
No matter how awesome a company is, its value is limited. When you buy it at a price far exceeding its intrinsic value, you have already overdrawn all its future growth in advance. It’s like buying a pile of cupronickel at the price of gold. Although cupronickel is also metal, this deal is destined to be a loss.
This is why many beginners in value investing have their hands full of “Good Companies,” but their accounts are in loss all year round. Because they only learned to “Look for Good,” but didn’t learn to “Look at Price.” They treat investment as a “Beauty Pageant,” thinking it’s enough to pick the prettiest one.
But true investment is “Horse Betting.” You not only have to pick the horse most likely to win, but also bet at an extremely low “Odds” when it is not favored.
So, how to measure these “Odds”? How to find that best betting timing in a fog?
This requires us to introduce today’s real “Protagonist”—Probability Rights.
In the next part, I will take everyone into the hardcore financial world. We will redefine the algorithm of investment like Wall Street mathematicians. We will turn investment from an “Art” into a cold “Science.”
Part II: Decrypting “Probability Rights”: The Ultimate Algorithm of Investment
I. The “First Principle” of Investment: Cognitive Leap from “Right or Wrong” to “Odds”
The ancients said: “Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.”
In this river of investment full of fog, what we really need is not a “Fish” that some master tells you will rise tomorrow, but a set of “Fishing Gear” that allows you to see the stones and undercurrents at the bottom of the river yourself. Today, the fishing gear I want to hand over to you is “Probability Rights” thinking.
First, we must completely overturn a deep-rooted concept: Investment is never a “Right or Wrong Question,” but a “Mathematical Expectation Question.”
What does this mean? The education we received since childhood is that as long as I work hard, as long as I do it right, there will definitely be a good result. But in the chaotic system of the financial market, this logic does not work. Because the market is full of uncertainty.
A truly top investor never thinks about “Will my judgment be right this time?” but “If I am right this time, how much can I earn? If I am wrong, how much will I lose? What is the probability of this happening?”
Combining these three variables, we get the “First Principle” formula of investment:
Investment Expected Value = (Winning Probability × Potential Profit Amplitude) – (Failing Probability × Potential Loss Amplitude)
To let everyone thoroughly understand the power of this formula, I designed a simple gambling model. Now there are two bets, pick one, which one would you choose?
Bet A: There is a special coin with a 90% probability of heads and 10% probability of tails. Rule: If heads, you win 1 yuan; if tails, you lose 100 yuan.
Bet B: There is another coin with only 10% probability of heads and 90% probability of tails. Rule: If heads, you win 100 yuan; if tails, you only lose 1 yuan.
I believe 99% of people will intuitively choose Bet A. Because it looks too safe, the winning rate is as high as 90%! This is simply free money.
But, let’s use the formula above to calculate the “Mathematical Expected Value.”
Expected Value of Bet A = 90% × 1 yuan – 10% × 100 yuan = 0.9 – 10 = -9.1 yuan.
This means that although you feel you will likely win every time you play, as long as you play for a long time, you will lose an average of 9.1 yuan every time you play. This is a Sure-Loss Game.
Expected Value of Bet B = 10% × 100 yuan – 90% × 1 yuan = 10 – 0.9 = +9.1 yuan.
This means that although you feel you will likely lose every time you play, losing until you are disheartened. But as long as you persist, you will earn an average of 9.1 yuan every time you play. This is a Sure-Win Game.
Now, please substitute these two bets into the investment dilemma we talked about in Part I.
The act of buying a “Good Company” that “Everyone thinks is correct” at the peak of a bubble is choosing Bet A. The moment you buy, you feel the winning rate is extremely high; the company’s fundamentals are so good, how can it fall? But because the price is already sky-high, its upside (Profit Amplitude) is extremely small, while its downside (Loss Amplitude) is extremely large. This is a “High Win Rate, Negative Odds” death trap.
And those great value investors, like Buffett, spend their lives looking for Bet B. They specifically buy companies that are abandoned by the market, ridiculed by the media, and look like they are about to go bankrupt. These companies indeed have a high probability of failing in the future (Low Win Rate), but because the purchase price is extremely cheap, once it survives, the stock price can rise ten or a hundred times (Extremely High Odds). This is a wealth code of “Low Win Rate, Positive Odds.”
This is the essence of “Probability Rights” thinking: Give up the obsession with “High Win Rate” and turn to pursue the wisdom of “Positive Expected Value”.
