by Li Xiaolai
English Translation: John Gordon
##Preface
This pamphlet was finally titled The Self-Cultivation of Leeks, and there was really nothing I could do about it. “Leeks” was never a word that I used to use, but it’s in the title of the book. Why?
A private conversation that I had was recorded, which was later leaked. In the recording, the person who I was talking with mentioned “leeks” several times, but I never even used the word at all, let alone mention “cutting leeks”.
But quite a few of the articles that spread like crazy online used sensational headlines, and it turned into Li Xiaolai who was “cutting leeks”. This was probably because the people who wrote those articles didn’t even listen to the full recording at all. Maybe they used the so-called transcript that was spread online and completely misinterpreted what I said, or maybe they put on me what the other person said. In these written descriptions, Li Xiaolai became a “public enemy”, and “Li Xiaolai’s behavior”, according to some of the articles, became “confirmation of long-term suspicions held by outsiders about the dark side of blockchain”. But, this wasn’t the truth. What was the truth?
The truth is, Li Xiaolai never used the word “leeks”. Over the past ten-plus years, those who have read my writings, listened to my lectures, or read my books all know that I have a habit:
I’m always constantly refining my concepts.
Li Xiaolai never uses concepts that he believes “have no reason to exist”. Before this, “leeks” was one of these concepts. What is a leek? So if you make money you’re a “market manipulator”, and you lose money you’re a “leek”? If this is our understanding, then our concepts are too confusing. Does this mean that a novice is always a “leek”? Novices have a small probability of making money, and since we’re referring to the same group, what is the reason for using two concepts other than it being fun? Then what is really the definition of “leek”?
Before being clear about what a concept really means, I will not put it in my mind, much less use it. So, in that leaked recording of more than fifty minutes, I didn’t even use the word “leek” once, much less the phrase “cutting leeks”.
After thinking it through, the Internet has nothing against Li Xiaolai as a person. It doesn’t intentionally “record everything without regard to truth or falsity or good or evil and in a way that is difficult to truly alter”, that’s just what it is. It’s even-handed, just like the concept of “blockchain” that we are so enchanted with, or the concept of “time” that I have been enchanted with all of my life.
So what can I do? After thinking it through, I can write a pamphlet like this, writing down what I know, and what I know to be true. Also, I can purposely use this malicious title, and let more valuable thinking and truth spread more widely.
For readers that like this content, I have one request:
If you feel like Li Xiaolai’s thinking in this book is helpful to you, then please post and share it everywhere.
Please note: don’t just read it and share it yourself; also repost and reprint it “everywhere”. Also, use the title, The Self-Cultivation of Leeks! Thank you!
I thought of these originally more appropriate names:
- A Guide for Leeks to Avoid Getting Cut
- The Leek and the Sickle
- How Baby Leeks Can Grow
- Guide to Essential Knowledge for New Leeks
- Leeks Can Also Be Like Buddha (Stoic*)
- …
But, in the end, I thought that a self-mocking title with “leeks” in it would bring more traffic…
Also, in the content that follows, I won’t avoid using the word dumbass. Please forgive me!
Warning
If you don’t have “the ability to read a full document without skipping a word”, I recommend you stop reading… Because while the content that follows looks simple and clear, for those who have acquired the reading disabilities of “habitually ignoring large swaths of text” and “habitually combining partial bits of content”, it will be too easy to produce strange alternate meanings.
Are you really a leek? It’s really hard to say. Because very few people can clearly describe what the precise definition of “leek” actually is. However, from the way that people often use it in sentences, we can tell that “leek” usually refers to individual investors with limited power and resources in the markets. For instance, “I am a new leek”, or “they are all old leeks”. On the other side of leeks are the “big players”, which refers to large investors with extensive resources in markets.
In markets, people make money, and people lose money… But, usually, people have the impression that “leeks” lose money most of the time, while it seems like “big players” always make money, because they “must” have lots of methods of “cutting leeks” that other people don’t know about…
Some words are often used together in set combinations. The existence of certain combinations show that people are generally able to understand those combinations, and that they exist in the real world. For instance, before “good person”, you might use “strong” or “fragile”. But some other combinations almost never exist, because in people’s understanding they don’t exist in the real world. For instance, it would be difficult for the adjective before “scoundrel” to be “kind-hearted”.
The words that are combined with “leeks” are “cut” or “be cut”. The action of “cutting” in theory should be carried out by the adversary (the so-called “big player”), so “leeks” are often “being cut” … You almost never hear people use this kind of sentence: “I’m a leek and I cut the ‘big players’!” If someone actually says this, you can be almost sure that they are exaggerating.
As time passes, some people merely change from “new leeks” to “old leeks”. That is to say, they still don’t make money, and they still are “cut”… But there are others who, despite having once been “new leeks”, are later no longer “leeks”. Sometimes they say, “I’m also an old leek”, but they are just joking or being modest… Why? Because in the common way of thinking, even if someone is not a “big player”, as long as they made money they are no longer a “true leek”.
So, from the normal contexts that people use, we can come up with a basically precise definition:
A so-called “leek” is an individual investor with limited resources who either fails to make money or loses money in the market.
Looking at it this way, the task of a “leek” who wants to become a “non-leek” (not necessarily a “whale” or a “big player”) is quite simple:
Making money…
As long as you make money, you can seemingly humbly say:
… Actually, I’m just an old leek!
When you talk like this, you are very kind, very considerate, and you understand how to take care of the feelings of others. Those who haven’t made money, when they see someone like you who has made money, will feel even more devastated if you don’t use this “fake” language to comfort their weak hearts. From another perspective, you are not only kind and considerate, you are also very good at protecting yourself. Because if you don’t have this “falseness”, there will really be a lot of people who hate you, or even want to get rid of you — just like what Li Xiaolai has faced for a long time.
Even though this definition of “leek” doesn’t really satisfy people with its accuracy, let’s make do with it for a while.
Also, let’s add a common feature of so-called “leeks”:
They severely lack basic reading ability. They are the kind of people who buy things but have never read a manual in their lives. The are the kind of people who, no matter what they get, always ask somebody else how to use it… It’s so common, right?
“Leeks” are “leeks” mostly due to the one common reason:
As soon as they enter the market they “buy, buy, buy”!
In early March of 2011, when I saw the word Bitcoin on Twitter for the first time, I was shocked by it nearly every day… When I saw the first news headline, it said that in February its price had just exceed 1 USD! Then, after just a few days, the price was already 1.50… By the time I had my account set up and started to take action in April, it was already over 4 dollars… Then I started to buy, buy, buy, and by the time I completed the purchase of my first 2,100 coins, the average price had reached 6 USD… and it was still rising! Then, by the beginning of June, it reached a peak of 32 USD! I’d only had it in my hands for that long! Just a little more than a month, and I had more than 5x returns!
So, just like this, I became one of the “leeks” that people so often talk about. Why? It took more than 20 months for those “leeks” who “bought the peak”, including myself, to finally "cut our losses”. In the meantime, there was a vicious downturn, and at the lowest point the price of Bitcoin even dropped below 1 USD, which for those “leeks” who bought bitcoin at the peak was a drop of 97%!
Yes! I was an individual investor. I bought, bought, bought as soon as I entered the market, and then my assets were continually dropping, so I was a “leek”.
The market has some exasperating laws, such as:
As soon as you need to use cash, the market will fall!
It seems like there is no logic to support this, so you don’t have to believe it, but you will definitely experience the magic of this law.
For all novices, this law never changes:
- As soon as you buy, the price will fall;
- As soon as you sell, the price will rise… It’s simply infuriating!
So why does this “bizarre” situation occur? Because the fundamental reason for the end to a certain set of market conditions is “new capital drying up”. In other words, when middle-aged women who sell tea eggs on the street start talking about stocks, the stock market’s “new capital” is on the verge of drying up… Think about it! “When even you, who is not related in any way, know about it and want to rush in and make money”, then the market conditions have probably reached their end, right?
So, in May of 2013, when Li Xiaolai, who was an outsider not related in any way, learned about Bitcoin from the news and started to continuously buy, that set of bitcoin market conditions had reached its end. Reached! Its! End! So, just one month later, it entered a long bear market.
So, for novices, there are two sentences that are very important. The first sentence is a statement that is always correct. The second sentence is a suggestion that all veterans wish someone had given them way back then (if only someone had taught it to me back then!):
- If even you start to enter the market, the bull market is about to end…
- You should first observe, and buy nothing… Once the bear market arrives, wait until everyone starts calling each other names, and then start to buy, buy, buy!
Actually, making mistakes as soon as you start is not a rare occurrence. To the contrary, it’s very common! Think about it, even our lives aren’t very serious… Cui Jian made fun of this in a song:
(Suddenly an opportunity arose, empty without a purpose) — Just like when the girl gave birth to us, we didn’t say we agreed…
Our lives are full of absurdity, so clearly recognizing that we live in an absurd world is extremely practical and helpful for our healthy development.
I guess that you’re like me, and you didn’t have someone to share those two important sentences with you when you entered the market. So, your lot was just like mine, and after a short period of excitement you found yourself in an awkward situation that it seemed would forever be difficult to reverse.
Trading is one of the most natural and common behaviors in human society. Unfortunately — and I don’t know why — almost all countries in the world take it as a given that it isn’t a required course in general and higher education. So generation after generation are fated to mend the pen after having lost sheep.
Sadly, lots of “leeks” only have one sheep, and they never had a pen, so after their sheep was lost it was lost, and they never had a chance to fix the pen…
So you were like me, and as soon as you entered the market you made a big mistake. You didn’t know that the bull market was about to end, and you excitedly “bought, bought, bought” without any regard for the fact that the price was pumped with the fattening hormones of the bull market. You saw the profits in front of you and it even seemed like your IQ was soaring… And then, after that, you were stuck… What should you do?
You look all around, and you understand. There is a mistake even more horrible than “buy, buy, buy, as soon as you enter the market”. What is it? It’s this:
Spend all of your money as soon as you enter the market!
Of course, there is something more horrible, which is to “spend all of the money you borrowed as soon as you enter the market!” The poorer someone is, the stronger their desire to make money, so they often don’t hesitate to make reckless moves. In this way many novices dig holes for themselves and put on the noose. They not only spend all of the little money they have in the market, they also “leverage”, and borrow money to “invest”… And the result? It’s crushing.
If your luck is good enough, then you’ll be like me and have a chance to redeem yourself:
Even though you’re stuck, you still have money that you can slowly spend, so later, in a long bear market, you still have a chance to reduce your costs and build up a position…
So, “mending the pen after after the sheep is lost” has some prerequisites:
- You didn’t only have the sheep that you lost;
- It’s best if you have a lot more sheep aside from that one;
- Because you have a lot of sheep, you’ve made a “sheep pen” in the past;
- So, even though the “sheep is lost”, you still have a chance to “mend the pen”;
- So, once the “pen” is mended, you can manage more sheep;
- So, if in the beginning you lose one or two sheep, in the end it seems you don’t really care…
So, what’s the most important thing for “leeks” who have “mended the pen after losing the sheep” to do? It’s quite simple:
- If they still have money, slowly build their position…
- If they don’t have enough money, work as hard as they can to earn money outside of the market…
The way I see it, it’s hard to find a place in the world that requires the ability to learn more than trading markets. The success of almost any trade can be finally traced back to the ability to learn. Almost all badass traders are great learners and researchers.
People often use long-term and short-term to distinguish between “speculation” and “investment”, but this is very superficial. Speculation can also be long-term, just like investment can also be short-term. People see speculation as having a negative connotation, while investment as having a positive one, but this is also a common mistake and a superficial point of view. Which would you say would be better, a “failed investment” or a “successful speculation”? So, I won’t use concepts that are defined by “long-term” or “short-term”, whether for “speculation” or “investment”.
I personally distinguish between speculation and investment in this way:
Speculators refuse to learn, and investors are good at learning.
Before trading, research diligently and study deeply. After trading, whether you won or lost, you must review and summarize, correcting your ideas and thinking in order to improve your next decision. People who do this are investors in my eyes, even if they “enter and exit quickly”.
