I haven't updated my articles recently because I'm in a period of cognitive confusion. When I came online today, I saw a friend leave a message saying: You admire Buffett and agree with his investment philosophy, but Buffett is not optimistic about the crypto industry. Why do you want to invest in cryptocurrencies? As the crypto industry is a new thing, I think I should maintain an inclusive and open attitude. In addition, cryptocurrencies are highly volatile and can be viewed as an asset allocation. I wrote an article about big picture investment before. Now let me share:
Wealth only comes to those who have a broad mind - investment requires a big picture (the article was completed in May 2022)
When it comes to investment, many people will think of real estate, fixed deposits, gold, stocks, and bonds, etc. These are all investment types of family assets. But when asked what to invest in, how long should the investment cycle be, and when is the most worthwhile asset to allocate in the next ten years? Everyone's answers are all kinds of strange, and this is the difference between professional players and amateur players. Investing is a very hard and professional thing. How to make investing simple? The method that must be mentioned is to expand the investment pattern, find the long and slippery slope of asset appreciation, and make major asset allocation.
Think about it, what major asset class has outperformed the housing prices in Beijing and Shenzhen in the past 20 years? The answer is not in China, Bitcoin, Amazon stock, Masayoshi Son's Vision Fund, etc. See the asset performance in the figure below:
Bitcoin’s performance
AMZN's performance
Looking at the picture and sighing: 1. In the face of the power of the Kondratieff wave of the industrial cycle, the stock god may be just a drop in the ocean; 2. Goldman Sachs statistical paper: the choice of region and industry contributes more than 70% of the investment difference rate, and the investment is afraid of entering the wrong industry; 3. The American empire is prosperous
It may not be difficult to beat Buffett in ten years (relying on housing prices), but it is very difficult to beat Buffett in thirty years. Does the Chinese middle class still rely solely on real estate to maintain and increase their value? How to cross the possible long cycle of China's slowing growth? The past is gone, but the future can still be pursued. Where is the long slope of continuous asset appreciation in the future? Are there simple asset allocation rules that ordinary people can master? What ordinary people lack is not news and information; what ordinary people need is a holistic concept, framework, system and a simple and flexible execution plan. What stands between you and excess compound wealth returns is: "a stock selection concept that can explore the core advantages of multiple assets" and "an executable asset allocation trading system."
1. The investment secrets revealed by Swensen in the Yale Model: Emphasis on asset rebalancing, focusing on exploring opportunities brought by liquidity and thresholds
In the long run, frequent single timing has a negative or weak contribution to the performance of the investment portfolio. Kweichow Moutai VS CSI 300 Index (as shown below), which one is more difficult to discover and despise? It is difficult to achieve great success by frequently tossing around in the timing of the CSI 300 Index for a long time, and it is necessary to combine the advantages of stock selection.
Kweichow Moutai’s performance
CSI 300 Index
Long-term balanced dynamic asset allocation is the key to achieving a high Sharpe ratio and return-risk ratio. It is difficult to improve the long-term return-risk ratio of investing in a single market and a single product, but the transition to major asset allocation is very different.
The core of the Yale model's major asset allocation is to attach importance to asset rebalancing, focus on exploring opportunities brought by liquidity and thresholds, such as Shenzhen Qianhai Real Estate and Nasdaq US Treasury bonds, discover weak correlations, improve the risk-return ratio, and achieve alpha returns through comprehensive allocation of multiple varieties.
2. The big picture of investment - looking for long-term capital goods in major global categories and keeping pace with future core assets
Buffett's investment philosophy: Investing is like rolling a snowball. The key is to find a long and slippery slope and then roll the snowball down the hill. The snowball is small at the beginning, but if it rolls down long enough and sticks tightly enough, it will eventually become very big.
Based on the present, linking the future. Future core assets may be in future technologies: AI, new energy, science and technology, etc. Globally, the future market area may be the Greater East Asia and South Asia region that is undergoing internal reform and opening up to the outside world; the future production relationship model may be blockchain changing production relations. The most direct and effective way for ordinary people is to find future core assets in asset categories such as US stocks, A shares, Hong Kong stocks, real estate, digital currencies, and futures:
Comparison of historical static characteristics of eight dimensions of six major asset classes
Subjective analysis from a management perspective of the historical static characteristics of six major asset classes
First, compare the historical attributes of the major asset classes in seven dimensions, including the long-term average return, Sharpe ratio, volatility and maximum drawdown, liquidity, ordinary people's management costs, and leverage risk control methods, and score them. The higher the average return and Sharpe ratio, the more likely it is that it is a long slope as Buffett said! The greater the volatility, the worse the liquidity, and the more flexible the leverage, the more energy is generally consumed, the greater the management cost (unit energy cost), and the higher the timing ability required!
Second, it is difficult for ordinary people to manage high-liquidity leveraged capital goods investments with high volatility and low Sharpe ratio, such as A-shares and digital currencies such as Bitcoin. Overall, among the products that can be invested in with simple rules, real estate, US stocks and bonds, ETF funds, and Bitcoin are obviously better than A-shares, Hong Kong stocks, and gold. The long-term slope attribute of Bitcoin (historical average return, etc.) is far superior to other assets.
Third, if a set of simple rules-based program trading systems can be introduced, sub-categories of A-shares, Hong Kong stocks, gold and other commodities can also be suitable for ordinary people to participate in investment. The use of simple rules-based program trading can effectively reduce the management costs of asset management mark-to-market;
Finally, let me reiterate that short-term ups and downs can really arouse people's nerves, but investment is a lifelong thing after all. If you want a three-fold, five-fold or even higher return, then your pattern cannot be one year or two years, nor can you stare at one market. We need to expand our own pattern. The pattern is the internal pattern of your vision, courage, ability and other psychological factors combined together. The big pattern is to cut into life from a big perspective, and strive to stand higher, see farther, and do bigger. The big pattern determines the direction of the development of things. If you control the big pattern, you will also control the situation. Those who plan big things must lay out the big picture. For the chess game of life, the first thing we need to learn is the layout, not the skills. If you want to achieve financial freedom through investment, you must have a big pattern and have the courage to stand on the top of the mountain and look down on the small mountains. Find the long slope of asset appreciation around the world and go with it, so that your pattern matches the width and length of wealth growth.
Based on my superficial understanding and perceived asset types, I divide investable and manageable assets into 6 categories, covering 6 areas. The previous article has summarized the characteristics of these 6 categories of assets and made a personal subjective evaluation. We select no more than 3 core targets from each category of assets as alternative investment targets;
For the allocation and rebalancing of various types of assets, we can mechanically set the corresponding proportions, or we can dynamically adjust them according to the profit and loss ratio. Capital allocation is essentially a game of money, and it is adjusted according to the dynamic changes in the stock and increment of the global capital goods market structure: low allocation, standard allocation, and over-allocation. The standard position allocation should adopt the proportion of the entire capital goods market; for example, the size of the US real estate market is 80 trillion, the stock market is 70 trillion, and the reasonable ratio for future families is about 1:1. Dynamic positions should be mostly adjusted based on the profit and loss ratio of the expected product performance at the annual level (see the table below). 1. The standard position should look at the mean profit and loss ratio of the long slope and the long-term valuation percentile; 2. The trading position looks at the annual profit and loss ratio and the timing of building a position. Subsequent articles will further describe the selection and allocation of each major asset class.
