Historical article note: This article was originally published on 2019-03-28. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
During the Spring Festival, I attended a financial gathering and encountered an unexpected embarrassment: a US stock expert asked the audience to raise their hands if they hadn't traded stocks. I raised my hand honestly, and the expert immediately recognized me and gave me a high compliment, saying, 'Oh, you invest in real estate.' It wasn't that my face was easy to recognize, but among the roughly 100 people present, fewer than 10 raised their hands, making it quite unusual. Not trading stocks is like not using a smartphone—it puts you in the category of people who are relatively uninformed and lacking common topics with the majority. Financial asset investment is very different from real estate investment; it's not that I'm not curious or afraid to try, but I truly have great respect for financial asset investment. Previously, I believed that if real estate investment could secure my retirement, I would rather not touch stocks. Now I realize that financial asset investment is also an important investment area, after all, North America’s most developed sector is still financial asset investment. Although 76% of Canada's total wealth is in real estate, this includes commercial real estate, industrial real estate, hotels, and other types of real estate requiring huge investments, which individual investors can hardly own alone. Through financialization, these massive assets can be broken down and invested in real estate investment trusts (REITs). REITs themselves are financial assets and are traded on the capital market; if you want to invest, you need to understand the capital market. Additionally, my clients, after investing in multiple properties and withdrawing cash for other investments, often discover that apart from real estate, they know very little about other fields and are reluctant to invest in financial assets. There are only two investment tools: leverage and compound interest. Real estate investment uses leverage, while financial investment uses compound interest. If you only use leverage to invest in real estate, you will probably still need to hold investment properties after retirement, dealing with property maintenance and tenant management. Holding financial assets, which belong to the light-asset category, is more convenient for retirement, but you need to start understanding compound interest tools and financial asset investment as early as possible.
1. Successful arbitrageurs have a school, located in prisons of various countries
The proper term for stock trading should be 'stock market arbitrage.' There is no risk-free arbitrage market in the world, and no one can make a living purely from arbitrage. Buying low and selling high in the short term, then buying low and selling high again after making a profit, and never failing, is almost impossible. Suppose IBM's stock rises from $25 to $45 over three years. Person A uses trading, while Person B uses a buy-and-hold strategy: Even if A always buys low and sells high without ever failing, the most likely scenario is buying at $25 and selling at $28, earning $3; buying at $30 and selling at $33, earning $3; buying at $42 and selling at $45, earning $3. Over three years, A makes a total of $9 from three trades. If B buys at $25 and holds for three years before selling, he earns a total of $20 in one trade. Obviously, B profits more and incurs fewer transaction fees. Long-term arbitrage and making a fortune from it requires insider information on mergers and acquisitions. In the era of Michael Milken, Ivan Boesky, who profited from insider arbitrage, was eventually brought to justice. Those interested in this period can read the Pulitzer Prize-winning book 'Den of Thieves.' Quick and powerful ways to get rich are all written in the criminal law; reading the criminal laws of various countries can give you some understanding of what not to do. Buffett also practices arbitrage, but based on publicly disclosed merger information, not insider information.
2. Speculators are not humans, they are immortals
Speculating to get rich is the fastest legal way to make money in the world. In 1992, Soros made $1 billion from a single trade against the British pound. It's so easy, so why doesn't anyone follow Soros' example? Reading the books Soros wrote, we can understand: he is essentially a small-scale philosopher who understands human nature and macroeconomics, grasps political games, refuses to believe in universal wisdom, and thinks in a unique way. All these personality traits made him one of the rarest and most expensive critics in the world, using dollars to punish the foolish British Prime Minister and the Prime Ministers of Thailand and Malaysia. Soros calls the methods of making money in financial markets according to 'normal' thinking 'alchemy,' that is, all efforts to turn iron into gold. In his memoirs about his father, Soros wrote: My father never went to work, he just went to make money. Only those who regard 'making money' as the most important and urgent task, are always looking for others' mistakes, searching for market bugs, and have a strong and distinctive personality, are likely to become speculators. Hungary, a country that produces many speculators, also had a great speculator, András Kőstérani, who wrote the best-selling 'The Great Speculator' series, leaving investors ten rules and ten commandments for speculation. Following his advice is a process akin to cultivating immortality, ordinary people cannot achieve it. In the secular world, there are also those who occasionally achieve this, such as the four speculators in the movie 'The Big Short.' I once wrote an article titled 'Two Investment Principles Found Amid the Ruins of The Big Short,' expressing my admiration for these four speculator heroes. Before 1934, Keynes considered himself knowledgeable about many world statesmen, fully understanding monetary policy and credit cycles, and, arrogantly, speculated in the stock market based on his macroeconomic predictions. But he was, after all, still a mortal, losing more than he gained. After 1934, when he switched to micro-level corporate value investing, he achieved great success and remained a devoted believer in value investing until his death.
