The Shanghai Composite Index broke a 10-year high, and the call for a bull market surged. However, the issue of "making money is not easy" has become a challenge for many investors, and knowing how to "exit gracefully" is key to success. So how can one laugh last in investments?
During the major market trend from 2013 to 2015, many leveraged investors speculating on hot concepts felt good for two to three consecutive years, even building empires from scratch, as total stock market assets rose from hundreds of thousands to tens of millions. However, when the stock market turned downward, these investors not only lost their gains but even their principal, with accounts going into the red and owing money to securities companies.
How can one laugh last in a bull market? That is the "Traversability" strategy proposed by Taleb, the author of (Black Swan). The so-called "Traversability" strategy means that an investment portfolio can endure various scenario tests, whether in a bull or bear market, "buying ensures victory."
In stark contrast to the "Traversability" strategy is "Russian Roulette." If an investor can only withstand upward movements in the stock market and cannot bear any downward fluctuations, they place themselves in a dangerous situation similar to a Russian roulette margin call or being knocked out. As a wise person once said, "The divine sees future events, ordinary people see the present, and the clever see what is about to happen." By reviewing history and deducing future events, rational investors will understand how to come out on top in the end.
Stay away from "Russian Roulette"
Taleb once detailed the Russian roulette game: suppose there is a bizarre and boring tycoon who offers you $10 million to play Russian roulette. He has prepared a revolver with a 6-chamber magazine that only contains one bullet, then points it at your head and pulls the trigger. Each time the trigger is pulled is considered a segment of history, thus there are a total of 6 segments of history, each with the same probability. Five segments will make you rich, while the other segment will result in death.
If the fool at the roulette table keeps playing, unfortunate history will eventually occur to him. Suppose a 25-year-old plays Russian roulette once a year; his chances of living to 50 are extremely slim. But if many people are playing this game, there should be a few who reach their fifties and are extremely wealthy, while others become a pile of graveyards. Those who survive until the end clearly should not be the ones you try to emulate.
Taleb says that real life is more brutal than Russian roulette. First, it often fires deadly bullets, and its magazine can hold hundreds or thousands of bullets, unlike a revolver that holds a maximum of 6. After trying dozens of times, we forget that there is still one bullet inside and mistakenly believe we are safe. We may unknowingly be playing Russian roulette; we see others amassing great wealth, but do not understand the risks they bear.
Buffett said in a Q&A session at the University of Florida in October 1998: If you handed me a gun with a million chambers, containing only one bullet, and then said, 'Put the barrel to your temple, pull the trigger once, how much do you want?' I would not do it. You can offer any price; for me, the upside potential is meaningless, and the downside risk is obvious.
Under the Russian roulette strategy, investors may achieve good profits for several years, but ultimately, fate may snatch away both the principal and profits.
Taleb once cited an investor involved in emerging market bonds. He was ruined in the summer of 1998—after this market crash, he never recovered. To this day, he has only one quarter of losses on record, but the problem lies in that quarter; over the years, he has earned nearly $80 million, but in just that quarter, he lost $300 million.
