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Understanding Money

The application of knowledge in society mainly elaborates on

I. Knowledge can generally be divided into two categories:#

1. Scientific knowledge and principles

2. Knowledge about specific situations at particular times and places.

Hayek explains that whenever we talk about knowledge, we often naturally think of scientific knowledge, the lofty knowledge found in textbooks. In fact, this is only a small part of knowledge. More and more important knowledge pertains to who needs what, where, what qualities are required, what quantities are needed, and what price they are willing to pay to obtain these things—this specific information, which Hayek also refers to as "knowledge."

In different industries, mastery of skills, understanding of people, knowledge of the local environment, and understanding of specific situations are equally important. However, the "tacit knowledge" that is not organized cannot generally be considered scientific knowledge. This knowledge is dispersed in the minds of countless individuals, and no one person can grasp all the information. Yet, precisely because of this, each person actually possesses a relative advantage, as everyone holds unique information that can be utilized to create wealth.

Decisions based on this information can only be made by each individual or through their active participation; only then can this information be utilized. For example, a stock trader who bases their trades on market fluctuations, or a real estate agent who knows of an immediate opportunity, or those profiting from price differences of goods from different places, all rely on timely knowledge of information that others do not know, playing a role in society. They learn "abstract rules" to help themselves acquire "specific information" more quickly.

By immersing themselves in the situation, continuously applying specific information, and through constant summarization, they can provide feedback to abstract rules, thereby correcting or fine-tuning their understanding of abstract rules, which better guides the future process of acquiring specific knowledge.

What we want to earn is not money itself, but the things behind money—resources, products, and services.

Due to knowledge barriers, central planning often fails to make effective decisions; only decentralized planning can ensure that knowledge of specific situations is quickly utilized. At the same time, social and economic issues always arise from changes, and decentralized planning cannot make decisions solely based on limited knowledge of direct situations, which leads to the problem of how to convey information from others.

Hayek believes that decentralized information is conveyed through the price mechanism. The price system is the medium of information transmission, and through the transmission effect of the price system, social division of labor and resource coordination become possible.

Using a simple and common example to clarify the function of the price system:

Assuming there is a recent shortage of oil in the market. Raw material prices rise, and there will be a chain reaction in upstream and downstream industries. Suppliers begin to seek new sources of crude oil imports; as long as some people learn about the new shortage that arises from this, they will seek other sources to fill this gap, and the impact will quickly extend throughout the entire economic system. The extra money comes mainly from three factors: natural resources, labor, and technology. Humanity has created immense wealth by utilizing natural resources, investing wisdom and labor, and developing and creating scientific technology, a significant portion of which is created by companies.

"Where did the money ultimately go?" Investment and financial management is not an abstract matter; investing is throwing money into a very real organization in hopes of creating more wealth with it. Regardless of how a product is packaged, how nice its name sounds, or which big brand company produces or sells it, we should care about where the money ultimately goes, what the source of its returns is, and whether it meets the most basic common sense and axioms of the world.

In the article "The Nature of the Firm," it is argued that transaction costs are the costs of utilizing the market price mechanism, which includes two main components:

Discovering prices, the cost of obtaining accurate market information; the costs of negotiation, bargaining, and executing contracts between transactors.

Transaction costs, also known as transaction expenses, refer to the various costs incurred by both parties in a transaction before and after buying and selling, including the costs of disseminating information, advertising, transportation related to the market, as well as the costs of negotiating, consulting, signing contracts, and supervising contract execution.

According to Coase, the market transaction process incurs costs, and prices are uncertain and unknown; converting them into known quantities incurs costs. At the same time, the market transaction process is not always smooth, as conflicts often arise between transactors, necessitating negotiation and enforcement, which all require certain transaction costs.

For example, when renovating a house, I need to go to the home improvement market to find suitable flooring. After finding a satisfactory product, I need to compare prices from three different vendors and negotiate. After signing the contract and paying the deposit, I still need to verify the authenticity of the product. If there are issues with the installation, I need to contact them for resolution, which may lead to disputes.

Throughout this process, I not only incur the cost of purchasing the flooring but also significant time costs, communication costs, transportation costs, trust costs, etc. These costs arise from the transaction and are the transaction costs. Transaction costs are a very fundamental and universal concept; they influence our behavior and exist in all aspects of the economy, warranting deep reflection.

I. The economy is the sum of transactions; transactions are the smallest units of the economy.#

The economy is composed of individual transactions, and all transactions constitute our economy. Society is filled with transactions: shopping is a transaction, working to earn money is a transaction, studying and training is a transaction, going to the hospital for treatment is also a transaction, buying books is a transaction, going to the cinema is a transaction, starting a business and selling products to customers is a transaction, raising funds from investors is also a transaction, and going public in the capital market is still a transaction. It can be said that life is filled with transactions.

Transactions are the smallest units of the economy, and understanding transactions helps us understand the operation of society and the economy from the ground up.

II. The inevitability of transaction costs#

Transaction costs deserve our attention primarily because of their inevitability. Due to the inherent characteristics of transactions, every transaction inevitably incurs transaction costs. Each transaction includes two types of costs: production costs and transaction costs. Production costs refer to the costs of producing products and services, which relate to the relationship between humans and the natural world; transaction costs refer to the costs incurred by people willingly interacting and cooperating to reach transactions within a certain social relationship, which are the costs of human relationships.

Essentially, where there are human trading and exchange activities, there will be transaction costs. Overall, the reasons for the generation of transaction costs can be viewed from four dimensions:

The specificity of transaction assets, the bounded rationality and opportunism of both parties, information asymmetry, and the uncertainty and complexity of the transaction process.

1. The specificity of transaction assets refers to the fact that the assets being traded themselves lack market liquidity, or once a contract ends, the costs invested in the assets are difficult to recover or convert for other uses. For example, once that flooring is laid in my house, it cannot be sold to others.

2. The bounded rationality of both parties refers to the limitations that participants in a transaction face due to physical, mental, and emotional constraints, which produce restrictions when pursuing maximum efficiency. For instance, when I talk to a vendor while buying flooring, if I am particularly speculative, I may be more likely to accept a higher price that they falsely report.

3. Opportunism in transactions refers to the fraudulent methods that various parties involved in a transaction adopt to seek their own interests, which simultaneously increases mutual distrust and suspicion, thereby raising the supervision costs of the transaction process and reducing economic efficiency. For example, after I buy flooring, if I hear that the vendor's integrity is not very good, I may suspect that the product delivered does not match what was displayed, leading me to verify the product and even take time off to supervise the flooring installation.

4. Information asymmetry in transactions refers to the fact that both parties often hold different degrees of information, making it easier for the party with more favorable information to benefit. As a buyer, I may only buy flooring a few times in my life, and my understanding of flooring is certainly not as good as that of the vendor. To reduce the possibility of being taken advantage of, I must obtain relevant information about flooring in advance and visit different stores to compare prices. Even so, information about non-standard products like flooring remains quite opaque, and the price I pay is still likely to be higher than its average selling price.

5. The uncertainty and complexity of the transaction process refers to the possibility of various risks arising during the transaction process. Take that flooring again; after I pay, if the vendor suddenly says that the stock of that flooring is insufficient to cover my house, and production will take another month, then whether I let the renovation team stop working to wait or go back to choose new flooring will incur additional costs.

As can be seen, transaction costs are like friction in economic activities, omnipresent. If viewed from a physics perspective, transaction costs are like the entropy generated by motion; they are part of the motion.

III. Transaction costs are also a source of business innovation#

Transaction costs contain a wealth of business innovation opportunities. Business innovation manifests in three aspects: creating new functions or improving functions, reducing production costs, and reducing transaction costs. Creating new functions and improving functions from nothing to something is certainly innovation; reducing transaction or production costs through different methods is also innovation.

The first two types of innovation are a game between humans and nature, while reducing transaction costs is a game between humans, solving various barriers in the transaction process through technology, processes, and other means. The internet has reduced transaction costs by lowering information asymmetry, and brand promotion allows products to be trusted through visibility, thereby reducing transaction costs. Therefore, companies should strive to build their brands and cultivate good reputations, as under good reputations, the transaction costs of their products are relatively low.