3. Value investors are all gods
Graham, Buffett, and Munger have taken the concept of value investing to the extreme, making other heretical ideas pale in comparison. Berkshire Hathaway’s stock is priced at $330,000 per share – a masterstroke that ordinary people cannot hope to reach. Graham’s *The Intelligent Investor*, Buffett’s letters to shareholders, and Munger’s *Poor Charlie’s Almanack* have been read so many times they are falling apart, yet no one has surpassed these three wise men. In Buffett’s view, value investing is like a closed-market theory: after selecting a company and buying it at a price below its intrinsic value, one can still profit even if the market then closes. This precise stock selection can only be done by a business coach. The performance of Berkshire Hathaway precisely shows that Buffett and Munger are not only elderly men who got rich through honesty and wisdom, but also the world’s best business coaches. Berkshire Hathaway is a company that holds the stocks of businesses chosen by Buffett and Munger, such as Coca-Cola. When Coca-Cola pays dividends, the money goes to Berkshire Hathaway, which does not distribute dividends to its own shareholders/investors to avoid them paying taxes too early. These undistributed profits push up Berkshire Hathaway’s stock price, and its shareholders only pay capital gains taxes when they sell their shares, thereby maximizing their investment returns. Buffett’s principles – selecting companies with a moat, holding long-term, avoiding businesses one does not understand, net cash per share, and others – organically form an ecosystem of investing and holding, which can be called the art of investing. Listening to a Picasso lecture won’t teach you how to paint; reading biographies of financial figures won’t teach you to trade stocks. Things that have already become art cannot be mastered by mere hard work.
4. Can ordinary people only lose money in the stock market?
The stock market is a secondary market for trading stocks. The money you earn is the money someone else loses. It is inherently a zero-sum game. If trading is frequent and transaction fees exceed dividends, this game turns into a negative-sum game. Professional institutional investors gradually replace retail investors, turning this negative-sum game into a 'loser's game.' Professional athletes win competitions through active offense, while amateurs win by 'not making mistakes,' forcing the opponent to lose. Games among amateurs are called loser's games; to win a loser's game, one must not make mistakes. Howard Marks of Oaktree Capital wrote 'The Most Important Thing in Investing,' which is essentially a checklist for avoiding mistakes. It is very practical and applies not only to stock investing but also to real estate investment. The author strongly recommends another book, 'Fooled by Randomness,' in which Nassim Nicholas Taleb explains the phenomenon of occasional success followed by ultimate failure in the stock market. 'A Random Walk Down Wall Street,' first published in 1974, has been revised up to the 11th edition and is one of my favorite popular investment philosophy books. It provides advice for ordinary people investing in financial assets: dollar-cost averaging into index funds. Stocks are always issued by specific companies: railroad company stocks were popular in the 1930s but are not now; many companies have gone bankrupt and delisted, but an index does not face the risk of delisting and can be held long-term, even passed down through generations. People who participate in stock market investment make up the stock market itself. To beat the stock market is to beat oneself, and such pride has ruined many. Investing in an index means pursuing average returns and accepting mediocrity; perhaps this is the investment return rate that ordinary people should expect.
5. Investing in financial assets is far more than just trading stocks
Should we go to jail, practice immortality, become deities, or admit defeat and live as ordinary people? None of these are necessary. What is important is to understand and invest in financial assets, and let financial assets serve our retirement. Investing in financial assets includes stock investment, but is not limited to stocks; it also includes index funds, actively managed funds, bonds, trust funds, and other kinds of financialized light assets, commonly known as an investment portfolio. Configuring such a portfolio requires considering: 1. The investor's personal characteristics, such as age, income, risk tolerance, and short-term and long-term plans; 2. Understanding the rotation cycles of major asset classes, as well as credit cycles; 3. Deciding whether to choose investments that generate current income. The combination of these three major considerations forms a personalized financial asset portfolio, so no two investment portfolios in the world are exactly alike. Once the investment portfolio is selected, you either learn to maintain and adjust it yourself, or entrust a professional to help. For newcomers who are unfamiliar with the capital markets and financial assets, professional assistance may even be needed for setting up the portfolio. For example, some high-quality assets naturally generate current income, inevitably increasing the current tax burden. Such assets need to be held using specific Canadian tax deferral or tax-sheltering tools, including RRSP and TFSA.
Building your own investment portfolio, holding it long-term, and continuously adjusting it requires a certain level of wealth accumulation, a correct understanding of the characteristics of various financial assets, and proper financial management concepts. I have never heard a lecture in the Chinese community explaining the basic logic and management philosophy of investment portfolios, whereas many articles rush people to invest during the RRSP season, which feels somewhat misguided. I have written many articles about real estate investment logic and fundamentals, so my circle of friends tends to lean towards that area. I invited experts from BMO Capital Markets to give a supplementary class and hold a lecture on the underlying logic of financial asset investment. It is a free lecture, and registration is as follows:
VI. Are financial advisors here to harm us?
Let me tell you a little story about why I am giving this kind of lecture. A client complained to me about their investment advisor: they lost money on investments and also had to pay a lot of taxes, so they withdrew all their investments to buy a house because buying a house earns quickly. I questioned their statement: if an investment product generates current income, it is taxed, so if taxes were paid, it indicates the investment had returns and was not a failure. Market prices naturally fluctuate; only selling below the purchase price results in a permanent loss. If the plan was to buy a house anyway, the money should have been planned as a short-term investment and not invested in financial assets with high price volatility that also generate current dividends or interest. The success or failure of financial asset investment is 50% determined by whether you clearly communicate what you want: capital appreciation or dividends, and how long the money will remain untouched. Otherwise, an investment advisor won't be able to help you build an investment portfolio.