Discussing common misconceptions and the right attitude towards stock selection in the crypto world

Today I want to discuss some misconceptions about selecting coins, stocks, and the basic attitudes one should have from a conceptual perspective. First, I want to clarify the order. In value investing, the most important factor, which determines whether value investing can succeed, is perhaps 60% of your human nature. What kind of person you are, whether you are patient, whether you are rational—these are very important. Your human nature determines whether value investing can succeed. This is the first and most important point.

Second, when it comes to choosing coins and stocks, it’s about finding good companies. Some people understand this industry and companies better, know more, and can identify good companies. Most people, however, rely on some financial knowledge, from an outsider’s perspective, through financial analysis to select coins and stocks. Actually, financial analysis is a limited method because it only allows you to select coins and stocks based on a few financial statements. But most people don’t even understand or can’t read financial statements, so trying to pick coins and stocks based on them is like a fairy tale. Financial statements are just one aspect or tool for selecting coins and stocks.

In my previous videos, I mainly discussed some basic concepts of value investing and their logical relationships, such as margin of safety, investing as doing business, buying coins and stocks as buying companies, whether to invest contrarily, risk being the top priority, why risk should be the first consideration, and so on. I clarified many logical points earlier and then introduced a lot of financial knowledge to help understand these concepts. These parts take up a large portion of my videos, not because they are the most important, but because many people may not understand them. I am not teaching everyone financial knowledge; rather, I am explaining how to understand it based on your basic ability to read financial statements. Now, I will start talking about what might be more important in investing—selecting coins and stocks and human nature. Of course, my program also discusses evolutionary psychology and other fundamental aspects of human nature.

Today, let’s return to the original topic—selecting coins and stocks. We know that 90% of companies are garbage companies and are not suitable for investment. Because these garbage companies, or the industries they are in, are not good or profitable, and also because management may be dishonest. If you have some financial knowledge, even basic, you can easily exclude these 90% of garbage companies. For example, look at whether the company’s long-term gross profit margin is good, whether its operating income can grow steadily, or examine its long-term return on equity and the composition of ROE. Basically, you can judge whether the company is good or not.

Also, check whether the management is honest. If the securities regulatory commission frequently issues inquiries or if there are multiple violations, you can immediately exclude such companies without even looking at financial statements. Just by reading the news, you can eliminate these companies. Technically, it’s very simple.

Using these financial indicators to exclude some companies—are there any fish that slip through? Are there really good companies that, due to occasional poor performance, end up being discarded? Possibly, but does it matter? Not at all. Why? Because you don’t need to catch every fish. Investing in a few good companies in your lifetime is enough. Like Munger, who only invested in three companies in his life and became one of the wealthiest people in the world. Buffett is similar—more concentrated. The vast majority of super-rich people in the world built their wealth from one or two companies. So, you don’t need that many.

This is different from the college entrance exam—where you must answer many questions correctly, and the more, the better. Investing is completely different; we need to be practical, avoid dogmatism, and not rely on habitual thinking. That’s why I say that the thinking of the college entrance exam can be harmful—not because the exam itself is harmful, but because people have this habitual way of thinking. So, the main thing is to accept that some fish will be missed. If the financial statements are poor, it’s okay to skip it—treat it as nonexistent.

However, most retail investors in the world do not look at financial statements or rational data. These data are not omnipotent, but they are necessary and a prerequisite. Most people chase hot topics, follow trends, and are full of illusions about the future, leading to the misconception that beauty is in the eye of the beholder—completely wishful thinking—without paying attention to current financial statements.

Companies with poor financial statements historically, or those with frequent violations, are less likely to become good companies in the future. Investment must involve probabilistic thinking. Being a good student in the past doesn’t guarantee being a good student in the future, but if you weren’t a good student before, the probability of suddenly becoming one is very low. So, we need to think probabilistically in investing.

But human nature is arrogant, ignores facts, and disregards poor financial indicators in the statements. They think they know more than others, read some articles, understand concepts, industry development, and are full of illusions about the future. They are interested in new energy, and other so-called new technologies and projects, even though the financial statements of these companies are a mess.