What about “leeks”? The don’t study, they don’t research, they only see what is under their nose, they blame everything but themselves… Whether or not people like this have money, whether or not they have a high IQ, they are all “failed speculators” in my eyes, and they are true dumbasses.
Since I started in 2011, seven years have passed in a flash, and I’ve seen countless people go crazy, whether it be for bitcoin or blockchain. But how many people have actually read the bitcoin whitepaper? And how many people have not only read it, but read it multiple times, and periodically bring it out to read it again? Most people who have not made money in bitcoin really can’t blame bitcoin, they can only blame themselves. Why? Because they don’t even know what the thing that they are trading really is…
If you discover that you need to consult others, or “seek out gossip” before you’re able to decide on the direction of a trade, then that means you are one of those so-called “leeks” — because you don’t understand the trade you’re making at all. If in spite of this you don’t go and learn and research on your own, and don’t want to draw a conclusion of your own, then you are in fact an “uncultivated leek”.
In the phrase “mend the pen after the sheep is lost”, “pen” in the end actually refers to your “opinion bank”, “knowledge bank”, and “decision-making apparatus”.
“Entering at the tail end of the bull market” is the fate of most people, so there’s nothing to complain about, and because it’s “established fact”, there’s no way to change it. However, entering the market in ignorance, and then leaving the market in ignorance, is the most tragic ending. Having entering the market in ignorance, but — precisely because of experiencing the sad results of ignorance — working like hell to become someone with knowledge — this is the wise choice. It’s not only wise, it is the choice of a strong person.
Be a strong person. This is the belief of all excellent traders. It is also an idea that “novices” and “new leeks” must establish. Only if they do this can they avoid “still being a leek” in the future.
What can you do in a bear market besides making money out of the market and building up positions? Study! At least start practicing your ability to learn.
Not sure what to learn? Keep reading, and read diligently, without skipping a word. Read repeatedly, and at least you’ll learn some ways of thinking and conclusions that you were unable to use before. In that way, you’ll change your way of thinking… Thinking brings decisions, decisions bring action, and action changes fates. This is the truth.
Everyone has to clearly explain their own bitter experiences to themselves — not an explanation for others, but an explanation for themselves. This is why people often “demand an explanation”. If they can’t explain their bitter experiences to themselves, it’s very, very uncomfortable.
In a hospital, everyone who contracts a terminal illness must go through a painful period of “self-explanation”. “Why am I the one who got sick?!” This is an incredibly painful and uncomfortable self-interrogation. Maybe it’s clearly just a matter of chance, but “Why me?” reflects the unwillingness to accept of every unfortunate one.
In middle school, you may have observed this phenomenon. There are some ugly girls in class, and their explanation for “having never received any love letter” is this: “I’m not that type of person! Not like those vixens…” Observers see things for what they are, but these people still are confident in their own explanation. However, while it does make them feel good, are there really no side effects to this kind of explanation? In fact, there are many, many side effects. For instance, aside from making them inauthentic, in order to make this twisted explanation stand up, they will not hesitate to use any means to torment and frame those whom they call “vixens”. Even though those “vixens” made no mistake other than being pretty… Of course, even worse — and maybe they never know it — is that it is exactly their actual twistedness that will ensure that the partner they find in the future is also twisted.
What is the greatest common understanding of “leeks”?
According to my observations, all leeks endorse an idea that is actually mistaken:
So-called trading is a “zero-sum game”.
That is to say, they believe that the money they earned is money lost by others. Or, in other words, any amount of money that they lose has definitely been earned by someone else.
This is very contradictory. When these “leeks” are angrily denouncing “the cutters of leeks”, what is the basic thing that they are angry about? It seems as if what they really hate isn’t the “cutting of leeks” that they speak of; what they really hate, logically, can only be “why am I not the one cutting leeks?!” If they had a chance to “cut leeks”, they wouldn’t think twice, because they have decided that it is a “zero-sum game”. So everyone is a leek, and everyone has the same fate: either be a leek and get cut, or cut the leeks of others…
Where is their mistake?
They completely ignored the greatest force of the market: market cycles, or — to use more common language — alternating bull and bear markets.
In a bull market, most people make money, and the amount lost by a few pales in comparison to the amount made by so many. So which leek was cut? In a bear market, most people lose money, and the amount lost in aggregate by those people is countless times more than the amount made by the few. Who is cutting leeks?
So, this is not at all a “zero-sum game”!
In fact, in the tail end of a bull market, people buy at a price that is fattened by hormones, no matter who they are. In the tail end of a bear market, people buy at a starved price, no matter who they are...
In an open market, no one can point a gun at you and force you to trade, everyone trades by their own will… Then why are people overjoyed when they willingly buy, but later on start to utter cries of anguish? We need an explanation. Yes, we all need to give ourselves a clear explanation, to explain the awkward situations we find ourselves in.
Do you want a correct explanation? Or do you want an explanation that makes you feel good?
A correct explanation will trigger your subsequent correct choices and actions. An explanation that makes you feel good but is definitely wrong, aside from making you briefly feel good, can do nothing but bring about all sorts of “surprising” side effects, because it is bluntly wrong… Which type of explanation do you really want?
The correct explanation is quite simple:
We bought at the wrong time.
In a bull market, everybody is successful, and even the worst target might continue to rise steeply. In a bear market, everyone is oppressed, and sometimes good assets fall even more steeply…
“The wrong timimg” is the most basic, most reasonable, and most instructive correct explanation, and it may even be the only reasonable explanation.
Also, when you’re a little bit more mature, you will understand: in the future, you must not participate in any zero-sum games — they are a bigger waste of time than gambling! (You should know that, in reality, fair gambling actually doesn’t exist. In order to preserve fairness, or, using fairness as a means, all casinos have a house spread…)
Because “leeks” believe that they are playing a “zero-sum game”, as soon as they enter the market they almost turn into a different species. Observe carefully, as this description has no trace of a joke:
Shorts (sellers) and longs (buyers) brush past each other, each silently calling the other a dumbass.
Why are they destined to call each other “dumbasses”? It’s a zero-sum game, so:
- One of the two has to be a dumbass;
- I’m this smart, so the dumbass can only be you!
All manners and cultivation at their core are the result of deep thought, and have nothing to do with the use or non-use of dirty language — just as we discovered before that using the presence of or lack of study as a more precise way to distinguish between speculators and investors.
If someone thinks incorrectly, or if the direction of their thought is incorrect, then in an instant they will truly become a vulgar person. People who participate in truly zero-sum games depend on “I am stronger than my opponent”. If they win they can do whatever they want, but “if they lose they’ve got to admit defeat”. However, those who treat non-zero-sum games as zero-sum games have no idea that they’ve made a mistake from the start, so their end can almost only be like this:
- Originally they had a 50% chance of winning;
- But they misunderstood, so their chance of losing goes way up;
- Their explanation for winning or losing is completely wrong;
- Their explanation was wrong, so their next judgement will be wrong;
- Then their chances of winning or losing the next time are also warped;
- The so-called fate of leeks is cast in this way;
- Therefore, in the end leeks all become full of complaints — complaints that they have produced for themselves…
What is the truth?
Transactions are always completed by two parties. Even if a buyer wants to buy, they can’t buy if there is no seller, no matter what the price is. Conversely, sellers are the same, they can’t sell if there are no buyers, no matter what the price is.
At any given time, if traders have completely identical thinking, judgement, needs, and conclusions, it is impossible for there to be a trade. At their core, all trades are the result of differences in thinking. That is to say, traders must find someone who has different or even opposite conclusions in order to complete a trade, or else all they can do is “hang out their order”, and wait for someone with different conclusions to come along.
So once a trade is completed, it makes sense that both parties should be grateful to each other. Why are they trading insults? Even if they’re not grateful, they should at least say thank you, right? So people who think deeply have a natural and sincere politeness:
Shorts (sellers) and longs (buyers) brush past each other and wish each other all the best.
We all live in such a beautiful world, but just because of one small misstep leeks live in a dark corner that they have created for themselves. It’s quite a spectacle!
A psychologist came to this conclusion in a paper: there are no bad people in this world, only good people, stupid people and sick people. In my view, a lot of sickness comes from stupidity. Back when I read this paper, all of a sudden I felt that the world had “become” brighter!
Be very careful about assuming that those who are talking about “value investing” are those who act and make judgements in accordance with “value investing”. If you’re often confused by superficial representations, then your trading results can only be very poor.
Successful traders are always very few. The common feature that the few have in common is that they are not moved by superficial representations, but like to investigate the underlying essence of those representations.
The reason why most people are talking about “value investing” is because they are already “stuck” in their positions — this is the essence of the situation. This is also the core reason why so many people like to talk about value investing — because, as we already know, most people are enticed to enter the market at the end of the bull market and the beginning of the bear market; they “buy, buy, buy” as soon as they enter, and the big bear that follows squashes many people to death with each step.
This is a very interesting phenomenon:
No one on this earth doesn’t learn.
Everybody is learning! Even an idiot is always learning… It’s just that not all learning is the same. Because the direction and methods of their learning have natural defects, what they “learn” is useless, or even harmful.
“Thoroughly research where the value is and then decide whether to buy or sell” and “throw all caution to the wind and trade right away and then research after you’ve discovered you’re wrong” obviously have a world of difference between them, and the results they bring about are also poles apart.
This is really an interesting phenomenon, because cleverness and stupidity are, unexpectedly, not determined by inherent factors, but instead determined merely by “sequence”… Just like in chess, what is done first and what is done later is the final determinant of winning and losing — both sides have the same number of pieces, and the board is symmetrical, but in the end there is winning and losing. What is it decided by? Unexpectedly, it is merely sequence. Of course, “sequence” has a lot of other names, such as “tactics”.
If your so-called “fate” is that you traded at the wrong time, then the way to fix this is definitely not to go “looking for value”… Every lock has its own key, and the vast majority of people don’t have a master key. Even if you’re impatient you should never rashly seek medical advice — this is common sense.
If you made a trading decision at the wrong timing, then what is the correct course of action?
It’s easy:
Wait for the next correct moment of opportunity!
Overly simple answers are often overlooked, because, just as people always assume that major events are controlled by vast conspiracies, they also don’t believe that a big thing like “making money” could have such a surprisingly simple answer.
In the face of a correct timing, even a treasure such as “value” seems frail and powerless. So observe carefully: those who blindly believe in value investing can only understand their mistake and quietly pay for their incorrect decisions.
If you’ve never thought of this before, there is no need to feel inferior; if one needed to feel inferior because of this type of thing, I would have killed myself long ago — because it was only after several years in the market that I started to understand the flaw of “value investing”:
Even though it is correct, it can only explain a small part of the world.
So-called “leeks who have been cut out of the market” don’t actually leave the market because they lack patience. Just as you saw before, even an idiot is naturally constantly learning. Any person, as long as the conditions are appropriate, has enough patience — this is a fact.
Lacking patience is merely a superficial representation. So what’s the essence of the situation? Lacking strength.
If two people are betting on flipping coins, with a bet of 10,000 RMB each time, and the coin is a perfect coin, so nobody can possibly cheat… Then let me ask you, what decides who wins in the end?
This isn’t a brain twister, but you might think that this questions has some problems with it:
- It’s clearly a 50/50 chance, how is there a winner?!
- Since there’s no winner, how can we talk about “deciding who wins”?
This is the best example, and it can prove that the vast majority of people can only see the superficial representation and cannot observe the essence.
In the end there almost certainly will be a winner — if the two people have different financial resources. The chance is 50/50, but despite the fact that the overall chance is 50/50, it won’t be “this time is heads, this time is tales, and this cycle continues”… In an extreme situation, one participant might only have 10,000 to bet, so if he loses in the first round he will be eliminated. If you loved to flip coins as a child, you know that in actuality it’s quite common to flip 32 heads (or tails) in a row! If one party has 2-300,000 and the other party only has 30-50,000, then the participant with more money to gamble can win more easily, right?
So in this type of game, in the end, it’s not “luck” that decides who wins, but “strength”!
