12
2024/07
The "Weak Investor" strategy in trading
Starting as a grassroots salesperson at Wahaha and achieving a staggering 37,000% return over nine years as a retail investor, Feng Liu caught the attention of public fund giant Qiu Guolu, becoming the general manager of an asset management company with nearly 40 billion RMB under management. This legendary story belongs to Feng Liu, a grassroots A-share investor who achieved financial freedom through stock trading and became a star private equity manager.
Beyond his remarkable performance, Feng Liu’s investment philosophy, honed through years of market experience, is worth learning for retail investors. Remarkably, his “Weak Investor System” is a pioneering theoretical system tailored to the investment mindset of retail investors. Let’s delve into Feng Liu’s Weak Investor System.
1. Why Use the Weak Investor System?
According to Feng Liu, the Weak Investor System assumes that you are at the lowest level in the market regarding information access, understanding depth, time and energy, emotional control, and social resources. You can only rely on time, odds, and common sense.
This philosophy doesn’t try to fill the gaps but instead emphasizes going with the flow and acknowledging oneself as a retail investor, a weak player. 99% of ordinary people need more systematic industry and financial knowledge, need more professional team support, and can’t conduct frequent field research or socialize with industry executives.
The Weak Investor System portrays ordinary investors, guiding them in investing. It offers a possibility for every retail investor but doesn’t encourage passivity. Instead, it requires finding the right entry points and turning passivity into proactivity.
2. How to Invest with the Weak Investor System
Weak investors are not entirely powerless. Their strength lies in being more rational and patient than the market, which are the most advantageous weapons for value investors. Strong investors conduct in-depth research to eliminate blind spots, while weak investors only see what is presented. Specifically, “weak investors” can invest in the following ways:
- Common Sense and Time:Weak investors should rely on common sense and objective facts to make market judgments because common sense is usually reliable. They must be more patient than the market and avoid making hasty trades. They should constantly question and challenge themselves, making fewer proactive logical judgments to avoid following trends due to insufficient knowledge and to prevent losses.
- Cautious Valuation:Valuation is inherently subjective. As a weak investor, one should avoid confidently asserting that a stock is undervalued or overvalued because the market is usually efficient. Weak investors should make as few proactive value judgments as possible.
- Contrarian Investing:Contrarian investing helps weak investors avoid their shortcomings and leverage their strengths. Since weak investors find it hard to surpass market cognition, they can use their time advantage to wait for performance improvements patiently.
- Diversified Investment:Assuming weak investors can’t fully understand a company, they should only invest some of their funds in one company. Weak investors should assume they will make mistakes and evaluate the probability and potential losses of these mistakes, taking protective measures like diversifying positions to reduce risk.
3. Differences Between Strong and Weak Investor Systems
Strong and weak investor mindsets are based on fundamental value investing, so there’s no absolute right or wrong. It depends on what suits the investor. However, there are key differences:
- Depth of Research:Strong investors focus on in-depth research to find market pricing errors, whereas weak investors can’t surpass market cognition and don’t emphasize deep fundamental research as much.
- Offensive vs. Defensive Thinking:Strong investors are proactive, making many judgments to base their decisions. Weak investors adopt a defensive stance, acknowledging their ignorance and avoiding proactive judgments, aiming to make fewer mistakes and minimize the impact of errors.
- Market Efficiency:Strong investors often challenge the market, believing in its frequent inefficiencies. Weak investors avoid such confrontations, assuming market superiority in cognition.
- Portfolio Diversification:Strong investors might diversify less, while weak investors must diversify due to their limited understanding of any single company. Although, theoretically, strong investors could achieve higher returns, weak investors often attain stable returns by making fewer mistakes.
4. Advantages of the Weak Investor System
- Closer to Objective Reality:Assuming weakness in information acquisition and understanding reflects a respect for market and unknown factors. This approach reduces the likelihood of errors.
- Expanded Circle of Competence:Strong investors must conduct deep research, limiting the number of companies they can evaluate. Weak investors, focusing on extensive logic, can consider more companies, allowing broader participation.
- Valuation Flexibility:Weak investors don’t try to counter market cognition or buy mediocre companies for perceived cheapness. Instead, they buy fundamentally strong companies, even if it means not emphasizing valuation.
- Lower Requirements for Investors:The weak investor mindset is more straightforward to implement as it involves following market trends and selecting well-regarded companies, requiring less continuous tracking of short-term data.
- Defensive but Effective Returns:Although the weak investor system is defensive, focusing on survival and avoiding significant losses, it often leads to higher returns by choosing flexible, high-valuation companies and making fewer errors.
By understanding and applying the principles of the Weak Investor System, retail investors can navigate the complexities of the market more effectively, leveraging their inherent advantages and mitigating risks.