II. The Tribunal of History: The “Probability Rights” Apocalypse of the 2000 Dot-com Bubble
If the gambling model above is just a theoretical deduction, then now, I want to take everyone on a time machine back to that fanatical, confusing, and enlightening era at the end of the 20th century. We will use the Dot-com Bubble of 2000 as a huge historical tribunal to see how the scalpel of “Probability Rights” dissects the madness and tragedy of that era.
What kind of era was that?
The air was filled with the fanatical scent of the “New Economy.” At that time, any company, as long as it added “.com” after its name, its stock price could triple in a day. Sitting in street cafes were no longer old people reading newspapers, but groups of young investors staring at K-line charts and talking loudly about “Price-to-Dream Ratio.” Federal Reserve Chairman Greenspan issued a famous warning in 1996 called “Irrational Exuberance,” but it did not stop the torrent of the times at all.
Everyone firmly believed one thing, an incomparably “Correct” belief: The Internet will change the world.
Friends, please remember this belief. From the perspective of God afterwards, this judgment is 100% correct. The Internet did change the world, and its profoundness even exceeded the boldest imagination at the time.
However, it was this incomparably correct judgment that ultimately directed the most tragic wealth massacre in human history. Countless people went bankrupt in that bubble, including the great physicist Isaac Newton (referring to the South Sea Bubble, applicable in sentiment), who lamented: “I can calculate the motion of heavenly bodies, but not the madness of people.”
In that huge historical trial, two defendants are most worthy of our study today. One represents “Bet A,” and the other represents “Bet B.”
The first defendant is called Cisco.
In 2000, Cisco was God. It was the “King of the Internet” in the world at that time. Everyone knew that to get online, you needed routers and switches, and Cisco almost monopolized this market with a share of over 70%. It was hailed as the “Water Seller of the Internet” and was the most stable and profitable company in this gold rush.
In March 2000, Cisco’s market value once exceeded $550 billion, surpassing Microsoft to become the world’s most valuable company. Its P/E ratio, that is, valuation, reached an astonishing 200 times!
Now, let’s measure Cisco at that time with the ruler of “Probability Rights.”
Is the winning rate high if you buy it? Very high. The Internet needs to develop, and it cannot do without its equipment; its fundamentals are as solid as a rock.
But, what about its Odds? Almost negative. When you buy it at a price of 200 times P/E, you have already paid for the company’s profits for the next 200 years in advance. The room for its stock price to rise has been completely blocked, while the room for falling is an abyss.
Buying it is choosing that “Bet A” with a 90% win rate to win 1 yuan and a 10% chance to lose 100 yuan.
What was the result? After the bubble burst, Cisco’s stock price plummeted from $80 to over ten dollars. Even though it remained a great, profitable company later, those investors who bought at the peak took 15 years to break even. If inflation and opportunity costs are counted, they lost completely.
The second defendant is called Amazon.
In 2000, Amazon was a joke. It was burning money crazily at the time, losing huge amounts every year. Wall Street analysts were generally bearish on it, and the famous financial magazine Barron’s even published a cover article titled “Amazon.bomb,” predicting it would soon go bankrupt.
Founder Jeff Bezos, in the eyes of many people at the time, was a madman who only knew how to paint pies in the sky.
Now, let’s measure Amazon at that time with the ruler of “Probability Rights.”
Is the winning rate high if you buy it? Very low. In that endless winter of burning money for the Internet, it could go bankrupt due to a break in the capital chain at any time.
But, what about its Odds? High beyond imagination. If you could understand Bezos’s “Flywheel Effect,” if you could understand his long-term strategy of exchanging losses for market share and customer experience, you would understand that once it survives, it will redefine retail, and its market value will be trillion-level.
Buying it is choosing that “Bet B” with a 10% win rate to win 100 yuan and a 90% chance to lose 1 yuan.
What was the result? After the bubble burst, Amazon’s stock price also fell from over $100 to single digits. However, for those investors who dared to bet in despair, they seized an opportunity to change their destiny. Since then, Amazon’s stock price has risen hundreds, even thousands of times.
Friends, the trial of history is over.
Cisco and Amazon, these two companies, one “Correct as the Sun,” the other “Wrong as a Joke.” But the final investment returns are worlds apart.
This trillion-dollar lesson tells us: Mr. Market never rewards “Correctness”; he only rewards the few who have a profound understanding of “Probability Rights”.
He rewards you for daring to stand alone at the door of Bet B when everyone rushes to Bet A; he rewards you for being able to penetrate the superficial fog of winning rates to calculate the “Mathematical Expected Value” hidden under the iceberg.
