The Most Important Thing-Keep reading and thinking

1:Second level thinking. Think differently and react differently. Investment is an art instead of science. questions to ask in 2-level thinking:
what is the range of likely future outcomes?
which outcome do i think will occur?
what is the prob. i am right?
what does the consensus think?
how do my expectation differ from other consensus? ....

2: Efficient Market ?
inefficiency is a necessary condition for superior performance.

3: Value.
Random Walk Hypothesis, Chicago School 1960s. (Eugene Fama): past price movement has no help in predicting future movements.
Momentum Investing: Enable investors in a bull market that continues upward.
the emphasis on value investing is on tangible factors like hard assets and cash flow instead of intangible ones.
value investors buy stocks out of conviction that the current value is high relative to current price. Growth investors buy stocks because they believe the value will grow fast to produce enough appreciation. The first one is buy today while the latter one is buying tomorrow.
  
4:the relationship between price and value.
it is only attractive of it is priced right.

5：Understanding the risk
risk means more things can happen than will happen.
riskier investments are those for which the outcome is less certain. That is, the probability distribution of returns is wider.
Rather than the volatility of returns, risk is the likelihood of losing money, especially permanent loss.
Investment risk: falling short of one's goal; under-performance (benchmark risk); Career risk( agent cost); Unconventionality; illiquidity;
what gives rise of the risk of loss: 1: risk of loss does not necessarily come from weak fundamentals, weak asset can also generate high returns. 2:risk can be present even without weakness in macro environment.
How do people measure the risk: 1: risk is a matter of opinion; 2: the standard for quantification is nonexistent. 3:Risk is deceptive, Black swan.
Objective measure of risk-adjusted return Sharpe ratio.
Fooled by Randomness: alternative history.
"Lucky idiots", it is impossible to tell how much risks it entailed after the event.
probable things fail to happen-and improbable things happen-all the time. and we need a distribution describing all the possibilities.
return alone says little about the quality of the investment decisions. return has to be evaluated relative to risks but risks cannot be measured. Risks can only be judged by sophisticated experienced and second-level thinkers.

6:Recognizing risk
high risk comes primarily with high prices.
risk tolerance is antithetical to successful investment. When people are not afraid of taking risks, they will not receive compensation for doing so.
real estate: cap rate=Net operating income/price.
the risk-is-gone myth is one of the most dangerous sources of risk.
worry and its relatives, distrust, skepticism and risk aversion, are essential ingredients in a safe financial system.
credit spread
risk arises as investor behavior alters the market. --"perversity risk"
when everyone believes sth is too risky, their unwillingness to buy usually reduces its price to the point where it is not risky at all.
when everyone believes sth embodies no risk, they usually bid it up to risky point.
this paradox exists because most investors think quality, as opposed to price, is the determinant of whether sth is risky or not. But high quality things can be risky and low quality things can be safe.

7:Controlling risk
great investors are those who takes risks that are less than commensurate with what they earn.
risk is not observable and what is observable is loss. Loss generally happens only when negative risk happen.
risk control is invisible in good times but still essential.
risk control is the best route to loss avoidance while risk avoidance is likely to lead to return avoidance.

8:Being attentive to cycles
Rule one: Most things will prove to be cyclical
Rule two: some of the greatest opportunities for gain and loss come when other people forget rule one.
The basic reason for the cyclicality is the involvement of human. People are emotional and inconsistent, not steady and clinical.
everything that was good for the market yesterday is no good for it today.
CREDIT CYCLE:
1：the economy moves into prosperity.2:providers of capital thrive, increasing capital base,3:bad news is scarce, risks entailed in lending and investing seem to have shrunk,4:risk averseness disappear. 5:financial institutions expend their business,6:they compete for market share by lowering demanded returns, lowering credit standards, providing more capital and easing covenants.
"the worst loans are made at the best of times".
when the capital destruction occurs, the other half of the cycle begins:
6:losses causes lenders to become discouraged and shy away. 7:risk averseness rises and credit restriction, interest rate increases,8:less capital is available, 9:companies become starved for capital, borrowers unable to roll over debts, leading to defaults and bankruptcy.
wax and wane.

9:Awareness of Pendulum (钟摆；摇锤；摇摆不定的事态)
the pendulum-like oscillation of investor attitudes and behavior: between euphoria and depression, between celebrating positive developments and obsessing over negatives, between underprice and overprice.
improper risk aversion is the key contributor to the market excess of bubbles and crash. Greed/fear cycle.
学术上assume investor's attitude towards risk is constant, actually it fluctuates.
risk: risk of losing money and risk of missing opportunity.

10:Combating Negative Influences
Inefficiency-mispricing, misperception, mistakes from other people-provide potential opportunity for consistent outperformance.
Greed;
Fear;
Willing suspension of disbelief;
Tendency to conform the view of the herd;
Ego;
Capitulation.

11:Contrarianism(逆向思维）
Do the opposite of what others do.
Buy when they hate them and sell when they love them.
Swensen："investment success require sticking with positions made uncomfortable by their variance with popular opinion. Casual commitments invite casual reversal, exposing portfolio managers to the damaging whipsaw of buying high and selling low. Only with the confidence created by a strong decision-making process can investors sell speculative excess and buy despair-driven value."