IV. Transaction costs contain enormous business opportunities#

The second reason we should pay attention to transaction costs is that they account for a significant proportion of the economy. Due to the inevitability of transaction costs, they contain enormous business opportunities.

Alibaba grew by solving the problem of transaction costs. Taobao connects merchants and buyers, reducing the cost of information collection for buyers and alleviating information asymmetry. To reduce the cost of information verification for merchants, it later launched Tmall, allowing customers to purchase products with more confidence. To address the supervision costs of transaction fulfillment, it introduced Alipay, originally intended for the e-commerce industry; due to its significant reduction of transaction costs in offline transactions (cash and change), it quickly applied to various offline transaction scenarios. Meanwhile, online banks, having obtained the operational data of merchants, reduced information asymmetry and could offer merchants lower loans than traditional banks. By reducing various transaction costs in commercial transactions, Alibaba's business flourished, disrupting traditional industries.

In the past, renting a house was a painful experience, with various fake listings online. After finding a suitable place, calling the agent always resulted in being told that the house had just been rented out, but there were a few good ones they could take me to see. Photos were completely unreliable, so I had to follow the agent around. At that time, the transaction costs in the rental market were enormous, and the entire industry was in a state of extreme inefficiency. In 2011, Lianjia was the first to launch genuine listings nationwide, requiring all agents to upload listings that strictly adhered to the four standards of "real existence, real price, real sale, and real pictures." Lianjia later introduced VR viewings to further reduce transaction costs.

Deciding where to eat is a question many people need to ponder daily. In the past, when going to a place to eat, one would generally just pick a restaurant at random, and whether it was good or not was left to chance. The cost of information collection and verification was high. Now, one can simply open a review app to see a list of must-try restaurants nearby, significantly reducing the chances of making a poor choice.

V. Finding entrepreneurial opportunities in transaction costs#

If we break down transactions by process, they can be divided into:

Information collection, information verification, communication and negotiation, decision-making, contract signing, supervision and execution, and operational maintenance.

Information is dispersed like islands in society. The emergence of the internet has significantly alleviated information asymmetry and reduced the cost of information collection for users.

Search engines like Baidu, local life service platforms like Meituan and Dianping, classified information websites like 58.com, e-commerce platforms like Tmall, JD, and Pinduoduo, and various vertical industry trading platforms are all

developed by utilizing internet technology to reduce the cost of information collection in specific fields.

The low-hanging fruit in this area has already been picked, and what remains are fields where products and services are difficult to quantify. Advertising is another method; regardless of the approach you take, the greater the likelihood your product appears in front of customers, the easier it is for them to obtain that information, making visibility a crucial factor.

Information verification costs: If all information in the market were true, things would be much simpler. However, the market is filled with noise, and the authenticity of information is uncertain, necessitating verification, which incurs significant additional costs. Generally speaking, transaction platforms will internalize this work; otherwise, the platform will struggle to survive due to the high verification costs for users.

Communication and negotiation costs: The transaction process is not always smooth and often requires repeated communication and negotiation. Communication requires timeliness; in certain fields, users previously preferred face-to-face communication, but this incurs high transportation and time costs. With the popularity of video interactions, compared to the exhausting trips to visit clients, people can obtain similar amounts of information with less energy and time expenditure.

Decision-making costs: Many e-commerce platforms strive to provide a richer variety of products, but this may increase users' decision-making costs. In the past two years, live-streaming sales have certainly made the list of the hottest trends, with countless viewers emptying their wallets during Li Jiaqi's "Oh my god! Buy it!" The explosion of live-streaming sales has its reasons; the closed purchase decisions and trust in the host reduce users' costs of information acquisition and comparison, facilitating transactions more quickly.

Contract signing costs: When both parties reach a consensus and proceed with a transaction, signing a contract also incurs costs. Compared to traditional paper contracts, which are costly and inefficient, paperless, digital, and online electronic contracts are gaining attention and support from the government.

Supervision and execution costs: After a contract is signed, it is necessary to supervise whether the other party executes according to the agreement. If the platform can easily supervise, it will reduce the related costs for users themselves.

In the past, various illegal taxis roamed the market, charging exorbitant prices and often taking longer routes, wasting both time and money. After platforms like Didi emerged, the experience of travel improved significantly due to easier complaint processes and the ability to upload driving data to the backend.

Switching costs: Many transactions are ongoing and repeated, and switching partners incurs costs. To retain customers better, more effort can be put into this area. Data, user habits, network relationships, capital deposits, brand recognition, etc., are all aspects worth careful consideration.

What do companies use to improve efficiency instead of the market?#

Companies establish organizational hierarchies to allocate resources through excellent management, achieving more efficient production (providing goods or services) than the market. Although corporate decisions can save transaction costs compared to the market, internal division of labor and collaboration can also lead to communication costs between departments and individuals, which can be understood as organizational costs within the company. (In addition to communication costs, another major organizational cost arises from opportunism.)

These organizational costs limit the boundaries of companies, meaning that companies cannot expand indefinitely. The boundaries of a company can only expand until the organizational costs resulting from increased internal hierarchies equal the external market transaction costs. To some extent, the fundamental purpose of a company's existence is to reduce transaction costs. To obtain information about goods or services outside the market, one must pay not only the price of the goods or services themselves but also other costs.

For example, the costs of searching for information, negotiation costs, supervision and management costs, implementation costs, etc., and most importantly, the asymmetry and incompleteness of market information make transaction costs very high. The purpose of a company's existence is to use scale and specialized division of labor to reduce costs in the transaction process, maximizing benefits.

Two extremely valuable things: "User perspective" and "Innovative vision." In the financial industry, practitioners generally focus more on asset management rather than understanding users. Having both knowledge and action pays great attention to users, and cross-industry partners can bring more "user perspectives." At the same time, the first is "cultural matching." When recruiting, we also pay attention to whether what the company is doing is something everyone internally loves. It is like liking a person but not recognizing their lifestyle and interests; it is difficult for two people to stay together for long, and work is the same.

The second point is "Curiosity." Curiosity is a precious quality for an innovative company. We can never be satisfied with the current solutions, always seeking better solutions to provide better services to users, and achieving personal growth in the process.

The third point is "Self-motivation." In the entrepreneurial stage, one will face many difficulties and challenges, and many problems need to be faced independently without standard answers. Therefore, whether one can continuously drive oneself forward becomes very important.

To give a simple example:

For instance, humans have always needed wood. In the beginning, we found it very difficult to chop down trees, but some clever individuals polished stones into stone axes, significantly improving everyone's efficiency in chopping trees.

In this process, people, through their wisdom and labor, utilized natural resources (i.e., stones), improved technology (as there were no axes before), and raised the level of tree chopping from 20 trees a year to 200 trees a year. The surplus resources can then be used to further improve life. Gradually, everyone's lives improved, and thus the overall wealth of society increased.

Accumulation of human wealth is, of course, a simplified example; the real world is far more complex than just making axes to chop trees. However, if you reflect a little, the accumulation of human wealth is fundamentally this process.

Yuan Longping allowed us to plant more crops on the same acre of land, feeding more people, and more people mean more labor; telephones, WeChat, and various video conferencing systems enable people to communicate more efficiently, fostering more consensus and wisdom; antibiotics and surgical knives allow us to live healthier lives and extend the lifespan of the entire race. All these changes are brought about by our utilization of natural resources, applying various labors, and creating various new technologies.

What are the investment methods? Investment methods can be mainly divided into two types: stocks and bonds.

Bonds refer to companies borrowing money from creditors and promising to repay the principal and interest within a certain period. Creditors are usually banks and investors who purchase corporate bonds. When a company cannot repay, creditors have the right to demand the company repay the debt by selling its assets. This means that creditors only receive interest as a return, and the company's profitability or loss during its operation is almost irrelevant to the creditors.