So, the question arises. Since the calculation formula for mathematical expectation is so simple, why in reality, 99% of people, including smart people like Old Li, unhesitatingly chose that sure-loss Bet A?
This is no longer a question that finance can explain.
Part III: The Brain’s Bug: Why Are We Born to Hate “Probability Rights” Thinking?
I. The Verdict of Nobel Laureates: “Irrationality” under Prospect Theory
If the financial market is a stormy sea, then everyone’s brain is a ship that comes with Bugs from the factory. The blueprint of this ship was drawn on the African savannah millions of years ago. At that time, our ancestors needed quick reactions, avoiding beasts, and finding certain food. This ancient survival instinct was carved into our genes, but in the complex world of modern finance, it has become our biggest cognitive shackle.
Nobel Laureate in Economics and psychologist Daniel Kahneman, with his famous “Prospect Theory,” issued a detailed “Diagnostic Report” for our broken ship. This report reveals two core BUGs, perfectly explaining why we naturally hate “Probability Rights” and are obsessed with that “High Win Rate” death trap.
The first Bug is called “Certainty Effect.”
Kahneman did a classic experiment. He asked participants:
Choice A: 100% probability to get 3000 yuan.
Choice B: 80% probability to get 4000 yuan; 20% probability to get nothing.
From the perspective of mathematical expectation, Choice B (80% × 4000 = 3200 yuan) is obviously better than Choice A (3000 yuan). But the experimental result was that the vast majority of people unhesitatingly chose A.
Why? Because our brains have an almost paranoid obsession with “100% Certainty.” To get that “Certain” 3000 yuan, we are willing to give up that “Probabilistic,” higher-return 4000 yuan.
Now, please substitute this experiment into the purchase decision of insurance.
That “Return-of-Premium” insurance that promises you “cure if sick, return principal if not” is Choice A. It gives you a commitment of “100% Certainty” to get the principal back, making you feel incomparably safe. And that “Consumption-Type” critical illness insurance is Choice B. It tells you that there is an 80% probability you might never use it (no claim) in your life, and the money is wasted, but once a claim occurs, it can give you a payout of hundreds of thousands or millions.
Our brains naturally choose that seemingly “No Loss” return-of-premium insurance, even if its real return rate is pitifully low and the protection leverage is extremely low. We give up the “Mathematical Optimal Solution” to pursue “Psychological Certainty.”
The second Bug is more deadly than the first, called “Loss Aversion.”
Kahneman found that the pain brought by losing money is about twice the pleasure brought by making money. That is to say, the pain of losing 100 yuan needs the happiness of finding 200 yuan to barely soothe.
This asymmetrical psychological feeling causes our behavior to become extremely distorted when facing risks.
When making money, we are “Risk Averse.” If a stock in hand rises by 10%, we sell it quickly, afraid that the cooked duck will fly away. This is why retail investors can never hold onto bull stocks and only make small money.
But when losing money, we immediately turn into “Risk Seeking” gamblers. If a stock in hand falls by 30%, we refuse to sell it and constantly add to our position, praying it will rise back. Because the action of “Selling” means turning “Floating Loss” into “Real Loss,” a pain we cannot bear. So, we would rather hold a wrong decision and lose all the way down.
This is why retail investors’ accounts are full of deeply trapped junk stocks all year round, while those stocks that really make money have long been sold off.
Now, combine these two Bugs, and you can see our pathetic portrait as investors: We naturally like certain, tiny gains (Certainty Effect), while extremely fearing any tiny, certain losses (Loss Aversion).
This factory setting makes us instinctively and irresistibly choose Bet A (High Win Rate, Win Small Money) when facing the previous gamble, and feel physiological rejection of Bet B (Low Win Rate, Small Probability of Loss).
Our brains are simply not built for investing. It is an excellent “Survival Machine,” but a terrible “Probability Computer.”
II. Emotional Kidnapping: Exhausted Between “Greed” and “Fear”
If Prospect Theory is the BUG of our underlying operating system, then in daily investment operations, there are two powerful “Emotional Viruses” constantly attacking our fragile system.
The first virus is called “Fear of Missing Out” (abbreviated as “FOMO”).
When an asset, such as a stock or housing prices in a city, starts to skyrocket continuously, your circle of friends and your news apps are all discussing it. At this time, a strong sense of anxiety will seize you. You are afraid that “If I don’t get on board now, I will miss this era forever.”