It’s basically the same principle: “leeks” leave the market not because they lack patience, but because they lack strength. If the “amount that would inevitably get trapped” when they entered the market actually only made up a small portion of their assets, would they “lose patience”? Would they lose their cool over that? Would they become unbearably anxious over that? Would they be extremely ashamed about that? They wouldn’t. It’s more likely that they would be calm and unperturbed. They would be ashamed about their mistake in judgement, but they wouldn’t carry out even more unreasonable behavior due to that embarrassment.
So there’s only one way to escape the “fate of leeks”: increase your strength.
What does strength refer to in the trading market? There is a clear definition:
Long-term, stable, low-cost cash flow.
This is actually quite difficult to obtain, but it’s not that there is no trail to follow. Some people seem to have unlimited money to borrow, others depend on continuously raising money, and I suppose that still others are like me and depend on “the ability to earn money outside the market”. But for most normal people, continuously earning money outside the market might be the only advantageous tactic.
At the same time, there is another important principle:
Control the position.
Always keep a certain percentage, or at least a certain amount, in cash — just as you need an oxygen tank when snorkeling, it’s not negotiable. As to how much the percentage should be, or how much the amount should be, there’s no rule, and it totally depends on your own thinking.
In urban legends, taking risks is always jumbled together with “bravery”. This sort of mixing up of concepts might not be too risky in daily life, but in trading markets this sort of mixup is often deadly.
Excellent and successful traders ultimately hate risk. Leeks don’t know this. Just as leeks are mistaken about the awkward explanations that they face, the are completely mistaken in how they explain successful people. They think that outstanding, successful people became successful by taking risks. Their understanding is linear and simplistic:
- The market has risk;
- Therefore, if you want to succeed you must take risks;
- Conversely, if you don’t take risks you cannot succeed…
Wrong! Bluntly wrong!
If you want to escape “the fate of leeks”, a concept you must learn is:
- Don’t take on risk if you can avoid it…
- Even if there is a time when risks must be taken, then let the fools take risks while you observe from the sidelines and gain experience.
The most direct way to gain experience is through your own experience in practice. But when it comes to risk, you must learn as early as possible to observe others taking risks, not through your own experience.
I had colleague at New Oriental who went to Oxford’s Saïd Business school to get an MBA. After he returned, he told me that in the first class the professor wrote these words on the blackboard:
Use other people’s money!
Note: this sentence comes from the name of a famous book that was published in 1914: Other People’s Money, and How the Bankers Use It. The author was Louis Dembitz Brandeis, and thanks to the internet you can read the book here: https://archive.org/details/otherpeoplesmone00bran.
This is a deep and wise admonition. Remember the “long-term, stable, low-cost cash flow” mentioned in the last chapter. So, what graduates from that famous business school begin to cultivate from the first moment is “the ability to raise funds”. It’s just that, to avoid people misunderstanding, they also learn a bit of “hypocrisy” to protect themselves and don’t mention it. Isn’t the animal world like this? All animals have some secret methods to protect and hide themselves.
If I had the chance to open a world-famous business school, I would definitely put this sentence on the walls and make students remember it for the rest of their lives:
Watch other people taking risks!
This is more important than “Use other people’s money.” Why? Today, with the global economy having developed rapidly for several decades, it’s no longer that hard to “have a bit of money”, and there are more and bigger opportunities than in the past, so you’re able to do quite a lot of things “using your own money”, and “using other people’s money” is relatively risky…
But no matter how the economy develops, risk is still risk, and there always must be people to take risks to gain experience… but the person taking the risks doesn’t have to be you. So what do you do? You observe, you summarize, you learn. The bigger the risk is, the more people like you are needed. Actually, the person who takes the risk will ultimately thank you. Why? Sure, they lost money, but because of people like you summarizing their experience, not only did you benefit, but you shared the experience, giving their failure a new meaning.
It’s very hard to think of the correct conclusion, because sometimes the “correct conclusion” looks so evil, even if at its deepest point it is a bright light.
There are some other things that are not even “taking risk”, because with risk there’s always a chance for survival. For instance, borrowing money to enter the trading market, or adding leverage, or playing with futures without professional knowledge… These aren’t “taking a risk”, these are simply “courting death”. In the blockchain trading market, this is even more the case. It’s already a hugely volatile (risky) target, so if you add even more risk, isn’t that courting death?
However, leeks don’t believe this; they refuse to believe it. Even if they’ve already died a violent death, they still believe that “if someone were willing to lend me a little more money… Ha! I could definitely make it all back!”
Note
99% of the time, the content of this chapter will be misunderstood. The ambiguity arises from the phrase “other people”, and it’s usually those who have failed at investing or speculating who “step right up” and misunderstand it. They don’t understand that the “use” in “use other people’s money” refers to “legally using” in the field of finance, protected by relevant laws and regulations. Similarly, the “watch” in “watch other people take risks” obviously doesn’t refer to “watching with ill will”, but instead refers to rationally observing and learning.
There is some risk in writing this, because before it has been completely explained it is easily misinterpreted as being “politically incorrect… So basically, once I’ve written it I will be condemned, and condemned from every corner.
Successful traders, like Einstein’s “God”, don’t play dice games — they avoid things that are purely decided by chance.
Even if they sometimes accept risk, the risks they accept can only be for decisions in which “the odds of winning exceed 50%”, or, in the best case, “the odds of winning are much better than 50%”.
Leeks are different. They like taking risks, but they don’t even know how to calculate risk. Yes, risk can be mathematically calculated! But leeks have never calculated it, and they’ve never even thought that they should calculate it. So do you think they can win? If they did win, wouldn’t that violate heavenly principles?
You’re a novice, not a leek, or at least you don’t want to alway be a leek. So what should you do?
Learn!
You don’t want to learn? Is there anything else you can do? Yes — exit the market, and never participate.
So go ahead and learn, until you’ve turned yourself into a straight A student.
Somebody borrows money from you — 100 RMB — and tells you that they’re willing to pay you back 110 RMB when the loan is due. What is your risk/reward ratio at this time? Your risk is the person disappearing and your losing 100 RMB. Your potential return, if the person returns your money, is having 10 RMB more than you had before. So your risk/reward ratio is 1:0.1, or 10:1. This doesn’t look very attractive at all!
If the other person told me that they would borrow 100 RMB and return 150 RMB to me the next day, then I would definitely not lend it to them, because these are terms that only a gambling addict who was in a hurry to play Mahjong would propose… I don’t have friends like this! All joking aside, let’s return to the essence. Actually, when you aren’t sure of the creditworthiness of the other party, no matter if your reward is 10%, or 50%, or 200%, your risk is the same: the most you can lose is your principal of 100 RMB. The risk/reward ratio is very different, but this ratio has a very different influence on your state of mind.
A bit confusing? Don’t worry, in the beginning piling up several layers of simple things seems very complicated and not very intuitive. Reading multiple times is the key to reading any book.
In the above example, the actual cost comes from the the pressure you feel from the “identical risk” — that you might lose 100 RMB. If it turns out that your monthly income is six figures, then you might even say to the other party, “Forget it, there’s no need to pay me back!” If you’re a poor kid in university who totally depends on support from parents, then 100 RMB might be your meal fee for a whole day. If it happens to be the end of the month, and all you have left is your last 100 RMB, then that cost is completely unbearable for you.
So you can see that there are many factors to consider in calculating the cost of risk, but your strength is most important, followed by risk/reward ratio. See, it’s the same everywhere: strength is most important.
Let’s switch scenes to trading markets.
You see a target, X, that has dropped from a high of 26 RMB to 20 RMB, and you guess that it is likely to go back up to 22 RMB, and at that point you can “cash out”. So you use 500 RMB to buy 25 units. So, what is your risk/reward ratio? Shall we calculate it?
The denominator is your potential return. Once the price has returned to 22 RMB, your total potential return is 50 RMB, while the total amount you have “taken a risk” with is 500 RMB. So your risk/reward ratio is 500:50, or 10:1. How does this ratio look? It’s actually not that great, is it?
But this calculation actually needs to be improved. Because novices don’t set stop loss lines. Or, to be more precise, “leeks” don’t have the concept of “stop loss”. You are different, as you’ve learned and you know you should set stop loss lines, so you set one for yourself: if the price drops to 18 RMB, then you will sell no matter what.
Now, what is your risk/reward ratio? The denominator is still 50 RMB, but what about the risk? The risk is 500 > - (25*18) = 50. So it’s 50:50, equivalent to 1:1… How is this different from flipping a coin? Why would you go to a trading market to flip a coin?!
Furthermore, this is still different from flipping a coin! Trading markets have fees whether you buy or sell, so if you take trading fees into consideration this trade is worse than flipping a coin and betting on heads or tails!
The reason that leeks are leeks, and will always be leeks, is that not only do they take risks, they also don’t calculate the costs of those risks. Even more tragic is that they have never even thought that they should make these simple calculations… They also learn, but what they learn is to “seek out gossip”.
Some leeks have made progress. Soon after they hear that experts have not only a “stop-loss line”, but also a “profit-taking line”, they use the most superficial method to understand the behavior of these experts, and they set a “hard rule” for themselves that is completely possible to follow:
Don’t be too greedy!
So why is this hard rule, which seems to have no problems, actually full of holes? Because the holes are not in the hard rule, but in the fact that all people are greedy, right? Also, why are you entering the trading market? Ask your heart, are you really entering so that you can make enough to buy three bowls of beef noodles every day?
Truly good suggestions are always actionable. The problem with the so-called “suggestion” of “don’t be too greedy” is that it is basically not actionable. You can think about it, but there’s no way to do it. It doesn’t count if you do it sometimes, because it’s impossible to do it in the long term.
How should you set a stop-loss line?
The price volatility of some targets is naturally much more extreme than others. The price volatility of bitcoin is countless times greater than that of the US dollar on foreign exchange markets. During the early days, the price of bitcoin even fell 80% in one hour, or it could rise 500% in an hour…
You can estimate the “daily volatility” of a trading target. If the daily volatility is 25%, your stop-loss line — in other words, “the biggest loss you can bear” — should be greater than 25% (40%, for example)... Because risk is what you are considering - especialy strong price volatility in trading markets - **"preparing for the worst" is always more prudent than "blind optimism".
As to where exactly to set the stop-loss line, there are many factors that can play a role. The trader’s personality might even be one of the important factors. The most frustrating thing is that in the moment it is your personality that really decides your behavior. But, when we look back and think about it, your personality in the moment is more likely to have been decided by your long-term behavior.
At this point, most “leeks” are totally confused — they discover that there are too many factors to consider. When they are summing up the factors they often make mistakes and can’t clear things up, let alone understand the principle and phenomenon of reciprocal causation…
So they’re all the same: when someone patiently explains the principles to them they quickly grow weary (notice that it’s not that they lack patience, but that they lack brain power). They all say the same thing: “Just tell me whether or not I should buy!” (This is fun: you might as well think about why they don’t ask the opposite: “Just tell me whether or not I should sell!)
If you want to avoid the fate of leeks, just train your brain. A brain isn't a good thing, it's a trained brain that is a good thing - you don't need to just train it, you need to train it correctly, train it well, and train it constantly.
So what do leeks do? They have learned to set a stop-loss line, but even though this is “progress”, the result is worse than no progress, because they haven’t calculated the stop-loss line at all, and instead completely rely on “leek instinct”. For instance, for a target with a daily trading volatility of 25%, they set their stop-loss line at 10% or 20%…
The result of doing this is another side effect that to them is completely “unexpected”. Because they have, through their own wishful thinking, lowered the numerator, even a small gain has a “low risk/reward ratio” to them. So all of their trades are “bad business”, but they never know where they made a mistake. In they end, all they can do is be like those people who are superstitious due to ignorance. They don’t see how they have been “cut”, so all they can perceive is that “someone has earned my money” (actually this is a mistaken conclusion)… So they curse the "market manipulators" every day while secretly hoping that they can make friends with a "market manipulator" and even secretly harboring the hope that they can become a "market manipulator" themselves one day…
Anyway, when setting a stop-loss line, you must not depend on wishful thinking. At least now you know that there is one factor you can count on:
The daily volatility of the trading target.
Even though it now seems you’ve understood “how to set a stop-loss line”, ever-worrying you discovers after a while that this is completely abstract, and is once again something that is completely useless. Why?