Stocks refer to investors buying a portion of a company's ownership with money, becoming one of the company's owners (shareholders). Unlike creditors, the profitability and loss status of the company during its operation is closely related to shareholders. Shareholders primarily receive returns in two ways:

1. If the company earns money each year, it will distribute dividends based on the proportion of shares held by different shareholders as a return.

2. If the company is sold, the shares held by investors will also be sold, thus obtaining a one-time profit. The premise of these two ways of obtaining returns is that the company itself operates well.

Why is the long-term return rate of stocks the highest? The long-term return of stocks is mainly due to the following three reasons:

1. Compound interest
2. Advantages brought by scaling
3. The "active" value

• The compound interest formula is as follows: Compound interest = Principal * (1 + Rate of Return) ^ Time

• The expansion of the company's scale and improvement in efficiency can effectively reduce costs, allowing the company's growth rate to exceed the overall growth rate of society.

• Most importantly: Excellent listed companies can rely on human wisdom, diligence, and courage to "actively" acquire a lot of value and create more wealth.

According to the investment system of "Having Knowledge and Action," we should believe in stocks, that good companies will definitely bring returns exceeding the average in the long term. Holding this belief is the foundation of the investment system.

How do investors lose money? According to statistics, most stockholders/fund holders redeem their investments when the market just starts to rise (after struggling to break even) and then buy heavily near the peak of the bull market. Investors who enter the market near the peak, regardless of whether they choose to sell or hold, will incur losses.

Why do investors behave this way? Stock price = intrinsic value * valuation

Among them, intrinsic value is objective, reflected in the company's ability to acquire a lot of value through human wisdom, diligence, and courage, resulting in the company's profits and net assets slowly increasing. This part of intrinsic value is difficult for investors to see.

Valuation, on the other hand, is subjective and relatively visible, reflected in whether investors' expectations are improving or deteriorating, and whether their emotions are positive or negative.

From the perspective of valuation, we can determine that one of the main reasons investors lose money is that people do not have the ability to directly perceive the prices of things, and their judgments about the price of something are easily influenced by external factors.

When we determine the selling price of a product in a non-professional field, we usually use the logic of "comparison" and "reference" to the prices of similar products, and we cannot directly determine the absolute price of this thing, especially for things that are inherently difficult to price, such as financial assets with relatively vague pricing. Therefore, the vast majority of people cannot accurately value the market, companies, or stocks.

Furthermore, emotions can be influenced by other market participants, which further affects investors' behavior.

What should we do? A sound investment knowledge system + controlling one's own emotions = a pricing basis for valuing companies and markets.

What should the expected annualized return rate of stocks be? We usually use "annualized return" to measure because the return on an investment is obtained over time.

Referring to the data on macroeconomic development over the past few years, we can conservatively believe that an annual growth rate of 5% to 6% is a basic guarantee for our return rate.

Therefore, due to investing in companies with higher operational levels, an expected long-term annualized return rate of 8% to 10% is achievable.

What do 8% to 10% represent?

These two numbers represent the net asset and profit growth of the company. ROE = Net Profit / Net Assets. It measures how much return each dollar invested by shareholders in the company can generate. That is, the return brought by the investment. As long as the company operates well, net assets will definitely increase gradually.

Charlie Munger once said that the long-term return rate of a stock is basically aligned with the long-term ROE achieved by the company.

How to improve long-term annualized returns?

There are two ways to improve our long-term returns.

Identifying companies with better long-term performance among listed companies can achieve an expected return of 10% to 12%.

Utilizing market price fluctuations, buying more at low points and holding or selling at high points will also increase long-term returns. The "Having Knowledge and Action Thermometer" can help everyone gauge market sentiment, and consistently buying low and selling high in the long term may raise the expected return rate to 12% to 15%. It is worth noting that Buffett's actual long-term return rate is only around 12.5%.

It is important to emphasize: having 12% to 15% in the long term does not mean there will be 12% to 15% every year.

Therefore, sticking to long-term investment is key.

In modern corporate systems, creditors' rights to claim debts take precedence over shareholders' rights to profit distribution.

Therefore, when a company makes money, it must first repay creditors, then pay taxes, and finally distribute dividends and retain profits.

1. Due to the existence of operating leverage, changes in income lead to disproportionate changes in operating profit (total income - total costs).

Fixed costs do not increase with income, and if the company has a certain scale effect, the growth rate of income > the growth rate of costs, resulting in changes in operating profit % > changes in income %.

2. Due to the existence of financial leverage, mainly influenced by interest, there are disproportionate changes in earnings before interest and taxes (operating profit + interest) and net profit (attributable to shareholders, commonly referred to as "net profit").

As mentioned at the beginning, debts are repaid first, reducing pre-tax profits, thus lowering taxes, and increasing shareholders' net profits.

What determines stock prices?

At this point, we can summarize stock prices into a formula:

Stock Price = Value × Valuation

Stock prices are determined by two factors: the intrinsic value of the company and the valuation. Valuation is the fundamental reason for significant short-term fluctuations in stock prices.

If the price of the stock you purchased rises, this increase may be caused by two factors: the first factor is the increase in intrinsic value, which may be due to the company earning more money during its operational value-added process, or it may be due to financing, issuance, etc., leading to a sudden increase in intrinsic value. The second factor is that investors' expectations have improved, and their emotions have become more positive.

The intrinsic value of a company is difficult for investors to see. It is hidden within the company and the economy. Entrepreneurs and employees work together to meet customer needs and achieve profitability, manufacturing product by product, writing code line by line, accumulating one order after another; these gradual improvements lead to increases in company profits and net assets.

Intrinsic value is objective, but the expectations and emotions behind valuation are subjective. As we mentioned earlier, facing the same company, the same market, and the same information, it is also difficult for us to make accurate valuations. At the same time, our emotions can also be influenced by other market participants, switching between greed and fear, which further affects our behavior.

Investment master Warren Buffett once wrote in the preface to Benjamin Graham's book "The Intelligent Investor":

• To achieve investment success in a lifetime, one does not need top-notch IQ, extraordinary business acumen, or secret information, but rather a sound knowledge system as the basis for decision-making, and the ability to control one's emotions so that they do not erode this system.

• What he refers to as "knowledge system" and "emotional control" are precisely what we will discuss in the next few lectures—"cognition" and "emotion," which are the foundation for valuing companies and markets.

The percentage change in net profit % > the percentage change in earnings before interest and taxes. This is financial leverage.

1. Therefore, changes in income indicators representing GDP may be small, but they often lead to significant fluctuations in net profit = operating leverage * financial leverage.

For companies, increasing the debt ratio within a certain range is a lower-cost financing method that can also increase shareholders' equity.

1. Stock-bond ratio: Regarding passive investors (cautious/conservative investors): the stock-bond ratio is 2:8, with the maximum ratio being 5:5. "If he acts according to his ability and limits his business activities to the strict safety range of standard defensive investments, achieving satisfactory investment results is simpler than most people imagine; achieving very good results is more difficult than people think." For someone like me, spending a certain amount of time and effort to learn and understand basic investment knowledge, hoping to achieve above-average results is good enough; to surpass the vast majority of people requires too much effort. In life, I generally follow the "2:8" rule.

2. The ability of stocks to resist inflation is greater than that of "bonds"—if you have money, you can invest. "We cannot say for sure that investors should generally wait until market prices are at their lowest to buy, as this may take a long time, potentially causing income losses and also missing investment opportunities. Overall, the better approach for investors is to invest in stocks whenever they have money, without delaying purchases—unless the overall market level is too high and does not meet the value standards used for a long time." "Long-term investment does not require timing; as long as you layout against the market, the pendulum theory suggests that you may not buy at the lowest point, as long as it is 'not expensive'—coming from 'two birds.'"

3. Margin of safety: Choosing an investment advisor does not need much explanation, but for me, only "professionals do professional things." Choose an investment advisor you trust and then "hold steady, hold on" to your buying strategy.

