A friend asked, in the recently popular "The Three-Body Problem," there are 'three suns' interacting with each other, and humans cannot predict their trajectory, leading to the constant emergence of chaotic eras and stable eras.
Investing involves even more factors, can it also not be predicted? Then how can one make money from investing?
The principles contained in "The Three-Body Problem" are similar to our investments, but also have differences.
Short-term trends are unpredictable.
Similar to the three-body problem, the short-term ups and downs of the market are random and also unpredictable.
Short-term fluctuations are more driven by investor sentiment, capital, and other factors. The number of these factors far exceeds three, they may also influence each other, and they may change very quickly.For instance, an investor's sentiment is likely to undergo significant changes due to a piece of positive or negative news.
The randomness of short-term market fluctuations is akin to a person walking their dog.
The dog is unlikely to maintain the same distance from its owner at all times but is instead drawn to various things along the way, running ahead of the owner one moment and lagging far behind the next. It is improbable for the dog to stay perfectly in sync with its owner, and it is also difficult to predict how far the dog will be from the owner the next time.
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The unpredictability of short-term trends is a similarity between investing and the three-body problem.
Long-term trends gradually rise.However, investing differs from the three-body problem in certain aspects.
In the long run, the stock market is not entirely without patterns; it tends to rise and fall with the earnings of listed companies.
Taking the CSI All-Share Index as an example:
- During 2012-2014, when it was at a 5-star rating, the CSI All-Share Index was at its lowest, just over 2,000 points;
- At the end of 2018, when it was at a 5-star rating, the CSI All-Share Index was at its lowest, just over 3,000 points;
- In 2022, when it was at a 5-star rating, the CSI All-Share Index was at its lowest, just over 4,300 points.If we rate each bear market as a 5-star event and connect them in a line, we would find that this line also trends upward over the long term. The driving force behind this upward trend comes from the long-term growth in profits of the underlying listed companies.
In other words, short-term trends are unpredictable, but over time, returns are positively correlated with the growth in profits of listed companies.
This is because listed companies represent the most outstanding assets in society.
In the long run, technological advancements and improvements in production efficiency will drive the profits of listed companies to gradually increase, which in turn will push the stock market to rise over the long term.
If we liken the profits of listed companies to the master, then the stock price is akin to the pet dog.The short-term trend of a puppy is unpredictable; however, if the owner moves forward by 1000 meters, the puppy will eventually also move forward by 1000 meters.
Short-term disorder, long-term order.
This is the characteristic of the market.
How to invest wisely
Understanding this, a relatively simple and reliable approach to achieving good returns in investment is to
(1) Select outstanding varieties with good profitability.Generally speaking, we can consider some index funds, index-enhanced funds, and outstanding actively managed funds as the main choices for investment.
Over the long term, the underlying companies of these funds tend to earn more and more money, which will be reflected in their long-term upward trend.
(2) Hold for the long term and do not be overly influenced by short-term fluctuations.
Moreover, even if you buy when the market is undervalued, it is quite normal to encounter short-term ups and downs.
Short-term price movements are unpredictable, and there is no need to overreact.
After selecting good investment options, investing during relatively cheaper phases and holding for the long term will eventually lead to the arrival of an upward phase, and good returns will naturally follow.Great truths are simple.
The setting of "The Three-Body Problem" is in the Centaurus constellation, within the Milky Way galaxy. Although the trajectories of the three stars in the Three-Body system cannot be accurately predicted, the entire Three-Body system is still within the Milky Way and is influenced by the galaxy's own motion. If the Milky Way as a whole moves in a certain direction, then even if the internal trajectories of the Three-Body are unpredictable, the overall system will still follow the Milky Way.
It's like how long-term stock prices follow earnings. We just need to adhere to some simple and reliable investment methods, such as selecting good varieties with strong profitability, buying when they are undervalued, and holding them for the long term. The profits will naturally follow.
We are capturing this long-term constant point.The great way is simple.