Soon you will discover that this “daily volatility” completely depends on what timeframe or scale you are observing. Look at the %K line by the hour, minute, day or month… and you’ll reach different conclusions. So at the very least there is another factor to consider, which is how frequently you make trades. Do you make trades daily? Or are you trading all the time? Maybe you should chose to trade once per quarter? This is not an easy decision, and it also doesn’t have a standard answer.
Some people are trading every moment, but they worry that they have “low efficiency”, so they depend on writing programs to engage in “quantitative trading”, making a futile attempt to capture every opportunity for profit in the market. Some people don’t even trade once per year, while some people trade once every few days… Let’s first not worry about what decides these trading frequencies — what’s important right now is: What results are influenced by “trading frequency”?
There’s an “elephant in the room” — one of those phenomena that is obvious but that people ignore:
The higher the trading frequency, the closer it is to a “zero-sum game”.
Wise people have repeatedly reminded us of this, it’s just that they have had different ways of saying it. The words are different, but the meaning is the same:
"In the short-run, the market is a voting machine… but in the long-run, the market is a weighing machine.”
— Benjamin Graham
So if leeks want to turn things around, I’ll say it a million times, there is only one road to take:
Reduce trading frequency… Reduce, reduce, reduce.
Don’t disbelieve this: as long as you’re frequently trading, you are still nothing more than a “leek”. Reducing the frequency of your trading is easy to say but hard to do. Many experts try to convince novices to reduce the frequency of their trading, but even though their reasoning makes a lot of sense the novices don’t care:
The result of frequent trading is an accumulation of trading fees, which will accumulate until they eat up all of your profits and principal…
We already know that the mistake that almost all novices make is to assume that they are participating in a “zero-sum game”, and so the vast majority of them become “leeks”. However, what the vast majority of them don’t realize is that, as their trading frequency increases, they are really getting closer and closer to “tirelessly playing a true zero-sum game”.
Most terrifying is that, from a macro perspective, exchanges are the only winners in the “zero-sum game” of the trading markets — everyone else loses. Even though the players are “gambling” (trading) amongst themselves, the exchange is “skimming off the top” (taking fees) no matter who wins. When you win, a bit gets skimmed off the top, and when you, lose a bit gets skimmed off the top, so no matter who wins or loses both parties have a bit skimmed off the top… and what’s the conclusion?
There's simply no “zero-sum game” in the trading markets at all.
The hallucination of leeks is that with their behavior they show that they believe and persist in believing that they can use their intelligence and strength to completely defeat fees… They never know that “skimming off the top” is the only sustainable business model in human history, and that it’s truly not something that can be defeated by an individual. Take a look at brokers around the world and you’ll understand.
The huge benefit of reducing trading frequency is evident in another area.
When your trading frequency is higher, it is hard to reduce your risk/reward ratio, because in such a short period of time it is extremely unlikely to “suddenly” have huge returns. Even though sometimes you will see “tremendous increases or decreases” in a market with huge volatility, trying to capture these tremendous increases or decreases is precisely the most risky behavior — it’s like trying to take coals from a fire.
When you actively try to reduce trading frequency (notice that I say “actively”, while “unconsciously increasing trading frequency” is the passive behavior that traders have been pushed into by the market), you will discover that this is actually equivalent to actively increasing your risk/reward ratio, because you actively decreased the denominator (return), without decreasing the numerator (risk).
When I first started, my trading frequency was also high. It was only after I understood, and started to actively reduce my trading frequency, that I realized that the amount of the return I required to satisfy me was constantly rising. I even gave myself the following rule:
Before it increases 10x, treat it as if it doesn’t exist.
10x! This is a level of return that I never even imagined when my trading frequency was relatively high. Maybe I will change this multiple in the future, but this is a number that could only appear in my mind after I had actively reduced my trading frequency many times over the long term. I couldn’t have imagined it before.
It’s counterintuitive that in the market:
- The shorter the term of the prediction, the closer it is to flipping a coin.
- The longer the term of the prediction, the closer it is to logical reasoning.
So the essence of reducing trading frequency is refusing to flip coins and insisting on logical reasoning.
Trading entails risk.
Laws are a lot of fun: if the issuer of a traded item fails to notify the public of the risk involved, they are quite likely to be determined to have committed the crime of fraud. But actually there is absolutely no need to make this kind of notification! Because all trading has risk, and traders should understand this before entering the market!
Regrettably, “leeks” are just that impulsive, and they rush into the market without reading, without thinking, and without learning. The reason that they rush into the market and “buy, buy, buy” is very simple: “Other people have already earned money!” It’s really not easy to protect “leeks”.
It’s the kind leeks who start to research “value investing” once they’re “stuck”, because they at least “silently take responsibility for the losses brought about by their mistaken decisions”, and they hope to improve their lot through “learning”.
More extreme “leeks” are actually more common, and they usually want to “defend their rights”! Once again, they want to “demand a explanation”, an explanation that makes them feel good.
In July of 2018, Lei Jun’s Xiaomi went public in Hong Kong, and that day it dropped below its listing price. Lots of secondary market investors “bought at a high price” and were “stuck”, and lots of them became so called “cut leeks”. So, tell me, is Lei Jun the one who “cut the leeks”?
In this situation, those who thought that they were leeks who had been cut by Lei Jun because they were stuck really have muddled thinking, so much so that they absolutely shouldn’t enter the trading markets, not just because of their muddled thinking, but because they have absolutely no ability to take responsibility for their own decisions and behavior. Ability is not something that you have just because you say you have it, right?
Facebook, a company that today has one of the highest market caps in the world, also fell below it’s listing price. So I ask:
If someone who bought Facebook shares before it dropped below its listing price didn’t sell but held until today, did they make money? Did they make money?!
Obviously, these people were not “cut leeks”, and they didn’t depend on “cutting leeks” to make money. Right?!
If you observe carefully, you will see this truth:
Often, so-called “leeks” are not cut by others; it is more common for them to cut themselves!
We can break their mistake down into three parts:
- First, they are unable to distinguish between value and price, and they make a mistaken buying decision;
- Next, they still can’t distinguish between value and price, so the make a mistaken selling decision;
- Finally, they still can’t distinguish between value and price, but they have no self awareness, so they think that others have cheated them and that they are “cut leeks”…
Above we are discussing the trading of good assets. Does the market have bad assets? (Note that I say “bad” and not “not good”, as there is a large distinction between these two and they should not be confused.) Of course! Not only are there bad assets in the market, there is also a lot of fraud. Malicious market manipulation, improper insider trading, corrupt transfer of benefits… countless types of fraud. In real trading markets (such as stock markets), laws and regulation have been refined over so many years, and the malicious behavior mentioned above has never been eradicated. The law lags behind, but bad people are forever making progress… And the blockchain world? In a world where the laws are less refined and more behind, of course there are more bad assets and fraud!
To take it a step further, those who take advantage of the cognitive deficit of “leeks” to entice them to “buy high”, and then think of ways to make them “castrate themselves” are absolutely bad people! Even if the law hasn’t yet caught up, they are definitely bad people. What is this a little bit similar to? Sometimes on the street you see people who intentionally cover up all or part of their license plate (have you seen those who wipe mud on their license plate so that two or three characters are covered?). These are “definitely bad people”. Why? Because this person is thinking about how to avoid responsibility before they have even been caught… So, these are “definitely bad people”.
But honestly, you haven’t seen the even more ruthless “leeks”!
They know that they’ve “been cut”, so they decide to persist until they can “cut others”. If someone uncovers the truth during this process, and obstructs “their opportunity to cut leeks”, then they will fight with them at all costs.
If you’re interested, you can search online for the “Nanjing Qianbaowang” incident. A bunch of so-called “investors” clearly knew they were participating in a Ponzi scheme, but this is what they thought:
If Xianbaowang went under before they themselves exited, then weren’t they the helpless victims?
So Qianbaowang couldn’t go under before they found the next group of victims! Now you see how scary “leeks” can be, right?
All leeks have a fantasy. Every day, or even every moment, they are staring at the %K lines. This idea often appears in their minds:
Argh! If only I had sold there (looking at a high price point) and then bought here (moving their gaze to a low price point)!
I don’t know about you, but I certainly had this type of fantasy when I first started. Later, after observation, I guess that every novice has had this type of fantasy.
As to why it is a fantasy, you can tell by this phrase:
If only…
This is the most typical phrase that people use when they want to shake off awkwardness. The reality is that you can’t change the past, but leeks still can’t help fantasizing, and thinking that things would be better if only the past were this way or that way.
It’s hard for novices to avoid this type of fantasizing, but old leeks are chronically childish.
You can tell by listening to them describe a “market manipulator” (this is quite possibly their fantasizing):
“Li Xiaolai sold all of his EOS and cashed out at 32 RMB, and then when the market price went down to 6 RMB he bought it all back… Just like this, in a few days Li Xiaolai got more than 5x returns!” (This is from a news report in mid-August 2017)
32 RMB was the highest price point for EOS at that time, and 6 RMB was the lowest price point. Li Xiaolai is really amazing! He could predict in advance the highest point and “sell everything”! Not only that, he quickly predicted the lowest point and at that point “bought it all back”!
This is an astonishing series of events. It’s okay for novices to not understand, but are old leeks still this way? At any point in time there is a price in the market, but along with this price there is also a “trading volume at that price”. This is very important!
Calm down a bit, take a look at the K line and you’ll understand. At that time there was very little trading volume at the price of 32 RMB. Actually, at any “highest point” or “lowest point” the trading volume is very low! At the highest price point, you can only sell a small amount. If you keep selling, then you need to sell at a lower price… Conversely, at the lowest price point, you can only buy a small amount. If you keep buying, then you need to buy at a higher price…
This is just how leeks are: every now and then they need to use fantasies to console themselves about their past. And then they can’t help using those same fantasies to explain things that are currently happening. They have no idea that these are things that are actually completely impossible.
It’s still the same mechanism:
They think that they are playing a zero-sum game, so if they lose money someone else must have earned it… As far as who “earned” it, they don’t know that that “who” only exists in their fantasy, so it must be a “real person”. Who is it? It can only be that “person who they already know made money”… So they naturally take Li Xiaolai to be that person. Yes! It can only be Li Xiaolai.
As you gradually improve, and leave that road that destines you to become a leek, you will naturally understand:
As a participant in trading markets, it’s not very likely that you will sell at the highest point, and it’s difficult to buy at the lowest point.
Why? The reason is quite clear and simple:
The highest and lowest points are caused by the impulsiveness of a small portion of traders.
You are destined to become a non-impulsive person, so those impulsive trades are destined to not belong to the non-impulsive you!
Believe me, you are a normal person, so it’s very normal for you to have fantasies from time to time. However, you are different. How are you different? You are different in that when you have a fantasy to can recognize the fantasy and clearly know that it is a fantasy. So you can be like a normal person and shake your head furiously, shaking off the fantasy and continuing your normal life and normal thoughts…
Are people naturally good or naturally evil? More and more, I have come to believe that people are “naturally good”.
Do people start foolish and then become more and more clever? Or is it the other way around, and they start clever and later slowly become stupid?
Actually:
People become stupid in the same way that they become bad, and the mechanism for these two processes is exactly the same.
Tell me, does this world have “people who are 100% bad”?
This is a question I have thought about often over the past year, because over the last ten to twenty years I have run into only one person that I extremely disliked. After she left the Publishing House of Electronics Industry (PHEI), I wasn’t willing to privately give her the publishing rights to a bestseller that I had written, instead deciding to keep publishing with PHEI. After this, this person would never pass up a chance to “vilify Li Xiaolai”, and I even suspect she hired people to write bad things online. But one person over ten to twenty years is actually quite rare, and the percentage is quite low.
When I was young I wasn’t very sociable, but, after training and improving myself, I have a lot of good friends, especially after the age of thirty — even if I’m still not necessarily very “sociable”.
When I introduce one friend to another, I often start off this way — and it is something I am very proud of:
This is my friend of twenty years…
As to how I make friends, I wrote an article on my WeChat Public account: “What is a friend?” (two articles in total).