4. Market fluctuations and mean reversion: The general idea is that stock market prices deviate from their true prices (during a bull market), and eventually, they will return to their actual value, meaning that both speculators and stock investors must prepare to endure significant shrinkage in their stock market value or even long-term being stuck; conversely, the same applies. After reading the book, I firmly believe in the value investment philosophy, and within the margin of safety, there must be wisdom (believing in value investment) and the ability (investing with spare money) to "hold on."

5. Human nature and emotions: The meaning of "avoiding" refers to the feelings we often harbor: aversion, jealousy, suspicion, concern... "Without concern" means having none of these feelings. Humans are indeed too complex; psychological states change constantly, cognition rises and falls, and external environments change rapidly, in this case, one can only be grateful for a 50% understanding. "Buddha's compassion, well done, well done," people can only save themselves. The saying "contentment brings happiness" is hard to express; isn't that a joke? Ordinary people! "The enlightened person must have a clumsy heart; you are too clever; how can you be an enlightened person! The enlightened person must have a clear mind; you are not clear at all; what are you talking about enlightenment! You cannot obtain it; temporarily comforting your own heart." In martial arts novels, one often sees monks, usually from Shaolin Temple, appearing, and no matter the situation, they always start with: "Well done! Well done! Benefactor... Do you know where this term comes from? It comes from the words spoken by the Buddha during his travels: in Pali, there was a time when the Buddha spoke to Shariputra, saying, 'Well done! Well done!'"

Economic cycles, corporate profit cycles, and market sentiment cycles amplify fluctuations but will eventually converge back to the long-term trend itself. This long-term trend is also a growth of national economy and corporate profits that we continuously emphasize in our courses. However, these three cycles, along with various other cycles (such as credit cycles) and factors, cause the entire market to fluctuate, and the role of human nature in this is particularly significant.

When the economic situation is good, entrepreneurs blindly invest in reproduction, and financial institutions like banks also facilitate this behavior during the credit easing of the economic upturn (easy loans), further amplifying corporate profits.

Reflected in market cycles—media reports are all good news, corporate profits frequently exceed expectations, and everything is thriving. At this time, investors' psychology and emotions take over the scene. "Such a situation must continue; a golden decade is not a dream," and thus stock prices soar. At some point, some factor causes corporate profits to fall short of expectations, and at this time, the last buyer has already entered the market, and thus the stock market begins to decline.

When the economic situation is good, operational and financial leverage become burdens for companies, and corporate profits quickly decrease or even incur losses. The stock market further declines, and the media is filled with bad news. Investors believe that this situation will surely continue, and the economy is doomed, leading to stock sell-offs. Companies lay off workers, investors' wealth shrinks, and everyone tightens their belts, reducing unnecessary consumption, leading to a decrease in corporate income and profits... until the next cycle begins.

Value investing is not about never selling; it is about daring to reduce positions when the market is severely overvalued, realizing profits and avoiding systemic risks brought by future mean reversion characteristics. When the market is significantly below intrinsic value for some reason, we believe it has a margin of safety, and value investors will buy at market lows. The social security fund can achieve stable and good investment returns due to decisively reducing the proportion of equity assets when the market was severely overvalued in 2007, cashing in on that year's profit levels, and daring to increase positions when the market was at lows in 2005, 2008, and 2010.

After the global financial crisis in 2008, many asset management institutions suffered huge losses, and we reflected on the fact that simply adhering to a "buy and hold strategy" might make it impossible for investors to avoid systemic risks. During the post-financial crisis period, a dynamic asset allocation concept should be gradually established. The dynamic asset allocation of the social security fund is based on the fundamental ideas of value investment and long-term investment, adjusting positions to sell high and buy low when the market significantly deviates from the value center at a certain stage. Practice shows that the specialization of external managers often reflects in security selection, while their grasp of market timing tends to be short-term. For example, whether stock-type, equity-type, or mixed public funds, the annual average turnover rate is generally between 200% and 500%, and the stock portfolio of the social security fund also exceeds 100%. For large-scale investment institutions, considering transaction costs, the "buy high and sell low" strategy we mentioned is based on medium to long-term judgments, and the market must have a considerable degree of fluctuation, rather than making short-term trades in small fluctuation ranges, which leads to frequent trading and high transaction costs. Moreover, based on short-term emotional judgments, it is easy to make mistakes; continuous short-term errors may lead to significant directional losses, often resulting in a loss that outweighs the gains in allocation. "Grasping the big and letting go of the small" is the only way for investment institutions like the social security fund to actively allocate. Looking back, the excess returns generated by the social security fund through buying high and selling low are almost equivalent to the market's beta returns, enabling it to navigate the turbulent capital market through rational patience and timely judgment.

The core goal of regulation, "to protect the legitimate rights and interests of investors," is consistent. Under this value system, first, everyone will not do anything that harms user interests; in addition, it will drive oneself to improve in practical operations, providing good services for users. Moreover, we pay great attention to professionalism in investment research and compliance work directly related to investment.

1. Stability#

Stability does not mean casually following the trend into the market; one must have a clear understanding and conduct serious analysis of the larger trends, developing one's own way of thinking rather than going with the flow. Stability also requires constantly adjusting one's estimates in conjunction with market trends and winning through this.

When investors step into the stock market, they should carefully learn and understand the details of each link, simulate trading, invest as much as they can afford, and avoid impatience. Investments should not exceed one's capabilities. It is important to understand that securities investment carries a high risk, and coupled with the pressure of insufficient funds, during times of anxiety, it is naturally impossible to exert high intelligence, and the chances of winning are relatively small. In other words, speculators need to combine flexible thinking with objective situation analysis; only then can they remain undefeated.

2. Patience

The rise and fall of stock market trends do not form overnight but develop slowly. The formation of a bull market is like this, and the formation of a bear market is the same. Therefore, do not act impulsively before it forms, to avoid the pitfalls of entering and exiting hastily; learn to embody the word "patience." A small lack of patience can disrupt a major plan; patience leads to vast horizons.

3. Precision

Precision means being decisive and resolute. If one is always hesitant, investment opportunities often vanish in an instant, and the results of hesitation often lead to missed investment opportunities. If one thinks too much about an issue and drags out the time, it is certainly difficult to talk about "precision." Of course, the precision we speak of is not absolute accuracy; there is nothing in the world that is 100% certain. If the trend looks good, do not short against the trend; at the same time, when the price point you have in mind is reached, enter the market to go long; otherwise, if you hesitate too long and miss a better opportunity, you can only watch the board and sigh.

4. Ruthlessness

Ruthlessness has two meanings. On one hand, when the direction is wrong, one must have the courage to cut losses and exit. On the other hand, when the direction is right, one can consider adding positions appropriately and riding the wave of success. In the early stages of a price increase, if you have already made a significant profit, it is advisable to hold onto the stock a little longer rather than easily cashing out; you could earn even more. For example, in Taiwan, if you bought stocks at the beginning of 1977 and made a 30% profit by July, if you sold at that time, two months later, when it rose over 100%, you would regret it deeply!

5. Rolling

In stock market investments, take your profits when you are 80% full, and when the stock price reverses, use the filter principle to withdraw troops immediately. In the early stages of a price drop, do not linger; be decisive and cut losses.

When a bear market arrives, one should reduce holdings of stock chips as much as possible; it is best to stay away from the stock market and wait for the bull market to arrive before entering at the right time.

Regarding the psychological tips of stability, patience, precision, ruthlessness, and rolling, in the overall strategy, precision is secondary; stability is the most important. Because in any skill, precision relies on talent, while stability relies on strategy and capital, which can then be achieved through management means.

Judging one's risk profile

Xiao Wang, Xiao Li, and Xiao Ding all go to buy funds. Xiao Wang is a low-risk preference person, Xiao Li is a medium-risk preference person, and Xiao Ding is a high-risk preference person.