Many retail investors are arrogant, which is essentially driven by greed. Greed makes them want to get rich overnight, buy cheap coins and stocks, and be fooled by the hype of management or companies, full of illusions about the future. The classic example is “beauty is in the eye of the beholder”—wishful thinking, ignoring facts, and lacking rationality. This is also a human trait in investing—it just manifests in different contexts, such as in romantic relationships or in the coin and stock markets.

Therefore, we don’t need to catch every fish. If the indicators are poor, just filter it out—this is different from the college entrance exam. We only need to focus on a few great companies. This is the first misconception we should face—simply put, it’s about facing human nature, avoiding arrogance and greed, doing what we should do, and filtering out based on financial statements. That’s the first.

The second misconception is that good companies don’t require much effort to identify; they are very easy to spot. As long as you have some basic financial knowledge, you can see it. Look at return on equity, gross profit margin, whether revenue is increasing, etc.—it’s very easy. This is not my saying; it’s Warren Buffett and Charlie Munger’s. They can make decisions within minutes. They don’t mean they are more experienced or smarter.

If you look at the annual reports of excellent companies like Moutai, Gree Electric, or Yunnan Baiyao, you will know. They are very outstanding, with no secrets—everything is visible on the financial statements, very easy to see. This is a misconception—finding great companies doesn’t require a lot of effort. Just like the previous misconception, 90% of companies are garbage and easy to identify; good companies are also easy to identify—clear at a glance.

Of course, there are companies with good-looking financial reports that are actually faking their numbers. What should you do in such cases? When you see good financial reports, don’t buy immediately. First, confirm whether the management is honest—look at annual reports, news, and whether they have violations. Violations are a one-vote veto. If they are dishonest, no matter how good the financials look, it’s meaningless. Just like a person who likes to lie—no matter how good their words sound, it’s meaningless to you. The same applies here, so always veto.

You can also do some market research—see if the products of companies with good financial reports are popular and whether people are willing to buy. From a business perspective, you can see some clues, especially if the products are consumer goods—you can access the best information. If you have some basic business knowledge, even if they are faking, there will be a big discrepancy between their operations and financials, which many can see.

For example, in the past, domestic blue-chip companies in the coin market had very high gross profit margins, but they sold common products—nothing special compared to peers. Market investigations showed they had no unique products, yet they appeared to sell very well every year. In such cases, spending a little time can help you identify them. So, good financial reports don’t necessarily mean a good company, but a good company’s financials should be good. A little investigation and some time are enough to tell.

Good companies are easy to spot, but the problem now is that good companies are often expensive. When you buy, you can’t buy a good company just because it’s expensive. You need a good price. You should have a basic valuation of the company—first, put it into the coin and stock pool for observation and wait, give it a valuation. The rest of the time is waiting—waiting for the market to truly turn, or for the company to have a temporary bad news, causing the coin and stock price to fall. When there is a margin of safety, and the price versus valuation has a significant margin of safety, then it’s time to buy.

This tests one’s patience—and that’s human nature. In fact, in the coin and stock market, I say “the most important thing in investing is human nature”—you need patience, avoid following the crowd, avoid arrogance, avoid greed. These are human traits—you must suppress them, at least avoid them, and not act impulsively in the short term.

Buffett left Wall Street and returned to his hometown, away from the coin and stock market, focusing on studying companies patiently. When he finds a good company, he waits patiently. Some companies he can wait decades for. Do you have that patience? So, the coin and stock market is essentially a game of human nature—and also a game of cognition. Ultimately, it’s a game played in this realm.

I will briefly talk about this—I’m not trying to teach you how to pick coins and stocks, because there are many technical aspects involved. I just want to share some basic misconceptions about selecting coins and stocks. First, 90% of companies are garbage; if the financials are poor, basically don’t consider them. Don’t let illusions, arrogance, and greed replace your rationality. Don’t ignore facts—facts are the financial statements. That’s the first misconception.

The second misconception is that good companies are very easy to find; it’s not that difficult. So don’t be afraid, you don’t need deep financial knowledge—just basic, elementary financial knowledge, and verify from operational and management honesty perspectives. Does it reflect the qualitative and quantitative aspects of the company’s management policies? The second step is patience—good companies require patience to wait. Filter out bad companies immediately, don’t indulge in illusions. If you can avoid these two misconceptions and maintain these basic attitudes, you won’t encounter major problems in selecting coins and stocks.