But during the entirety of my 45th year, which is over the past year, I have run into a large amount of so-called “bad people”. Betrayal, fraud, slander, mixing up right and wrong, even entrapment…. Aside from Zheng Yiting (@xdite), I won't mention any other names — but there aren’t enough fingers on my one hand to count them all! With such density, I must find a way to reflect: have I become the problem?
Repeated thinking has led me to two conclusions:
- It seems that the percentage of people has not actually increased, because the number of new people I met this past years is basically equivalent to the total amount of people I met during the previous twenty years…
- And then I was surprised to discover that the world doesn’t have 100% bad people, it only has “good people” and “people who have gone partially bad”…
Think about it carefully. In your life have you run into a “100% bad person”? I thought carefully about it, and discovered that I hadn’t. Looking around in the past, or even in history, I couldn’t find anyone — even murderers might be protecting their daughter, even rapists have love. Isn’t Lust, Caution this type of story?
So, in the end, my conclusion is:
All people want to be good.
If I were to choose between “people are naturally good” and “people are naturally bad”, right now I can only chose the former. So there are no “purely bad people”, and maybe there are only “partially bad people”. For instance, people who are 10% bad, or 20% bad… I would guess that it would be difficult for even a “50% bad person” to exist, because at over 50% that would be a lot of suffering in their heart.
All people want to be good. But once the person has made a bad decision, then they will face a choice:
- Admit the mistake, and then work hard to correct the mistake…
- Not admit the mistake, and then “rationalize” the mistake…
“Rationalizing one’s mistakes” is at its essence a process of reshaping one's brain. As soon as this process is completed, the person is still someone who “want to be good” in their heart — this is the only way we can explain how those corrupt officials teach their children at home that they should be people of good character.
If you simply divide the people in this world into “good people” and “bad people”, then these unclear concepts will constantly influence future decisions, and of course you will burdened by these possibly incorrect decisions (or we could simply call them “actions brought about by fantasies”). So, I must thank these people I have met over the past year, because the end result of their existence is that “Li Xiaolai has evolved”.
If I weren’t upgrading my “operating system” like this, there is no way that I could understand Zheng Yiting’s behavior (Her nickname online is X-Dite, or XDite). Over the last few months, she has been describing Li Xiaolai as an “evil investor” everywhere, but has always avoided several obvious facts:
- With Li Xiaolai’s help, she held training courses in the mainland and made more money than she did in many years in Taiwan;
- This training company was invested in by Li Xiaolai, who requested and carried out a reduction in his share from 40% to 30%, telling her, “I don’t care, I want you to work harder and make more”;
- Later, the vast majority of OTCBTC’s users came from Li Xiaolai’s community;
- As of early August 2018, Zheng Yiting had not given Li Xiaolai any investment returns from OTCBTC, not even returning the initial investment…
If she wants to call Li Xiaolai an “evil investor”, then she should at least first return the investment after making money, right?
After upgrading myself, I started to understand her train of thought. After making huge potential profits and having a huge potential valuation, she suddenly decided that the originally agreed upon 40% was really too much, so she didn’t want to share with the early investors, and didn’t want to carry out the obligations of what had been previously agreed upon. This is the only core reason, and these were later her actual actions — however,, she needed to rationalize these decisions and behavior. After rationalizing, she still completely “wants to be good” in her heart. For example, she is still diligent, still hard working, and she still wants to convince other people and tell herself that she is kind and fair and righteous… It’s just that these residual effects remain:
- Since these decisions and behavior have been rationalized, the next time she runs into a similar situation she will respond with the same decisions and behavior without hesitation…
- The next time she runs into a slightly more extreme situation, the cost of making an incorrect decision will be lower, and the impulse will be higher…
So, to be frank, when I see Zheng Yiting constantly rationalizing her own behavior, and working so hard on the path of “becoming a worse person”, I cannot hate her, I can only feel pity for her — it’s just another pitiful person in the world.
A reporter asked me about Zheng Yiting and several other people:
Do you hate them?
My reply was the same:
No. I really don’t hate them. First I don’t have time, and second I really feel they are quite pitiful, because once they have started to go bad, there’s basically no way to come back…
Furthermore, if I can’t understand the existence of this kind of “normal phenomenon”, my world would be a dark place.
I might also understand the couple who recorded and then leaked a private conversation with me to be “scoundrels” — five months previously they secretly made a recording, then five months later they secretly gave it to someone with ulterior motives, and then they created a negative image of Li Xiaolai…
But actually? Actually this is more likely:
When they were talking with me, they to some extent took Li Xiaolai to be someone like a teacher, and thought that his ideas had value, so they secretly recorded the conversation. Had they requested permission at the time, they either would have been refused, or, if Li Xiaolai had agreed, then five months later everyone would have heard the “clean version” — there wouldn’t have been as much dirty language, and criticisms of people wouldn’t have been by name…
I guess that they later shared this recording with close friends or colleagues, and then after that it was discovered by people with ulterior motives who used the most ruthless tactics to “make things difficult” for Li Xiaolai:
- Taking everything out of context;
- Even going so far as to make up statements (Li Xiaolai didn’t use the work “leek”, but they used such frightening headlines);
- Spending money to get mainstream media to share it on Sina Weibo accounts;
- Hiring people to create frightening topics in WeChat and Telegram groups;
- Organizing “groups to report offenses”, inciting emotions and promising to “find help in the government if you tell me”;
- Organizing lots of people to make anonymous reports to government officials — with the material to report being the made-up “explosive material in the recording”;
- Approaching lawyers and saying, “I don’t care how much it costs, I want Li Xiaolai locked up”…
So the couple weren’t actually the perpetrators, but they are quite pitiful — from now on, who will be willing or dare to be open and sincere with them?
Some people have tried to sell me anti-eavesdropping tools, and some people have recommended “even more amazing dark professional PR teams”… I rejected them all. I don’t want to turn into that kind of person just because I have run into that kind of person. Not at all.
I hope I can remain the way I was.
To take it a step further, I don’t want to turn bad. Not even a little bit.
When faced with that kind of person, I also don’t want to use “their tricks”, or “their methods”, fighting fire with fire or whatever… Because if I do that, even if I win, I lose, and I lose badly, because I have been changed by them — and what’s worse than that?
To be precise, even saying that “I want to be a good person” is giving me too much credit. Really all I want is this:
I don’t want to turn bad.
How can I keep from becoming bad? It’s easy, and we’ve already made it clear:
If I accidentally make a mistake, I must correct it, and absolutely not try to do any form of “rationalization”.
The mechanism for a person becoming stupid is the same; it’s completely the same. They just made a foolish decision, they just didn’t work hard to correct their thinking, and they just unconsciously rationalized their prior stupidity… So they start to become stupid, and they go further and further down the road of becoming stupid. The earlier discussion of the way that all “leeks” think is full of clear examples and explanations.
So, if you don’t want to become stupid, you just have to do one thing:
It doesn’t matter if you do one stupid thing, but as soon as you discover you are stupid you must immediately correct it, and absolutely do not rationalize your dumbass behavior. Otherwise, you can only go further and further down the road of becoming stupid… The most terrifying thing is that dumbasses are definitely not lonely, because their natural percentage in the population is quite large, and their consensus is even stronger. So if you’re not vigilant enough you will definitely become an dumbass who feels happy but is actually in pain — this is without question.
So, in the end, all wise people are the same, with no differences in this point of view:
If after a period of time you don’t even feel that the past version of you was a dumbass, then this shows that you have already completely turned into an incurable dumbass
Look at what Bridgewater’s Ray Dalio says:
Pain + Reflection = Progress
After going through this process of thinking, the words I use to evaluate people have started to change. “Not bad” is the highest evaluation of a person’s character; in the same way, “not stupid” is highest evaluation of a person’s intelligence. It matches up with that saying: good people are all the same, and bad people are all different; smart people are all the same, and stupid people are all different…
Note: There is an article in the magazine Scientific American that I recommend you read closely. It’s called “The Dark Core of Personality”, and you can learn about the concept of the “D-Factor”. Here is the web address: https://blogs.scientificamerican.com/beautiful-minds/the-dark-core-of-personality/
People who enter trading markets are never lacking in pain, because pain is flying all over the place. So what they really lack is just one thing:
Reflection
With both pain and reflection, progress must result. So if novices want to escape from the fate of leeks, they must reflect every moment of every day, and after they reflect they still must reflect again.
You are entering a place with risk, and here there are almost no certain returns, so what should you do? Or, to put it another way, “how can you correctly decrease your risk/reward ratio”?
risk/reward ratio = Potential risk ÷ Potential reward
What profound theories can be derived from such a simple equation? Staring at something for a long time and letting your imagination run wild for a long time is the only way to do so-called “deep thinking”. Just as we can start to see patterns that we couldn’t see before if we stare at the ceiling for long enough, all deep thinking is the result of staring at something for a long time. This was the process for Descartes inventing the Cartesian coordinate system — if you’re interested, go to a search engine and look up Descartes’ story.
Looking at the equation, you can see that there are only two ways to decrease risk/reward ratio: either increase the denominator, or decrease the numerator
Here are some feasible methods to reduce the numerator:
- Adjust the stop-loss line, reducing the amount of risk you carry;
- Reduce the amount of each trade relative to overall assets;
- Increase your ability to earn money outside of the market (or increase fundraising ability).
Are there any more? Think about it. Each of these items is worth adjusting your own behavior.
And to increase the denominator? What are some workable methods?
- Choose higher quality trading targets;
- Choose the most opportune times to trade (for instance, buy after several steep falls in price);
- Increase holding time (for instance, crossing one or more bull/bear cycles).
Everyone has different preferences, everyone has a different history, and everyone has different desires, so there is no standard answer here, and the three items listed above for each are not necessarily a complete list. As for me, I have limited ability, so in the end I just listed these three that had meaning. So, I could only make choices in the range of my ability.
Finally, this was my choice:
- To reduce the numerator, I think of ways to increase my ability to make money outside of the market, and I treat money that I put in the market as if I’ve lost it…
- To increase the denominator, I don’t make moves after I buy, no matter what the price does, and cross through multiple bull/bear cycles…
After many years passed, I discovered that making this choice at that time had a prerequisite:
My daily expenses were fairly average, I generally didn’t spend that much money, and before entering the trading markets I was already a relatively affluent member of the so-called “middle class”. This meant that when I entered the market, my threshold for desiring to “cash out” was relatively high, or “extremely high”, so it created a virtuous cycle. The denominator got larger and larger, and the numerator got relatively smaller and smaller.
In any case, your goal is very clear: when your denominator gets relatively large enough, you are no longer a “leek”, because you have escaped the “curse of the leek”. How do you escape it? It depends on your choices. Once you’ve done it, go and tell those “leeks” about it. Will they believe you? Let me tell you from experience: They! Will! Not! Believe! Why? You’ll know when the time comes.
One-sided thinking is the common fault of all “leeks”. If you don’t believe me, just wait and see.
It’s very difficult to do early stage investing! It’s just that the vast majority of people don’t know this. They only see the legend that early stage investors make a lot of money, but they don’t know the truth at all.
First, there are many times more failed early stage projects than there are successful ones…
You may have heard that LI Xiaolai started buying bitcoin in 2011; at the end of 2015, after Ethereum came out, even though Li Xiaolai wasn’t optimistic about it, his partner Lao Mao grabbed the opportunity; in 2017, even though Li Xiaolai didn’t know about the seed round of EOS, he invested in the angel round… Aside from this, Li Xiaolai also invested in QTUM, ZCash, SIA, GXS, XIN, MOB…
I’ve read Lao Mao’s book Blockchain Investing Notes many times myself…
Li Xiaolai lives publicly online, so he won’t deliberately hide the failed projects that he has invested in. If you listed out all of the projects that Li Xiaolai has invested in (even though I don’t hide them, I’d find it embarrassing to publicly list them all over the place), the conclusion is clear: there are more than ten times as many failed projects as successful ones!
Second, you actually can’t invest much money in early stage projects…
This is a problem that most people haven’t thought about. When Peter Thiel invested in Facebook he was the earliest angel investor, but how much did he invest? Only 500,000 USD. He also wanted to “take a large position”, but he actually couldn’t invest more! If you invest too much in startup companies they will turn bad. Do you believe it? If you give too much money, then you have to own too high of a percentage, and investors don’t want to do it and don’t dare. Do you believe it?