Just in time, three types of funds were newly launched:

Individuals' conditions and personalities exhibit three basic attitudes toward risk: aggressive, stable, and conservative. Aggressive individuals are willing to accept high risks in pursuit of high profits; stable individuals are willing to bear some risks, aiming for profits above the market average; conservative individuals prefer safety and immediate benefits, willing to give up potentially higher-than-average returns, seeking only to preserve capital and interest. Human personalities and behavioral patterns often influence each other; for example, impatient people walk faster and talk like machine guns without stopping; slow people tend to procrastinate and find it difficult to make decisions. In terms of investment, timid individuals fear losing money, so they appear conservative; bold individuals want to earn more, so they become adventurous; while moderate individuals adopt a stable approach, pursuing steady growth.

For a long time, many people who do not understand their investment attributes have used the wrong investment methods and chosen the wrong investment tools, resulting in very tragic outcomes, either losing their capital or being forced to exit.

Only by understanding oneself can one gain wealth in the process of financial management. Personal financial management should follow these six principles:

1. Understand the purpose of your financial management: making money and how much money to make.

2. Without clear financial goals, one will definitely lose direction in financial management.

3. Do not overestimate returns.

4. Do not underestimate risks.

5. Set profit satisfaction points and loss stop points.

6. Refuse to drift in the sea of stocks.

Regular savings refer to customers agreeing with banks on the savings period when making deposits, either in one lump sum or in installments during the savings period, and withdrawing principal and interest in one lump sum or in installments. Regular savings can be further divided into seven types based on different deposit and withdrawal methods and interest payment methods: zero deposit and full withdrawal regular savings, full deposit and full withdrawal regular savings, principal deposit and interest withdrawal regular savings, discounted regular savings, full deposit and zero withdrawal regular savings, large transferable time deposits, and special savings.

Based on people's savings needs, we can choose different types of savings. Below, we will briefly list a few savings methods.

1. Principal deposit and interest withdrawal regular savings

The interest calculation method for flexible savings is as follows: savings within three months are calculated at the current interest rate; savings over three months are calculated at 60% of the interest rate for the same level of full deposit and full withdrawal regular savings; for savings with a term of one year or more (including one year), regardless of the length of the term, the entire term is calculated at 60% of the interest rate for one-year full deposit and full withdrawal regular savings. The formula is:

Interest = Principal × Term × Interest Rate × 60%

Because flexible savings do not have a fixed term, there may be fractional days when withdrawing, and in such cases, daily interest rates apply. Below is an example to illustrate the calculation method for flexible savings:

Example: Ms. Liu deposited 10,000 yuan into flexible savings on February 1, 2008, and withdrew on June 21, 2008. How much interest should she receive? First, we calculate the actual term of this deposit, which is 140 days, and it should be calculated at 60% of the three-month interest rate (annual interest of 2.88%).

The interest to be received = 10,000 yuan × 140 days × 0.8% (daily interest rate) × 60% = 67.2 yuan.

It is precisely because of the advantages of flexibility, convenience, and confidentiality that the flexible savings method has a wide range of applicability. Specifically, it is suitable for some funds whose term and purpose have not yet been determined, and for which there are relatively high requirements for interest and confidentiality, as well as meeting the needs of savings investors for flexible deposits and withdrawals. Currently, some banks have begun to offer named savings, allowing users to report losses with identification documents in case of loss.

3. Zero deposit and full withdrawal regular savings

Zero deposit and full withdrawal regular savings, referred to as "zero-full," is a type of regular savings where deposits are made monthly, and the principal and interest are withdrawn in one lump sum upon maturity. Zero-full savings have the characteristic of "accumulating small amounts into a whole, using small money to accomplish big things," and the monthly deposit is not large.

4. Notice savings deposits

Notice savings refer to deposits made without a fixed term, but the bank must be notified in advance when withdrawing, and the withdrawal date and amount must be agreed upon.

5. If the withdrawal amount does not meet the minimum withdrawal amount stipulated for this deposit.

If you plan to save an amount exceeding 50,000 yuan, then "notice savings" is definitely your best choice, as choosing this savings type can yield the most interest. It is also important to note that if the expected deposit term exceeds three months, it is advisable to choose other savings types besides notice savings. Additionally, notice savings allow for multiple withdrawals, but the amount of each withdrawal and the account balance must not be less than 50,000 yuan or 6,250 US dollars, meaning it must meet the minimum account balance requirement. After withdrawal, the bank will issue a new deposit notice to the customer, and the interest on the remaining balance will be calculated from the original deposit date, continuing at the original deposit interest rate.

5. Education savings

Education savings refer to individuals opening accounts at designated banks according to national regulations, depositing specified amounts of funds within a specified period, and specifically for educational purposes. This is a special savings plan specifically for students to pay for non-compulsory education expenses. All enrolled primary and secondary school students (from the fourth grade of primary school onwards) can participate in education savings with the help of their parents to prepare for future expenses for attending high school or college and other non-compulsory education.

The entire economic expenditure of a family can be divided into five major categories.

1. Daily living expenses

In the process of financial management, every family knows that establishing a household will incur some daily expenses, including rent, utilities, insurance, food, transportation, and any expenses related to children, which are unavoidable every month. Based on the family's income level, when implementing savings, the family can establish a public account, where each person contributes a fair share each month to cover the family's daily living expenses.

2. Large consumer goods expenditure

Family construction funds are mainly used to purchase durable consumer goods for the family, such as refrigerators, color TVs, and other large items, as well as preparing economically for future housing purchases and renovations.

3. Cultural and entertainment expenses

Modern family life inevitably incurs entertainment expenses. This part of the expenditure is mainly used for family members' sports, entertainment, and cultural consumption. Its main purpose is to add a touch of interest to the family's mundane life amidst the pressures of work.

4. Financial project investment

Family investment is a necessary means for every family to achieve capital growth. There are many ways to invest, with relatively safe options like savings and bonds, and riskier options like funds and stocks. Additionally, collectibles can also be considered a form of investment, including stamps, coins, and artworks. We believe that allocating 20% of a family's fixed income as investment funds is relatively appropriate for ordinary families.

Knowledge about loans.

1. Types of personal loans

(1) Personal housing loans. Personal housing loans are loans provided by banks to support individuals in purchasing or renovating houses. Currently, this mainly refers to mortgage loans, which are typically referred to as "personal housing mortgage loans." The maximum loan amount is 80% of the total price or appraised value of the purchased (renovated) house (whichever is lower), with a maximum term generally not exceeding 30 years.

(2) Personal car loans. Personal car loans are loans provided by banks to support individuals in purchasing cars. If the purchased vehicle is for personal use, the loan amount cannot exceed 80% of the car's price, with a term not exceeding 5 years.

(3) Personal consumer goods loans. Generally refers to loans for durable goods in daily life. That is, loans provided by banks to support individuals in purchasing durable consumer goods in daily life. Durable goods refer to household items priced above 3,000 yuan (including 3,000 yuan) with a normal lifespan of over 2 years, such as household appliances, computers, furniture, fitness equipment, etc., with a term generally of 5 years.

In addition to the above, various banks may also offer different services, such as personal business loans from construction banks.

2. General loan process

(1) Submit a loan application to the bank. Personal loan applications generally require the following items: household registration book, proof of marital status, ID card, income proof, real estate ownership certificate, and relevant proof from guarantors, etc. Additionally, a series of related fees must be paid.

(2) After the bank accepts the application, it will investigate and evaluate the relevant materials. After receiving the relevant materials, the bank will conduct a preliminary review, perform a credit investigation on the borrower, and evaluate the customer. For customers who meet the loan conditions, the application will be approved; for those who do not meet the conditions, it will not be approved, and reasons will be provided.

(3) Sign a loan contract and open an account. Once the bank approves the application, the relevant loan contract can be signed, and the individual can open an account at the bank, thus everything is ready.

(4) The bank disburses the loan. The final step is for the bank to issue the loan to the applicant.

3. The knowledge of loans

Loans are not just about filling out a form to apply to the bank; there is a lot of content involved. If you do not want to become a "house slave" or a "debtor," you must study the knowledge within loans.