This fear will make you completely abandon reason. You no longer care whether its valuation is reasonable, nor whether its fundamentals have changed. There is only one thought in your mind: Buy In!
This chasing high behavior caused by the fear of “Missing” is the root of the vast majority of tragedies. You think you are chasing an opportunity; actually, you are chasing the last bus to the cliff.
The second virus, two sides of the same coin with FOMO, is called the “Gambler’s Fallacy.”
When the asset in your hand falls continuously, an illusion will arise in your heart: “It has fallen so much, it should bounce back, right?” “It has fallen by the limit for five consecutive days; the sixth day should be red, right?”
You treat an independent random event as a sequence with rules to follow. This is like a gambler in a casino seeing the roulette wheel hit red ten times in a row and feeling that the probability of hitting black next time will increase greatly, so he bets his entire fortune on black.
But the fact is, every spin is independent, and the probability of hitting red next time is still 50%.
This illusion of “Must Rise After Falling Much” makes countless investors constantly double down on the wrong path, the so-called “Adding to Position.” In the end, small losses turn into huge losses, and being trapped turns into cutting losses.
Friends, seeing this, everyone should understand that in this game of investment, the biggest enemy is never the market, nor the dealer, but ourselves. It is those innate BUGs in our brains, our uncontrollable greed and fear, that make us lose “Wrong” money on “Right” things again and again.
Part IV: Action Guide: Becoming a Smart “Probability Player”
Since we know we are “Sick,” is there any medicine to cure it?
Yes. Although we cannot change human nature, we can fight against those deadly instincts by establishing a set of strict “Investment Disciplines” and “Thinking Frameworks.”
I. Arsenal One: Margin of Safety — Buy Watermelons Only in Winter
The patriarch of value investing, Benjamin Graham, gave the first antidote, and also the most important one, called “Margin of Safety.”
This concept sounds mysterious, but its essence is extremely simple, just one sentence: Use 50 cents to buy something worth 1 dollar.
This extra 50 cents is your “Margin of Safety.” It is like a thick sponge cushion protecting you. Even if your judgment of the company’s value is slightly off (e.g., it’s actually only worth 80 cents), or the market continues to fall irrationally, you still have a high probability of not losing money.
How to find a margin of safety? It is to do things contrary to human nature: Buy watermelons in winter and down jackets in summer.
When a good company is wrongly killed by the market due to the downturn of the entire industry or some short-term negative news, stock prices plummet, and everyone avoids it, this is precisely when the “Margin of Safety” is greatest.
At this time, buying it is equivalent to getting a “Low Risk, High Odds” probability right. Because its downside space is already very small (Limited Risk), and once the industry recovers and value returns, its upside space is huge (Infinite Profit).
This requires great patience and the courage of reverse thinking. But this is the only antidote against the FOMO virus.
II. Arsenal Two: Asymmetric Returns — Looking for “Free Lottery Tickets”
The second antidote comes from Nassim Taleb, author of The Black Swan. He gave a more radical and fascinating strategy called “Asymmetric Returns.”
The core of this strategy is to look for those opportunities where “Loss is Limited, while Profit can be Infinite.” That is the extreme version of Bet B we mentioned earlier.
What are asymmetric returns? For example.
You take a small part of your investment portfolio, say 5%, to invest in those cutting-edge, early-stage technology companies with a narrow escape from death (of course, ordinary people should invest through professional venture capital funds).
This investment has a 99% probability of losing everything, going to zero. Your maximum loss is this 5%.
However, once one of these companies becomes the next Google or Tencent, the return it brings could be 100 times, 1000 times. This one success can not only completely cover the losses of all other failures but also bring you amazing excess returns.
This is like spending 5 yuan to buy a lottery ticket with a jackpot of 5 million. The worst result is losing 5 yuan; but the best result is changing your life.
In life, there are such “Asymmetric” opportunities everywhere. For example, attending an industry summit with a ticket of 500 yuan. The worst result is wasting half a day and 500 yuan; but what if you meet a noble person there who can change your career?
Developing the habit of looking for “Asymmetric Returns” will make your life full of surprises.
III. Arsenal Three: The Kelly Criterion — The Art of Optimal Betting
Finally, when you find a good probability right opportunity, how much should you bet? Go all-in, or buy just a little?
Here, I want to introduce a mathematical tool regarded as a classic by casinos and Wall Street—the “Kelly Criterion.”