And there’s something even more important! Because they are “early stage”, early stage investors can only become long term investors…
In the long period before Facebook went public, Peter Thiel’s stock was “completely illiquid”. Gains and losses on illiquid assets are nothing more than “book value”.
I bought a lot of bitcoin in the second half of 2011 and the first half of 2012. By April 1, 2013, bitcoin had gone from a low of less than 1 USD to 100 USD in just a few months! You must think I earned a lot! But actually? In the trading markets at the time, transaction volume was very low. A lot of exchanges were flooded with orders from the exchanges themselves, which people jokingly called “ghost orders”… So with that level of transaction volume there’s no way I could have gotten out. If I wanted to sell some , it would “crashed the market”, and it really would have crashed it to a scary place. So that “floating profit” was at most a number I could look at and feel happy about; it wasn’t real at all. It wasn’t until 2017 that the transaction volume for the whole market got to a place where one could freely enter and exit — but for me there was already no point to it, since my I don’t spend much money anyway.
Imagine again when Facebook went public on February 2, 2012. On the next day its stock dropped below the issuance price, “crashing 11%”! Even if you bought before the “crash” and “had your leeks cut”, how multiples would your return have been if you had held until today?
But here is the key:
When Facebook went public, it definitely was no longer “early-stage investing”, and there was such a large market that it had much better liquidity…
So you could invest as much as you wanted to, and there wasn’t an upper limit of “just 500,000 USD”…
“Leek’s” thinking is one-sided. They only looking at the “unit price” and conclude that “it’s already to expensive now”! So they always look for “cheaper”, and always look for “earlier opportunities”… Little do they know that this one-sided thinking is an “invisible sickle” that reaps them again and again.
Early-stage investing really isn’t something that everyone can do. Even if you don’t consider the necessary personal relationships, for most people their capital composition just isn’t right. Investing at an early stage is extremely risky, and most projects will fail, so you need to be able to invest in 50 to 100 projects. That means if you invest 500,000 in one project, you need to prepare 50 million. Even if you’re confident that your judgment is twice as good as others, you still need to have 20 million to try out with 500,000 per project, right?
Obviously, leeks don’t satisfy these conditions. They are not qualified, but they do it anyway, which means that the risk is infinitely greater.
Investing in early stage projects is absolutely not something that leeks should do. You must amass a certain amount of resources before you touch these types of opportunities, or else you will be cut again and again.
The reason to learn anything is so that you can “make use of it”. But the problem is that some skill take a lot of time and discipline to develop. So what about when you can’t wait? If a skill takes a lot of time and discipline to develop, of course the correct conclusion is not to “just not learn it”. The correct conclusion is this:
Learn, but don’t be in a rush to use it. Wait until you’ve learned enough to make use of it…
However, there are always some skills that you can “immediately put into practice”. People who are good at learning are actually just good at distinguishing this attribute of skills. They can judge what needs to be developed slowly through discipline, and what can be learned quickly and used right away.
Leeks who research “project analysis ability” when they are still just copying things mechanically are exactly like the “small town girls researching fashion” that Qian Zhongshu wrote about. They spend time and energy, but the result is that their imitation looks absurd.
Don’t do this. This is a skill that you have to slowly observe, slowly figure out, constantly reflect on, and even constantly negate yourself until you finally get it. Because of this, you must not use it indiscriminately, and you must not use it right away. You must patiently develop it with self-discipline — for at least three years.
So what do you need to learn that you can use right away?
The most important thing would have been: “don’t do anything after you enter the market, and only buy after watching for one year”, because if you had done this then you would already be “smarter”… But there’s no chance to use this, because you are like the vast majority of people and have already “been cut”.
Well… at least you’ve got me! Let me tell you a second thing, which you can use right away, and you still have time to learn and use:
Only buy the two or three targets with the highest trading volume.
This is a kind of wisdom. Temporarily let go of your own intelligence, and believe in the intelligence of the whole market. The market has helped you choose, so why don’t you follow along?
This is really hard to understand and hard to do. On the one hand you need to constantly improve and constantly study, or at least prevent yourself from becoming stupid. But on the other hand you also must temporarily let go of your own wisdom… it’s quite a contradiction, isn’t it?!
Maybe this is why people often incorrectly surmise that “investing is an activity that runs against human nature”?
Actually this is not a contradiction at all, and in fact it is in no way against human nature:
Since at the beginning your wisdom is lacking, you should temporarily let it go, and let it develop of to the side. What’s wrong with this? Setting aside your own intelligence doesn’t mean that intelligence is nowhere to be found! The market has intelligence, and the market is often smarter. Do you really not believe it? Once you have developed your intelligence to a certain level, you will understand…
So doing this is not “against human nature”. To the contrary, it’s just that in fact your past self hadn’t developed your learning habits and methods. In the past you always thought that things had to be fully learned before using them. You didn’t know that there were really things in this world that can be immediately put into practice, and that doing so was truly the best choice.
I will tell you a story, and we will see if it is inspiring.
Once upon a time in the Shanghai Stock Exchange, there was a force that people called “the Daily Limit Suicide Squad”. Their method was quite simple: if they saw a stock that was about to rise to its daily limit, they would buy; if it reached its daily limit on the second day, they would sell at market open on the third day; if it hadn’t reached its daily limit by market close on the second day, they would sell before the market close. Just that simple. This group operated for more than ten years, and incredibly they took tens of thousands and turned it in to who knows how much…
They are very frank, saying, "We didn't really read any books, we're stupid! So we just didn't think about it, since we couldn't understand it in any case. Whenever a stock was about to reach its trading limit, it meant that the market had done the thinking for us, and we just took action!"
Of course you shouldn’t just copy it, but from this example you can see how they avoided becoming leeks. They had a stop-loss strategy, and they had a profit-taking strategy, but, more importantly, they had the wisdom and courage to let go of their own wisdom…
There is another law that supports temporarily letting go of your own intelligence:
In trading markets, that which rapidly rises will rise even more rapidly, and that which rapidly falls will fall even more rapidly… so,
• When everything is rising, you must choose the one that is rising the most rapidly, because the odds say, or the market is teaching you, that it is more likely to rise;
• When everything is falling, you must choose the one that is falling the least, because the odds say, or the market is teaching you, that it is most resistant to falling…
Maybe you will think, “Aren’t you teaching me to speculate!” Don’t worry, you will reach your own conclusions sooner or later. It’s just that in the earliest stages you don’t have enough intelligence, so you must temporarily let go of using your intelligence (not “let go of training your intelligence”).
Observe the “leeks” and you will see how sensible you are. Their “intelligence” jumps around with the %K line, following whether or not their “bet” is doubling… When the price of the coin goes up they are arrogant and bossy, and when the price of the coin goes down they are like a dog who has lost its family. Do you want to be like them? Yes, I think I heard someone far away screaming, “NO!”
In 2013 I gave a lecture at Garage Cafe, and in the last five minutes of the lecture I gave some pertinent advice to all of the listeners:
Remember, you need to have a life, and life is most important!
Today, five years later, open a search engine, search for “blockchain sex life”, click a link on the first page, and read for a while… Those articles, they are in fact not joking, because these things actually happen.
Do you still remember the most important method for a novice to grow into a “non-leek”?
Reduce trading frequency.
This method looks incredibly simple, but few people are able to do it. Why?
Because we are people, and our innate genes determine that we like to pay attention to changes. In our lives it is the same, as we pay attention to things that move, and not to things that are static. This is why the vast majority of people like to raise pets, and there are comparatively many fewer people who like to raise plants…
It is very normal for novices who enter the trading markets to immediately be attracted by the %K lines and other types of related numbers and targets that jump around. Chinese people who trade in the A shares market are relatively blessed — the market opens so late every day, then breaks for lunch after two hours, and then closes very early in the afternoon… So even if you want to stare at the numbers, it’s just for that amount of time, and there are fifteen or so hours left in the day where there’s really nothing to look at. So you’ve never heard that traders on the A shares market don’t have a sex life. They have nothing else to do, so why not?
The blockchain world is different. Trading in the blockchain markets is 24x365, with no breaks. Even if the system of one exchange crashes, there are more than 10,000 other trading markets still operating. A share investors basically trades on one or at most two trading markets; but blockchain traders, they are always working with the interfaces of five or six exchanges, and many leeks wish they could attach five or six big screens to one computer!
What is it really that has stripped leeks of their lives, and even their sex lives? Is it really blockchain? Even though it looks so much like the chief culprit is blockchain, when we calm down we know that blockchain has been unjustly blamed! Then what is it really? It’s this:
Fear of Missing Out, abbreviated to FOMO, and sometimes called Fear of Missing Opportunity
FOMO, Fear of Missing Out. FOMO is almost the thing with the strongest base in the masses, and the lower you get the easier it is to be controlled by it. You’ll understand if you look at the slogans of pyramid sales or WeChat businesses, as they are basically follow the same pattern:
You already missed out on XXX, and then you missed out on YYY, now do you want to also miss out on ZZZ?!
The less opportunities a person has the easier it is for them to be stirred up by these sentence patterns. If you calm down and think about it you’ll understand. If you’re someone who doesn’t lack opportunity, if the price of bitcoin goes sky high, would it worry you? It wouldn’t! Because you have other opportunities.
During Spring Festival 2018, a group of people made a “3AM” chat group. They never slept, they were still chatting at 3AM, and when other people were almost ready to wake, they had just started chatting. The topics were all over the place, from history to philosophy, from mathematics to engineering, and everyone and their brother were spitting out economic terms that people didn’t understand but sounded good (most of them were superficial or even incorrect)… Were they really “excited”? Looking at them from another perspective, they were nothing more than another batch of “FOMO victims”. There is a batch of these people in every cycle. I’ve already been through several big and small bull/bear cycles, so I’ve seen this type of situation and this type of people so many times. What they say is actually all repeating what the previous batch of people who have already left had said before. There is no difference at all, but they act as if they’ve discovered a new world.
However, what is awkward is that they have already entered the market. What is more awkward is that they have already deeply felt the FOMO… So what to do?
Work harder and more earnestly on your life!
There is a lot of substance in life. Back then I depended on this method to adjust my own behavior. I took a pen and paper and listed what I thought were the most important parts of my life. For instance, after sifting through things, I felt that friends were an important part. Then, in order to maintain and strengthen strong bonds with my friends, what did I need to do? I made another list of several pages, and after sifting through it I discovered that “eating good food together” was one very important thing. So when I have time to kill, I drive all over the place looking for good restaurants… After trying many out I’ll find one that is really outstanding, and if it has several branches I’ll go to them all and pick out the best branch — for example, the Daxiong Lamb Restaurant in Ganjiakou is to me the best out of its four branches.
If you like to read, just buy more books and focus on finishing them; if you like to play the piano, then find more songs and practice them; if you like to watch movies, then buy more home theatre equipment, and search for more cinematic resources… You must learn to entertain yourself, and be good at entertaining yourself. This is the most important skill that badass traders must have — it’s even 100 times more important than trading judgement. For me, even writing books and articles has become one of my main methods for “self-entertainment”.
If you’re not good at entertaining yourself, and if you don’t spend a lot of your time earnestly living, then there is no way for you to reduce your trading frequency, and you will become like a leek and spend all day staring at the screen, even putting your phone in a place you can reach it while you’re making love to your girlfriend… If you really do this, then just wait for yourself to slowly turn into an old leek with even less possibility of a sex life.
You can be a novice, but you must not be a leek. You can “be cut once”, but you must not be cut multiple times. Of course, you absolutely must not be eternally cut… So, there is also one thing you must do:
Be a lonesome trader.
Experts don’t attach great important to “correctness”, because anyone can be correct. It’s not that hard. What is really hard is to not just be correct, but to be correct in a way that is different from the masses. Only being "unconventional and correct” can produce huge trading value.