1. The knowledge of self-assessment

Before taking out a loan, the first thing you need to learn is to assess your economic strength. Then, based on the comprehensive assessment data, determine the down payment amount and ratio. Economic strength generally includes two major parts: real estate and movable property.

2. The knowledge of income and expenditure budgeting

To better and faster repay the loan in the future, you must make reasonable predictions about the family's future income and expenditures. This must consider various possible influencing factors. Generally speaking, young people with higher education have higher income expectations, allowing for a faster repayment schedule.

3. The knowledge of calculating the loan limit

To determine your loan limit and avoid overburdening yourself with repayment pressure, you should calculate your loan limit based on your income and expenditure situation, according to the monthly balance of the family's income and expenditure. Additionally, during the calculation process, you should consider changes in the family's income and expenditure situation to avoid financial vacuums.

4. The knowledge of determining the loan term

Banks are willing to lend to homebuyers mainly because real estate investments are safe and reliable. If you want to invest in other types of projects besides real estate, it may not be so easy to borrow money from banks, as banks tend to be more cautious and impose stricter loan conditions for projects with uncertain returns.

(2) Regarding loan repayment and interest, many investors easily solve this problem through renting. Generally speaking, the debts of real estate investors are borne by tenants. After investors take out loans to purchase real estate, the vast majority earn income by renting out the property and then use the rental income to pay the bank's loan interest and principal.

(3) Real estate is an investment related to people's basic survival, so countries always provide the most favorable conditions for financing in real estate. Not only are the loan terms long, but the interest rates are also much lower than other consumer loans. If one can reasonably and maximally utilize this advantage in real estate investment, it is equivalent to turning real estate into one's private bank, providing considerable funds for real estate investment and other consumption while only paying very low interest.

(4) Another significant characteristic of real estate investment is its substantial appreciation potential. With the continuous advancement of social and economic development and urbanization, in urban areas, a large amount of effective land has been fully developed and utilized, while more and more people flock to cities, leading to a continuous increase in demand for real estate, which will create a supply-demand imbalance and further drive up real estate values.

(5) Real estate investment has a long cycle, which means the profit space is large, and the profit time is also long. Generally, a house has a lifespan of about 100 years, with the shortest being over 60 years. From the perspective of borrowing to buy a house, investing in real estate not only grants property rights but also provides at least 40 years of profit time. The appreciation potential of real estate also effectively offsets the negative impacts of inflation.

Real estate investment is based on the price difference of real estate at different times, buying low and selling high to obtain profits. In real life, we find that on one side, experts and the public lament the serious real estate bubble, while on the other side, housing prices continue to rise. In fact, this is closely related to the characteristics of real estate itself. So, when purchasing real estate, what kind of properties have the most appreciation potential?

First, the geographical location of real estate, as immovable property, is the most crucial condition for appreciation potential. Generally, properties near subways, large commercial areas, and transportation hubs have greater appreciation potential.

Second, the surrounding area of the property should have basic supporting facilities and government comprehensive urban planning, such as convenient transportation and primary and secondary schools, which will promote the appreciation of the property.

Third, the overall level of the community where the property is located, property facilities, security guarantees, public environment, and the intrinsic value of the house itself are all criteria for evaluating property appreciation.

Finally, one should look at the rental rate and rental situation of the property. The sales data of real estate in a region may sometimes be distorted, but rental conditions reflect the direct usage situation of end users. Therefore, rental income and rental rates can more accurately inform you of the true value of the property in that area. At the same time, rental income and rental rates are also one of the indicators for measuring short-term returns on real estate.

1. Macroeconomic and political environment#

This is the most important factor affecting housing prices. Economic growth generally leads to rising housing prices; economic recession generally leads to falling housing prices. If economic growth tends to stabilize, housing prices will naturally not fluctuate significantly. If the economy is in disarray, expecting housing prices to continue rising is undoubtedly a pipe dream.

2. Monetary policy#

Generally speaking, interest rate hikes may suppress housing prices, while rate cuts may promote rising housing prices; currency appreciation may also drive up housing prices, while currency depreciation may lower housing prices.

3. Real estate policy#

Because real estate is a major issue concerning the lives of ordinary people, the state places great importance on regulating the real estate market through corresponding policies. If the intention is to support and promote the development of the real estate industry, positive policies will generally be introduced, which may lead to rising housing prices; if the real estate market is deemed overheated and needs to cool down, policies to curb the rapid development of the real estate industry will be introduced, such as increasing the difficulty of obtaining housing loans. The state has introduced policies to vigorously develop affordable housing and self-owned housing, which will naturally impact the commodity housing market. Of course, the effects of different policies will vary in the long and short term.

4. Real estate costs#

Real estate costs generally include land costs, actual construction costs, and demolition costs. In China, land is state-owned, so how much land the government releases and in what manner will affect land costs. Currently, urban land costs are rising sharply, and "land kings" are constantly emerging, which has become a driving force behind rising housing prices. Construction costs include building materials and labor costs, which generally do not fluctuate significantly. As for demolition costs, they should be continuously rising in the long term.

6. Real estate bubble#

The real estate bubble is essentially the artificial inflation of property prices. How high property prices can go is uncertain, and the stronger the price increase, the more intense this psychological feeling becomes. In reality, it is difficult for people to distinguish between normal price increases and real estate bubbles; more often than not, the two are intertwined. So, how can we distinguish whether housing prices are in a bubble? We can use the following methods to judge.

(1) The number of times a house is resold. Generally speaking, the more times a property is resold, the larger the bubble. Speculators generally adopt three forms: flipping pre-sale properties, renting, and reselling. Among these three forms of speculation, flipping pre-sale properties is particularly harmful and has been considered a significant cause of market crashes in many countries.

(2) The speed of price increases. In a relatively sound real estate market, the increase in housing prices should not exceed the increase in residents' income. If it does, it indicates a larger bubble, which will lead to more people being unable to afford housing, and eventually, housing prices will drop.

(3) The vacancy situation of houses. Vacancy refers to inventory; any product in the market has a reasonable inventory. Maintaining a moderate number of vacant houses plays a positive role in balancing market supply and demand and regulating housing prices. Internationally, the inventory of houses generally does not exceed 15%. If there is no vacancy rate, it indicates that the real estate market is overheated, and a real estate bubble exists.

The so-called "using a house to support another house" has two situations: one is renting out an old house and using the rental income to pay off the loan for a new house; the other is investment property, renting it out to repay the loan. Many people buy a new house for themselves and then buy another house with high rental prices and appreciation potential to rent out, using the stable rental income each month to repay the loans for both houses. The method of "using a house to support another house" is indeed more cost-effective for consumers, but it also places higher demands on the buyers themselves, as there are many nuances to master.

1. Long-term investment remains optimistic#

Some investors believe that housing prices may fluctuate in the short term, but in the long run, after the adjustment period, prices will still show rigidity. As long as they can afford it, real estate remains a good investment. Others express that the current evaluations of rental prices by intermediaries are calculated based on a certain ratio of repayment amounts; as long as the quality of the property is not too poor and the financial pressure is not too great, in the current situation with many renters, it is still possible to choose "using a house to support another house." Some people say that while they are still working, they should acquire several small houses, forcing themselves to repay loans each month, so that when they grow older, they will not fear unemployment or retirement.

2. Control the repayment ratio#

Since it is an investment, there will be risks, and "using a house to support another house" is no exception. Financial planners believe that under normal circumstances, rental income + other family income (such as wages, interest from savings, etc.) should exceed the repayment amount + normal family expenses. In the case of unchanged family income and normal expenses, the higher the rental income, the lower the repayment amount, making the family's finances safer.

For properties that "support themselves through rent," one should have a thorough understanding of the rental market conditions in the surrounding area, including whether there are stable tenants and the surrounding municipal planning.

Additionally, mortgage loans must have stable repayment sources; rental income cannot be the primary source of repayment. Investors should choose suitable repayment methods based on their income situation.

Some buyers regard housing prices as the only criterion for judgment, believing that only when housing prices rise is it considered appreciation. This is actually an irrational manifestation of buyers: on one hand, housing prices may appear to rise, but it does not necessarily mean there is a market; on the other hand, whether a house appreciates is not solely reflected in its price.