Its complete formula is complex, but we can simplify it into a thought experiment:
Optimal Position (f) = Win Rate (p) – (1 – Win Rate) / Odds (b)
This formula tells us a counter-intuitive truth: Even for a sure-win game with a win rate as high as 60%, if your odds are low (e.g., 1:1), your optimal betting ratio is only 20%, not 100%.
Why? Because if you go all-in every time, as long as you encounter one small probability failure, you are directly out of the game.
The essence of the Kelly Criterion is: Never let one failure prevent you from participating in the next game.
What it teaches us is not only mathematics but also the wisdom of survival. In investment, Survival is always more important than earning more.
It perfectly explains why those gamblers who like to “Go All-In” will definitely blow up their accounts in the end, no matter how glorious they are in the short term. And what true masters are always doing is: Bet heavily when both win rate and odds are in their favor; bet small or simply leave when things are unclear.
This is the true “Self-Cultivation of a Gambler.”
Conclusion: From “Predicting the Future” to “Dancing with Uncertainty”
I. The Highest Realm of Investment: Becoming an Excellent “Casino Boss”
At the end of the program, I want to discuss an ultimate question with everyone: What is the highest realm of investment?
For a long time, we thought the Holy Grail of investment was “Prediction.” We frantically studied K-lines, obsessed with asking for insider information, worshipped Buffett and Soros as gods, thinking they possessed a “Crystal Ball” that could see the future.
However, after experiencing thirty years of market storms and watching the rise and fall of countless smart people, I increasingly believe in a conclusion that seems pessimistic but is actually full of wisdom: The Future is Unpredictable.
Anyone trying to precisely predict tomorrow’s stock price or next year’s housing price is either a liar or a fool.
So, since the future is unpredictable, how can we play this game of investment?
This returns to our theme today—”Probability Rights.”
The highest realm of investment is not to become a “Gambler” who hits the target every time, fantasizing about betting right on big or small every time; but to cultivate oneself into a calm, rational “Casino Boss.”
An excellent casino boss never cares whether the next spin of the roulette wheel will be red or black. What does he care about? He cares whether the game rules he designed are favorable to him in terms of Mathematical Expectation. As long as the rules are favorable to him (like that green 0 on the roulette wheel), then as long as there are enough participating gamblers and the playing time is long enough, he is the sole, certain Winner.
As individual investors, what we have to do is the same thing.
We cannot predict whether the next stock will rise or fall, but we can ensure that every asset we buy has a Positive Mathematical Expectation through the discipline of “Margin of Safety.”
We cannot predict when the next Black Swan will arrive, but we can benefit from chaos by building a portfolio of “Asymmetric Returns.”
We cannot predict where the peak of the next bull market is, but we can ensure that we will never lose our principal in the carnival and always have an admission ticket to the next game through the constraint of the “Kelly Criterion.”
When you no longer try to “Predict” the unknowable future, but put all your energy into building a “Probability Rights” system favorable to you, you evolve from a “Trader” swayed by market sentiment into a “Thinker” dancing with uncertainty.
You are no longer anxious, no longer afraid. Because you know that as long as you persist in doing things that are probably right, Time is your most solid friend.
II. Final Words
The opening of The Art of War says: “War is a matter of vital importance to the State; the province of life or death; the road to survival or ruin. It is mandatory that it be thoroughly studied.”
Investment, for our ordinary families, is also a “Matter of Vital Importance to the Family.” It concerns our parents’ elderly care, our children’s education, and our own lifelong financial security.
In this long gamble, our biggest enemy is never market fluctuations, but the “Ignorance” and “Arrogance” in our hearts.
May we all remember the historical lessons of Cisco and Amazon and be vigilant against those seemingly “Incomparably Correct” consensus traps.
May we all pick up the three weapons of “Margin of Safety,” “Asymmetric Returns,” and “Kelly Criterion” to fight against those ancient Bugs in our brains.
Finally, I would like to end with another sentence from The Art of War, which can be said to be the perfect embodiment of “Probability Rights” thought in Eastern wisdom: “First make yourself invincible, then wait for the enemy to be vulnerable.” [3]
It means that a truly brilliant general must first make his deployment impeccable and stand in an invincible position (ensure he doesn’t lose money), and then patiently wait for the opportunity to defeat the enemy (wait for the market to make mistakes and give good odds).
How similar this is to the thought of “Margin of Safety”!