When people weren’t optimistic about bitcoin, you bought; later, over the long period when people announced on different types of media that bitcoin was dead, you held… You were right, and you were right in a way that was different from the masses, so you could make returns that were unimaginable to others. In September of 2017, when the Chinese language media was condemning EOS, saying “EOS is trafficking 5 billion USD of vaporware", you were actually quietly adding to your position; and in June of 2018, when the EOS main net went online, you still held it. Well, you were right., and compared to the market you were right in an unconventional way. And even when the people who came later saw the price “rising and falling rapidly", you were still holding nearly 10x returns… So, once the whole world is going crazy for something, and they all have reached the correct conclusion, or even an overly correct conclusion, then correctness isn’t that valuable, either for you or for others. Isn’t this the case?
“Consensus” might bring about price (actually not necessarily value) — this is something that old and new leeks in the blockchain industry always say. However, you must understand that this refers to a conclusion that can be drawn from the market trading price. That is to say, it’s a partially correct conclusion — if you change a perspective, you might reach a completely opposite conclusion. Just as the shape of a mountain can look different depending on which side you view it from. The vast majority of “consensus” is actually not valuable.
I just stated above that “at the beginning you can temporarily let go of your own intelligence”. What I am now describing is the situation in which, after a period of time, you have already developed your own ability to think, research, and make judgements.
A friend once shared with me his principles of judgement:
- Listen to what most people say
- Consult the advice of a few
- Make his own decision
The meaning of “listen to what most people say” is not “listen” in the sense of doing what they say, but “listen” as in “hear”. When surviving in the market, just forget this item. It’s tiring and noisy to “listen to what most people say”, and there are no new ideas. “Most people” say repetitive things over and over, again and again. One group leaves and is replaced by another, and they say the same thing… It’s not even that meaningful to waste time with news, since most writers are business laymen, and, after all, fields have specialization.
So sooner or later you will understand that using these two items is enough:
- Consult the advice of a few
- Make your own decision
As time passes, your thinking will become deeper and deeper, and the final result is that “a few” no longer exist, and there is no one around you to discuss with, and no one worth your consulting — if you go further and further down a path, in the end you will definitely be alone, there is no way around this. So you are only left with one item:
- Make your own decision
By this point, I suppose that you must have already grasped many judgements and methods, and of course you have accumulated not a small amount of wealth. When you first started you felt very lonely, but later you didn’t have that type of experience. It’s as if you had lived in a small village before, but now you have made your home somewhere in the forest; even though your house is not large, it’s as if the whole forest is your courtyard. You are way from the hubbub, but you can start to hear other sounds, like the calls of the birds and animals…
Later on, you will derive your own methodology for life and work. For instance, in trading you keep to yourself, but in life you never keep to yourself, you build many good relationships and you constantly think of ways to make your life more colorful. So you will understand that being lonely in one small area of your life is not only not that bad, it’s actually quite enjoyable…
In fact, if you want to reach the highest level of achievement at what you are doing in any area, you must learn to be alone. Each person has their own way of being alone. I like to drive around the city. Why? I’m not that crazy about that so-called feeling of driving, but driving is truly a context in which I like to “be alone”. The car is a relatively clean and quiet closed environment, and when driving there is a sufficient reason to reject all phone calls (it’s past time that phone manufacturers should have phones sense when they are moving at the speed of a car and automatically reject all calls or automatically send a message saying, “the number you have called may be driving”)… It’s even better with the Tesla auto-drive feature. Many of my judgements, ideas, and decision were made in the car, because “being alone” is one of the best ways to boost productivity.
You must take good care of your loneliness. This is important.
In the trading markets, this point is obvious: you must — and can only — take responsibility for your decisions. If you made it, it's yours, and if you lost it, then it's also on you, because it was your decision and you used your money to make trades. All of the resultant experience and lessons are yours, and they are hard to spread to others, because others are not you. They are different from you, with their own histories, their own preferences, and their own ability to bear things…
In the end, you will understand that your final returns and the extent of your loneliness will definitely increase in proportion to each other to the same level.. If you are afraid of loneliness in this area, then don’t even be a leek. Directly leave the world of trading, because if you are like that then it’s really very unsafe for you here…
You have already seen that the habit of the “leek” is to want nothing other than trading and more trading… Even if there is someone to patiently and sincerely tell them that “reducing trading frequency” is the only way to escape the fate of a leek, they still won’t stop! Why? What will someone who has given up even their sex life listen to? It sounds funny, but I really feel that “leeks” are very Buddha-like — because they have already given up “worldly affairs”.
But you are different. You want to live earnestly, and you even want to enjoy loneliness.
Even more important is that you also have work, and you have study… Only in this way can you be someone who is always making progress; only in this way can you escape the fate of leeks. I emphasized before the importance of “the ability to make money outside of the market”, because otherwise you will be “short-lived”. Now I am talking about “the ability to develop your brain outside of the market”, because otherwise you will be “frail”.
Leek’s favorite phrase to say is “ALL IN”. What they are unable to understand is that “ALL IN” is the reason why they became leeks. In the end they are nothing more than an old leek… Because, in the end, from the perspective of their actions, ALL IN basically becomes “their money is ALL IN the trading markets" — this is an absolute taboo for trading participants!
Successful traders have this basic quality:
They always keep a certain percentage (or at least a certain amount) in cash.
Because they know what sort of high risk environment they are in. They know that, even if their judgements are very accurate, this world will not necessarily give a correct response at that time… As long as the unexpected exists it will definitely happen! What do you do when the unexpected happens? Without cash there is nothing you can do. There are no saviors in this world, only the risk cash reserves that you have prepared…
With this basic thinking, all successful traders will in the end make the same choice:
Whether it be cash, time, or life, you absolutely cannot be ALL IN in the trading markets.
Why? Because there is risk!
The core reason for doing this is not just to protect from risk. Even more importantly, successful traders all know that what they need most, aside from cash, is their own growth. In the end, all high quality trading decisions come from their own growth… Or, to be more precise, it’s the “cognitive gap” between their level of growth and the normal cognitive level of those who have rejected growth. Those returns are fundamentally a “cognitive gap waterfall”.
Where does growth come from? From work experience and diligent study.
Often old students will seek me out and say that they want to learn to invest full-time. My answer is always the same, but it is hard to explain and understand:
First, investing or trading absolutely cannot be treated as “full-time work”… Because as soon as you are “full-time” you have no way to grow. You must spend a lot of time on life, on other work, and on study… Otherwise, you can only be another leek.
More importantly, investing or trading absolutely cannot be treated as a job where you “take salary”. As soon as you take a salary, your brain starts to be shaped in another direction. Why is “loneliness” one of the most important qualities of this field? I’ll give you another reason: because when you are alone, you don’t have the need to meticulously “perform”. When people are being observed, their movements change — this is why participants in international billiards competitions can casually play a perfect game at home, but when they are in an international competition it is not so easy. Because the external observance that they experience changes their behavior.
So taking investing or trading as a full time job, or even a salary-paying job, is inherently quite dangerous. Even though it’s possible to reshape the brain, once it has been shaped over the long term it is is very difficult to change course. Treasure your brain.
For a long time, I’ve been working on a lot of things. On the one hand, this is so I can “think of as many ways as possible to actively reduce trading frequency”. On the other hand, an even more important reason is that I’m afraid of stagnation, and I’m afraid that I won’t grow. Because if I stop growing I won’t be able to handle the many challenges that will come one after the other… Failure isn’t terrifying; what is terrifying is facing failure and being unable to deal with it.
So, aside from trading, you must have a very good life. A good life is not something that can just be put there. It must be sought out, developed, and managed. In addition to life, you also need work. It doesn’t necessarily have to be work related to investment. No matter what kind of work it is, as long as you want to reach the highest level of achievement, it will be difficult. However, as long as you work at it, you will definitely grow, and reach a new level. Aside from life and work, you also need study. The greatest blessing of modern people is being able to study without the pressures of life. The goal of study is not to get a higher salary or a better position in society, but merely to satisfy your curiosity, and continue to develop your brain…
Almost all people naturally make a mistake when they enter trading markets: as soon as they enter they buy, buy, buy. My earlier explanation for why this is a natural mistake to make was that they were entering the market at the tail end of a bull market.
What is the deeper reason? The deeper reason is that when these people (including myself at the time) entered the market their minds didn’t have the concept of “cycles”. If traders have this concept in their mind, if they understand this concept, if they are good at using this concept, then they wouldn’t be very likely to see trading as a zero-sum game, would they?
After careful observation you will know that leeks only like to talk about trends, while the concept of cycles is fundamentally missing from their minds. At the most they will say:
- “Currently there is an upward trend…”
- “Currently there is a downward trend…”
- Or, “This is a major trend…”
Even thought this sort of description is sometimes useful, more often than not it is superficial and dangerous, because an upward trend needs a downward trend to constitute a full cycle. In fact, a true cycle is often only truly apparent after multiple cycles (at least two).
If we look deeply into true cycles, we will discover that rising and falling in the markets is merely a representation of a truth — actual economies don’t have straight lines, they only have fluctuation.
From within a long wave band, if you look forward or backward from any point, it looks as if you are on a straight line and not a curve, just as when we stand on the earth it’s hard to perceive that we are on a globe and and not a flat surface.
A rise and a fall constitute a cycle. If after two or more cycles we discover that the curve looks like a sin curve from math class, then the so-called “trend” was actually just a flat line. But the so-called “trend” that we often talk about and are looking for should be either up or down, because “flat” means “no change", and if there is no change then there is no trend.
This explains why what some people believe to be a so-called trend is by no means a trend in the eyes of others: the latter group places importance on true trends that become apparent after more than one cycle. It also explains why people who “buy the rise and sell the fall” will inevitably suffer: what they see isn’t the true trend, it’s nothing more than an illusion.
There is an important point here, and an interesting phenomenon:
All leeks believe in their bones that the target they are trading can’t actually keep rising…
So they “enter and exit quickly”; so they fundamentally can’t hold for the long term; so they “absolutely have no way to reduce trading frequency”… Even though when they get excited they’ll use phrases like “lifetime career” to describe what they’re doing, in their bones they just don’t believe that the target will rise over the long term.
The problem is, if you’re not sure that what you are trading is something that can rise over the long term, then what are you doing? It’s very strange!
Back to the point at hand, paying attention to cycles and the true trends that appear over multiple cycles will give you a brand new and more dependable world and view of the world.
… “If only I had taken a position at the bottom of the bear market, and then gotten out at the top of the bull market…” — There you go again, this idea has crossed your mind, which shows that you are still an immature child.
To tell the truth, in theory this is also skill that ambitious novices should learn in the end. But ambition can’t be this short-term, can it? Because what you are thinking about is “handling one bull/bear cycle”, and not “pass through multiple bull/bear cycles”… What did Old Mr. Buffett say? “The cycles that I like are eternal…” In this sentence, “cycles” doesn’t refer to the cycles that we are talking about, but why does he say he likes eternity? Because once you’ve reached a certain point, the money that you can make has already exceeded your ability to spend it. So, with the rest of it, what’s the difference in holding it for one year, or two years, or for eternity?
So how should you handle cycles? There are many theories, but in the end there is only one thing that I see as simple, dependable and easy to use without being too easy to mess up: carefully observe and understand the mood of the vast majority of traders. In a bull market, when FOMO reaches its peak and all sorts of investors are starting to be ALL IN, the upward trend slowly reaches its end; in a bear market, when most leeks have quieted down after cursing through their disappointment, the downward trends slowly reaches the bottom…
There are two famous charts that can help deepen your understanding. One is the “Kübler-Ross Change Curve”, and the other is the “Transition Curve”…
If you haven’t yet rushed into the trading markets, and you have unexpectedly read this small book, and you have already even read to the last chapter, the do you suppose that you will avoid the “mistake that almost everyone makes” mentioned in at the beginning of this chapter?
My guess is that you still have a 75% chance of making the mistake.
Why? Because you have a 50% chance of misjudging the cycle, and there’s a 50% chance your ability to control yourself doesn’t have a passing grade… So your chances of winning are approximately only 25%…
Controlling yourself is the hardest thing in the world. Later, when you reflect on your behavior, the saddest points will be when “you clearly knew what you should do but in fact you didn’t do it". It’s because the simpler the principles, the harder they are to follow. And when you realize that you weren’t able to control yourself, it will be hard to even imagine what it was that caused the situation. I also often feel like it’s without rhyme or reason — and the methods that I have finally found to resolve it are also quite unclear: increase time alone, increase time to blame myself, make myself feel more uncomfortable, hope to remember that pain, and hope that doing this will allow me to avoid the same stupid thing next time…
You are not a leek.