Some experienced developers and buyers suggest that improvements in transportation, environment, supporting facilities, good property management, and community culture that enhance the quality of living are also manifestations of property appreciation.

1. Living well

People live in society and inevitably rely on the social environment. Whether transportation is convenient and whether living facilities are complete will directly affect the quality of life. Imagine if homeowners have to take three or four buses every day to commute to work and spend half an hour just to buy some daily necessities; the quality of life would be hard to discuss. For residential projects, improvements in transportation, supporting facilities, and environment that provide residents with more convenient living conditions are also a reflection of the project's appreciation potential. Additionally, capable developers will not only ensure the quality of the property but also improve the software aspects, creating a good living environment for homeowners, allowing them to enjoy various pleasures in the community. Only when homeowners recognize the quality of living in the project will they be willing to live in this community, which will give them a good psychological tolerance for housing prices, allowing the property to retain or even increase its value.

2. High-quality software

Property projects are like a computer; good hardware facilities are certainly important, but without solid software, the entire system will collapse and become useless. Property management is like the operator, maintaining the operation of this system at all times, so an excellent property management team is also an important reflection of high-quality housing.

Transportation, supporting facilities, property management, and community culture are the intrinsic qualities of a house, and the external manifestation of this quality is the appreciation potential of the house. During the purchasing process, it is essential to conduct a comprehensive examination of both the hardware and software of the property. The transportation conditions, shopping environment, educational facilities, quality of property management, and community culture construction near the house should all be included as evaluation criteria.

Insurable risks in insurance only refer to "pure risks." Pure risk means that there is only a possibility of loss, with no possibility of profit. For example, risks such as property theft or illness are pure risks, which only incur losses and cannot yield profits. Therefore, insurance companies generally do not insure stocks. Specifically, insurable risks must meet the following conditions:

(1) High degree of loss. If the potential loss is not significant, negligible, or people can fully bear it, there is no need to take out insurance for such risks. For example, you would not buy insurance just because you are worried about losing an apple.

(2) Low probability of loss. If the probability of loss occurring is high, insuring such risks means expensive premiums, and the concept of transferring and diversifying risks becomes meaningless. For example, if the theft rate of new bicycles in a certain area reaches 40%, if you insure a new bicycle, you would need to pay a 40% pure premium, plus the insurance company’s operational costs (for example, 10%), making the total premium reach half the price of the bicycle! Clearly, insuring such risks is not cost-effective.

(3) Loss must have a definite probability distribution. When insurance companies determine the premiums, they need to clarify how likely it is for this risk to occur and how much loss it will cause, so they can calculate the premium to be paid. Therefore, insurance companies must grasp the probability distribution of risk losses and adjust these data in a timely manner based on changes in the external environment.

(4) There must be a large number of homogeneous insured objects. For any type of insurance, the number of insured objects must be sufficient; otherwise, it will not serve the purpose of diversifying and transferring risks. Additionally, according to the "law of large numbers," the more people insured and the more insured objects, the more stable the probability of risk occurrence and the degree of loss, which is clearly more favorable for insurance companies to calculate risks and ensure stable operations.

(5) Loss occurrence must be accidental. If it is intentional, the insurance company will not provide compensation.

(6) Loss must be determinable and measurable. Once a loss occurs, the insurance company needs to clarify the loss value and provide compensation; if it cannot be determined and measured, insurance cannot be conducted. Insurance is essentially a social arrangement for dispersing risks and concentrating responsibilities. For the entire social economy, insurance plays an important role in maintaining the continuity of economic development. In the event of a major disaster, enormous losses can severely impact the stable development of the social economy, even causing a break in the chain of economic development, while insurance can serve as a buffer and remedy, helping society through tough times. On September 11, 2001, the United States suffered a severe terrorist attack, the World Trade Center was struck down, and thousands of elites perished, resulting in enormous losses. However, due to a well-established insurance system, the global insurance industry paid out hundreds of billions of dollars, preventing the U.S. economy from experiencing severe turmoil.

Besides the wealthy needing to avoid losses from "halving their property in the blink of an eye," ordinary people need to transfer losses due to "accidents, health issues, and old age." This is the "three major risks" that must be insured in life.

1. Accidental risks#

Accidental events occur every day on the streets and alleys of cities. Risks are no longer rare events, and someone must bear the losses caused by accidents.

For young people just starting their careers or those with varying incomes, purchasing high-value life insurance is unrealistic. Their economic capacity makes it unnecessary and unwilling to put all their money into the insurance company's pocket. However, accidental insurance is a necessary policy for them. Because when facing sudden accidents in life, accidental insurance can comprehensively build a safety line to protect the insured's interests.

Accidental insurance premiums are low; for an insurance policy with a coverage of 100,000 yuan, the insured only needs to pay over 100 yuan, making it a "small investment for great protection."

There are many types of accidental insurance, and people can choose the type that suits them based on their characteristics and needs. General accidental insurance has a wide coverage area, usually lasts for one year, and does not limit the place of occurrence. A policy with moderate coverage (100,000 to 200,000 yuan) is suitable for everyone to purchase as accidental protection; travel accident insurance has a shorter term and strict limitations on the place of occurrence, covering only accidents during travel; transportation accident insurance is suitable for business people who travel frequently, and the insurance company compensates for accidents occurring on specific modes of transportation, such as airplanes, trains, cars, and ships; aviation accident insurance is suitable for people who fly infrequently; if they fly often, transportation accident insurance is more appropriate.

In an era of low interest rates and low investment returns, purchasing accidental insurance and other pure protection insurance is very necessary.

2. Health risks#

Insurance must follow certain principles.

Insurance must adhere to certain principles, specifically including the following aspects:

(1) Principle of utmost good faith

What constitutes utmost good faith? Utmost good faith requires that the parties must fully and accurately inform each other of all important facts related to the insurance, and no hypocrisy, deception, or concealment is allowed. If one party conceals important facts, the other party has reason to declare the contract void or not fulfill the obligations or responsibilities stipulated in the contract.

Choosing an insurance company

There are many insurance companies that can provide the same insurance products, so what kind of insurance company should policyholders choose? How to evaluate an insurance company? You can refer to the following standards:

1. Company strength comes first

Insurance companies that have been established for a relatively long time tend to be larger, financially stronger, and thus have higher credibility, with higher-quality and more capable employees, making them more worthy of choice for policyholders. In China, the insurance industry has developed relatively recently, so the main reference standards are the company's total assets, total premium income, business network, number of policies, number of employees, and past performance. Consumers should not only consider the cost of premiums when choosing an insurance company; purchasing insurance is not like buying other goods; in addition to looking at prices, business capability is also very important. Larger insurance companies generally have more mature claims processes and can provide timely services; even if the premiums are higher, the guarantee of timely claims service alone makes it worth choosing.

2. The size of the company

As a financial service product, many policyholders hesitate between choosing a large company or a small one when purchasing insurance. In this regard, it is essential to focus on the level and quality of service. Generally speaking, larger insurance companies tend to have higher claim standards and faster claim processing speeds, but the downside is that their premiums tend to be higher than those of smaller companies; comparatively, smaller insurance companies may have shortcomings in this regard but offer lower premiums, providing a certain price competition advantage.

3. The variety of products should be examined

Choosing the right product type means selecting the right protection for oneself. Every insurance company has numerous products, and it is not easy to sift through them based on one's ability. However, finding a good insurance company is different. A good insurance company can provide relatively comprehensive insurance products, allowing for a wide selection and saving a lot of trouble. A good insurance company generally meets several conditions: a complete range of products, high product flexibility, greater convenience for policyholders, and strong product competitiveness.

4. Verify your own needs

Ultimately, whether an insurance company is suitable must be based on oneself. What are your needs? Does the service provided by the company meet your requirements? Which company do you think provides better services? Carefully cross-check and compare with your own situation; this is the most important question when making decisions.