At the end of the program, I remembered Old Li mentioned at the beginning. A few years later, I met him again. He had walked out of that crushing defeat. Although he failed to stage a comeback, his mindset was much more peaceful. He told me that he spent a long time reviewing afterwards and finally figured out that he didn’t lose to vision back then, but to ignorance of “Probability.” He said if he could do it all over again, he would divide that 3 million into 30 parts and invest in 30 “Bet Bs” like back then. Even if he lost 29, winning just one would be enough. Old Li’s story is over, but the “Probability Rights” gamble for each of us has just begun.
Ensure survival first, then wait for opportunities. This is not only the wisdom of investment but also the wisdom of life.
I am the Financial Veteran of [Sage Fellow Traveler].
In today’s episode, we talked about many hardcore concepts. If you feel your brain needs a reboot after listening, congratulations, your cognitive firewall is being upgraded.
If you want to learn how to specifically calculate the intrinsic value of a company and how to find that opportunity to “Buy 1 Dollar Stuff with 50 Cents,” welcome to our [Sage Fellow Traveler] community. There, there is no noisy news, only calm deduction.
Let us be smart winners in this gamble full of uncertainty together.
See you next time, friends.
Core Content Summary of This Episode
1. Core Pain Point:
Why do we judge the era/industry/company correctly (Judgment Correct), but lose all money in the end (Result Wrong)? The root lies in confusing “Business Value” with “Investment Value” and falling into the trap of “Correct Consensus.”
2. Core Concept (Probability Rights):
Definition: The essence of investment is not pursuing “Correct Judgment” (High Win Rate), but pursuing “Positive Mathematical Expectation.”
Formula: Expected Value = Win Rate × Odds – Failure Rate × Loss Amount.
Model: Bet A (High Win Rate, Negative Odds) VS Bet B (Low Win Rate, Positive Odds).
3. Historical Tribunal (Dot-com Bubble):
Cisco (Bet A): An absolute good company in 2000, but valuation was too high, leading to long-term losses for buyers.
Amazon (Bet B): Highly questioned and losing money for years at the time, but the odds were extremely high, eventually bringing huge returns.
4. Human Nature BUG (Prospect Theory):
Certainty Effect: We are naturally obsessed with “Certain Gains,” even if they are lower.
Loss Aversion: The pain of losing money is twice the pleasure of making money, leading to “Running with small profits, holding onto losses.”
5. Action Arsenal:
Margin of Safety (Graham): Buy 1 dollar stuff with 50 cents to build a safety cushion.
Asymmetric Returns (Taleb): Look for opportunities with “Limited Loss, Infinite Profit.”
Kelly Criterion: The art of optimal position management, ensuring never to leave the table.
[Notes for Cultural References]
[1] “Chun feng de yi ma ti ji…” (春风得意马蹄疾…): A famous poem by Meng Jiao. Translated as “Riding a swift horse in the spring breeze…” describing immense pride and success.
[2] “Ti tian xing dao” (替天行道): A phrase from Water Margin, meaning enforcing justice on behalf of heaven. Translated as “Acting on behalf of Heaven” to show his sense of righteous mission.
[3] “Xian wei bu ke sheng…” (先为不可胜…): From The Art of War. “First make yourself invincible…” A classic strategy of defense first, then offense.
简介：
Challenging common misconceptions and attracting sophisticated investors.
Subject: Why “Being Right” is the Most Expensive Mistake in Investing
In 2015, a friend of mine went “All-In” on the “Internet+” trend. He correctly predicted the future of the industry, yet he lost his life savings.
He asked me a question that haunts many investors: “I saw the world correctly, so why did I lose my world?”
The answer is painful but necessary: In the financial market, “Correctness” is often a poison.
As a Financial Veteran, I’ve seen too many smart people confuse “Business Value” with “Investment Value.” They buy “Good Companies” (like Cisco in 2000) at the peak of consensus, ignoring the most critical factor: Probability Rights.
In this edition of [Sage Fellow Traveler], I deconstruct the “First Principle” of investment:
- The Cisco vs. Amazon Paradox: Why the “wrong” looking company delivered 100x returns while the “perfect” company stagnated for 15 years.
- The “Certainty” Bug: How Nobel Prize-winning Prospect Theory explains our natural tendency to make bad bets.
- The Antidote: How to use the Kelly Criterion and “Margin of Safety” to evolve from a gambler into a “Casino Boss.”
Stop trying to predict the future. Start calculating your odds.
#InvestmentStrategy #ProbabilityRights #RiskManagement #BehavioralFinance #SageFellowTraveler