How to save on premiums

Purchasing insurance for reasonable financial arrangement and planning can effectively prevent and avoid financial difficulties caused by illness or disaster, while also allowing assets to achieve ideal preservation and appreciation. However, in the current economic situation where saving money is the hard truth, how can one make their insurance purchases economical and cost-effective?

1. Understand what you are buying

Many insurance companies require insurance advisors not to use the most straightforward terms to explain the true meaning of a certain insurance product to potential clients. For example, many insurance companies avoid directly saying "life insurance" when discussing it, instead using euphemisms like "guarantee collateral," "retirement plan," or "tax avoidance scheme." However, policyholders must understand what they are purchasing. Insurance advisors always emphasize the advantages of insurance in reducing risks and avoiding taxes, but they tend to downplay another aspect of insurance: high handling fees, long-term monthly payments, and the enormous losses incurred if one terminates early. Therefore, do not be lured by the packaging of insurance; it is essential to clarify whether a particular insurance plan truly suits you.

2. Consider additional coverage

3. Choose a reasonable payment method

Premium payment methods can be divided into periodic payments and lump-sum payments. As the name suggests, periodic payments are made in installments; lump-sum payments refer to paying the entire amount at once, after which there is no obligation to pay further while enjoying the coverage rights. Different insurance products have different payment methods; choosing the right payment method can not only save on premiums but also affect personal financial habits.

Different payment terms will result in different total premiums paid. Due to interest effects, the shorter the payment term, the lower the interest cost, resulting in a smaller total premium paid; conversely, the longer the payment term, the higher the total premium paid. Periodic payments can be monthly, quarterly, semi-annually, or annually, with annual payments further divided into 5-year, 10-year, 20-year, or 30-year payment methods.

Most premiums will be automatically deducted from the account monthly or annually, which is very convenient. However, when reviewing the monthly or annual statements, you should ask yourself whether this payment method is suitable and whether the money spent is worthwhile. Because sometimes, annual payments can be 15% to 20% cheaper than monthly payments. Therefore, do not unknowingly get "bitten" by a big mouth.

Facing such a myriad of choices, how to choose the most suitable one?#

(1) For protection purposes, choose a longer payment term. Generally speaking, if the policyholder's purpose for purchasing insurance is to prevent risks and provide protection, then a longer payment method should be chosen. For example, life insurance and critical illness insurance.

(2) For savings purposes, choose a shorter payment term. If the policyholder's main purpose for purchasing insurance is to ensure a comfortable retirement, and the insurance purchased is of a savings nature, such as whole life insurance or retirement insurance, then, if financially feasible, a shorter payment term can be considered. Because for the same coverage amount or the same savings target, the total payment amount is lower with a shorter payment term.

Additionally, some policyholders may face payment requirements lasting two to three decades, worrying that they may not be able to continue paying on time, affecting the effectiveness of the policy. In such cases, if income is relatively abundant or if the policyholder has a certain bank balance, they can choose to complete the payment obligations within a shorter time frame to avoid such concerns.

Individuals in their youth are at the initial stage of investment, and their primary needs should be for accidental, health, protection, retirement, children, and investment (this order is arranged based on the characteristics of the age group). Health needs should be prioritized, and before purchasing insurance, one must first determine the medical expenses risks that oneself or family members will face in the future.

Each person's risks are different, so the required insurance coverage also varies. Factors influencing risks include occupation, income, region, age, and family situation. For example, individuals with social medical insurance may need commercial insurance coverage when facing significant medical expenses. Those without social medical insurance will require comprehensive commercial medical insurance. Individuals with good economic conditions can bear sufficient costs when ill. In contrast, individuals with average economic conditions may fall into poverty due to a serious illness. Those bearing family responsibilities may need additional allowances during illness. Meanwhile, single individuals may not face this issue. Therefore, one should selectively purchase insurance based on their actual needs rather than trying to cover everything.

Additionally, besides determining one's insurance compensation needs, various insurance companies' products have unique features in terms of underwriting conditions, insurance periods, payment methods, exclusions, and claims processes. Consumers can choose insurance that aligns with their income characteristics, payment habits, and brand preferences. Individuals with unstable future income should choose insurance that can be paid off in a short time or has a policy loan function.

3. Points to note when signing#

Once the work preparations are ready, the next task is to understand what issues to pay attention to when filling out the insurance policy, so as not to let a small oversight affect the effectiveness of the insurance product. Industry insiders say that mastering five key steps can ensure a smooth signing of the insurance contract.

First, when the salesperson visits you, you have the right to request the salesperson to present valid work credentials from their insurance company. Second, you should ask the salesperson to explain the relevant content of the insurance type truthfully according to the insurance terms. When you decide to purchase insurance, to ensure your rights, you should read the insurance terms carefully again. Third, when filling out the policy, you must truthfully fill in the relevant content and sign it personally; the insured person's signature section should be signed by the insured person themselves (except for minor insurance).

1. Clarify the purpose of insurance and choose the appropriate type of insurance

Before preparing to purchase insurance, the policyholder should first clarify their purpose for purchasing insurance. With a clear purpose, they can choose the appropriate type of insurance. Do you need property insurance or personal insurance? Is it life insurance or accident insurance? If you want to ensure a secure retirement, you should choose personal retirement insurance; if you want your children to receive better education in the future, you should choose children's insurance, etc. Avoid situations where you buy insurance but do not receive the expected protection due to choosing the wrong type.

When choosing the appropriate type of insurance, policyholders should consider three factors:

(1) Adaptability. Insurance should be considered based on the coverage needed for oneself or family members. For example, individuals without medical coverage can buy a "critical illness insurance" policy, so that if they are hospitalized due to a serious illness, the costs incurred will be borne by the insurance company, making the adaptability very clear.

(2) Economic affordability. Buying insurance is a long-term investment, and a certain premium must be paid annually. The annual premium expenditure must depend on one's income capacity; generally, 10% to 20% of the family's annual income is relatively appropriate.

For most people, purchasing family property insurance is the most important matter. If property is damaged, compensation can be obtained from the insurance company. To protect one's interests, when purchasing family property insurance, one needs to be more vigilant and attentive.

(1) It should be clear which properties to insure. This requires considering both one's insurance needs and the role that property insurance can play, as well as the insurance company's requirements. For example, not all properties can be insured; insurance companies have clear regulations on which properties can be insured and which cannot. Properties such as houses, furniture, household appliances, and cultural entertainment products can be insured, while the actual value of items like cash, jewelry, paintings, and antiques is difficult to determine, and these household properties must be appraised by specialized appraisers and can only be insured after special agreements between the policyholder and the insurance company. Additionally, insurance companies typically do not provide property insurance for certain household properties, including: properties whose specific value cannot be determined after loss, such as tickets, cash, securities, stamps, etc.; daily consumables, such as food, medicine, cosmetics, etc.; and items that are legally prohibited from being privately owned, such as firearms and drugs.

(2) Pay attention to the insurance responsibilities of family property insurance.

General comprehensive family property insurance only covers losses caused by two situations: natural disasters and accidents. If the property is stolen, this is not covered by comprehensive property insurance, and the insurance company will not compensate you, so it is advisable to purchase additional theft insurance for the property.

In addition to the aforementioned insurance coverage and responsibilities, you also need to understand exclusions, compensation ratios, compensation principles, insurance periods, payment methods, and additional insurance types, clarifying the protection you can receive in the future.

(3) Determine the insurance amount to avoid over-insurance and duplicate insurance. According to the compensation principles of insurance companies, if the actual loss of the property exceeds the insurance amount, compensation can only be made up to the insurance amount; if the actual loss is less than the insurance amount, compensation will be based on the actual loss. Therefore, when determining the insurance amount, the insurance amount should not exceed the actual value of the property; otherwise, you will end up paying significantly more in premiums. Some people insure the same property with multiple insurance companies, which is also inadvisable, as when property losses occur, each insurance company will only share the actual loss of the property, and the policyholder will not gain any additional benefits.

(4) Carefully fill out the policy and complete the insurance