You have never been a leek.
At most you “almost became a leek”…
— Even if you were “cut” when you first entered the market.
When we first started, we researched how people used “leek” in different situations to come up with a definition for “leek”:
A so-called “leek” is an individual investor with limited resources who either fails to make money or loses money in the market.
If I hadn’t spent so much time and energy earnestly writing this small book, I wouldn’t have thought of a clearer and more accurate definition:
So-called “leeks” are those traders who erroneously assume that they are playing a zero-sum game in trading markets that are essentially not zero-sum games.
No matter how much capital these traders have, they are essentially leeks, and they have the same “fate of leeks”. That is to say, the concept of “leek” is not necessarily tied to small individual investors. Leeks are leeks only because the basic assumptions in their minds are wrong in the same way — they are perpetually making decisions according to the ways of thinking of a zero-sum game while playing a non-zero-sum game — and all of their later decisions and thinking are limited by this mistake. It gets to the point that they self-righteously make incorrect decisions, and then constantly self-righteously rationalize those mistakes with wishful thinking, and the cycle continues in this way…
There is a lyric from “Hotel California” by The Eagles:
We are all just prisoners here, of our own device…
The fate of leeks is just like that!
You are different! Even though you almost became like them… I really envy you, because you read this small book! Cough, cough.
You know that this is not a zero-sum game, and from this you can, step-by-step, reach many earth-shattering conclusions… You can temporarily let go of your intelligence, but at the same time you don’t forget to train your intelligence, and so you gradually turn into a methodical trader.
You can see cycles, you can judge at which times you should use which trading frequencies, and you have the ability to take responsibility for your actions. You never again need to childishly use binary logical thinking such as “seeing things in black and white”, or “you are bad and I am good”. You can see through the superficial to research the essence, and you always try to find patterns and associated methodologies that can more completely explain this world. You can even control your mood and behavior, as in the end you reversed the situation, and you were not defeated by that “natural mistake”…
Li Xiaolai uses this book to wish you:
A good life of peace…
In the beginning, lots of bitcoin fans placed a lot of emphasis on bitcoin’s anonymity, but I always turned my nose up at this point of view — which of US dollars, French francs, Hong Kong dollars, Macau dollars, and RMB are not anonymous? You can break the law by writing on paper money! So I’ve never been able to bear the sight of those odd and secretive bitcoin holders. In 2011, I even put an ad at the top of my blog: “Long-term Buyer of Bitcoin”…
In 2013, when a CCTV reporter interviewed me, they asked me how many bitcoin I had. I didn’t feel like there was any need to hide, but I also didn’t need to be that clear, so my answer was: "Six figures, and the first figure is 1”… I didn’t imagine that this question and answer would give me a “label”, or a “hat”, but it ended up on my head — “Bitcoin’s Richest Person”.
But actually, Li Xiaolai was never “Bitcoin’s Richest Person”. At the time, I knew two people in China who had more bitcoin than I did. Even in 2018, there are still at least two people that I know who have more bitcoin than Li Xiaolai — it’s just that they are not the same people as in 2013.
Between 2015 and 2017, I lost more than 9,000 bitcoin because of losses at the Yunbi trading platform. At that time, Yunbi’s bank account would often be frozen, they said because of suspicions of “black money” entering the platform. To make the development team feel confident that even if there was a run on deposits there would be absolutely no problem, I had to sell some bitcoin and deposit money in the bank… It was often a wait of several months, and sometimes several accounts would all be frozen… Several months later the assets were unfrozen, and when I used that money to buy bitcoin again I could only buy back 1/3, or 1/5, or 1/6 of the bitcoin… So now it’s even more certain that I’m not the person in China who holds the most bitcoin.
It is quite miraculous, even if they are less than six figures, that these bitcoin came from 4600 RMB in the beginning of 2005. Back then I was still teaching at New Oriental. One day I was notified that “because of excellent teaching quality” Li Xiaolai would be awarded 2300 shares of New Oriental stock options, and in total I needed to pay 4600 RMB. At the time I was somewhat disappointed, because I entered the company too late… Older teachers had been given tens or even hundreds of thousands of shares a couple of years before. But I didn’t have a temper, I just went and paid the money. New Oriental successfully went public on the NYSE in 2006, and so an unsophisticated person like me with no overseas connections unexpectedly ended up with an overseas account…
After New Oriental went public, my colleagues bought new cars and new houses one after the other, but I didn’t do anything. Why? Not because I have willpower, but because it wasn’t worth that much money! After bringing it back and paying taxes, I couldn’t have even bought a Jetta… The IPO price at the time was equivalent to just over 30 RMB, but there was another fact: four shares were combined into one! So after New Oriental went public, I only had 575 shares!
Later I did some trading, and in the end I converted to shares of Apple — only because I had started to use Macs. By early 2011, these stocks were worth approximately 100,000 USD…
By late April of 2011, when I started to buy bitcoin, I was full of ambition, but I only used just over 10,000 USD to buy 2100 bitcoin at an average price of 6 USD — at the time I thought, if this really works out then “if I own 1/10,000 of an economy its still pretty badass!”
See, I once was also a so-called “leek”, buying, buying, buying as soon as I entered the market. And then? One month later, the price of bitcoin fell, starting from a price of 32 USD and cutting in half in just two or three days… At 24 USD I sold 75% after the thought crossed my mind to leave my initial capital in the market and “use the profits to mine” — what a nice dream!
What was the result? When bitcoin “crashed” I felt even better, and thought that I had gotten out just in time… And then? Then my first batch of 2100 bitcoin was wiped out.
I told about this experience later when I was interviewed by Southern Weekly. Anyway, it ended in “a crushing defeat”. What about the 25% I left in the exchange? You’ll know when you hear the name of the exchange: Mt. Gox… In 2011 this exchange was hacked, and my remaining 500 bitcoin were gone!
I felt bad for several days. I felt as if I’d been using a wicker basket to draw water and wasted a lot of effort.
But suddenly I understood that my previous behavior had been completely wrong! Even three or four months before these setbacks, I had been at a coffee shop in Shanghai with my friend Qian Geng, and after discussion we had reached this conclusion: “directly purchasing bitcoin is the best deal” — “in the finance world there is nobody whose strength and intelligence is more badass than capital, so it’s wrong to compete on strength and intelligence!” But how had I completely forgotten this principle? I was upset, but I made a decision to empty my stock account and buy bitcoin with US dollars…
By then it was already August or September, and bitcoin’s price had entered a long downward spiral… I continuously bought over time, sometimes selling a bit when the price went up, and then buying it back when the price went lower. Exchanges weren’t as developed back then as they are now, and there wasn’t much depth on the exchanges, so I mostly relied on contacting miners through online forums. By May and June of 2012, I had no more energy to buy and sell, and I’d also spent all of my cash. I calculated that the total amount I’d invested was around 160,000 USD (fortunately Apple stock rose rapidly and steadily over that period of time) … Along the way I ran into several swindlers and lost 50,000 USD, so in the end the average cost of the 108,000 bitcoin I had was just over one US dollar… But actually, I never bought bitcoin for less than two dollars — which shows that my trading results weren’t bad, because building a position in a bear market is actually relatively easy.
In order to make myself not trade anymore, I edited the host file on my computer, making all of the bitcoin-related web addresses resolve to “0.0.0.0”, and I set a filter in Gmail to make all bitcoin mailing lists go straight to the Archive folder… (Later, Jihan Wu mentioned that in August of 2012 he wrote me an email when Fried Cat was starting up, but I didn’t respond… Actually, I never saw the email, so I missed the chance to become one of Fried Cat’s founding shareholders!)
In January of 2013 I heard from a friend that the price of bitcoin had risen back to ten USD. I though for a bit, and felt that that wasn’t that much money! So I didn’t pay much attention. By February 28th of 2013, bitcoin’s price had returned to its “historic high” of 32 USD, and I read an article that “enlightened” me.
What did the article say? The article was a daily log of a “leek”, and the content was something like this:
Since the price of Bitcoin has returned to its historical high, I've sold every Bitcoin in my pocket!
I found this article funny right away, as the image of “I finally got out” shined through on the page — of course, I actually spit a mouthful of Coca-Cola on my screen! This reminded me through a negative that I shouldn’t become a person like that! So I kept convincing myself to remain unmoved… And the result? The result was that within less than 30 days bitcoin's price shot to 100 USD!
Just like that, I experienced the process of “holding on to an asset as it went 100x” for the first time. Only from that time did I have the chance to begin earnestly thinking about how to start learning investing skills, who to consult, how to train, how put it into practice, and which areas needed to be repeatedly thought about… And the result? From the end of 2013 to the beginning of 2016, almost all of my investment activities failed, whether or not they were within or outside of the bitcoin field! Looking back now, of course I failed! I had no experience, no connections, not even a method for thinking — if I didn’t fail then who would fail!
It was only in 2016 that I started to feel like I was “getting better”. Also, at this time I was no longer “alone”. For example, I “picked up” one of the most important people in my life, Lao Mao, who became widely known later. Why do I say “picked up”? Because Qiu Liang met Lao Mao in Shanghai unexpectedly when doing online customer meetings for Yunbi. Without Lao Mao, I would have completely missed Ethereum! His existence let me understand once again the limits of logic, and that on the edges of logic the same reasoning can reach completely opposite conclusions! I had explained this situation in my book Take Time As a Friend, but it was still quite shocking to deeply experience it again. We later invested in many projects together. In addition to Lao Mao, I have met many good partners on this path that I can cooperate with for my whole life — this is my good fortune.
In 2017, I announced to my internal partners that Li Xiaolai would no longer make money for himself — because it had no meaning, because I don’t spend much money and money that you don’t spend is actually not your money in the end.
And it is hard to increase the amount of bitcoin that I have personally, because later on bitcoin’s price increased another 20x or so… bitcoin is like this, the more you mess around with it the less you have — this is a law. And what will I do with these bitcoin in the future? I mentioned this idea in a lecture at Beijing’s Garage Cafe in 2013:
One of the advantages of holding bitcoin may be that I “don’t need to take the trouble of writing a will”… In the end, when I’m gone, the private keys are essentially destroyed… So this implies that the “circulating supply” is reduced by a portion, which means that the value of all of my bitcoin will be “proportionally divided” among people who hold bitcoin. No matter who they are, and no matter whether they are good or bad people… What is this? This is “great love”.
In the past few years my diabetes has gotten worse and worse, and when it was discovered in 2009 my pancreas was already failing… So my life expectancy is already shorter than normal people. What’s so great about “the richest person”? Especially since it’s a false reputation stuck on my head by others… Lots of people misunderstand me, and think that I care a lot about the things that they think I care about — even though what I care about is definitely something else.
Early stage investing is difficult, and it is not suitable for new traders entering the market, no matter how much money they have heard about other people making. However, of course it is not something that is unlearnable. The following are “INBlockchain’s Open Source Blockchain Investing Principles”, and you may want to use them as a framework for your learning and reference.
However, I have the duty of reminding you that there is another very simple principle that you can use right away:
- In a bear market you can buy, buy, buy as you please!
- After a certain amount of time in a bull market you must please start to be extremely, extremely careful…
Blockchain refers to a public ledger system maintained by a decentralized network that serves as an open and immutable database.
The term "Bitcoin" can be understood in several different ways, which is why people always get confused and hardly agree with each other when it comes to discussion of bitcoin-related issues.
First of all, Bitcoin is the first, the most successful blockchain application.
Moreover, Bitcoin is a world bank that is not run by any authority, but by a decentralized network.
In addition, this decentralized world bank, Bitcoin, issued a currency that happens to have the exact same name, Bitcoin. Some people are more meticulous and incline to refer to the currency as BTC, rather than Bitcoin.
Finally, seven years after the birth of Bitcoin (2017), seldom have people realized that BTC could also be thought of as the stock of the decentralized world bank, Bitcoin.
Since the birth of Bitcoin, thousands of other crypto currencies have been issued. Though most of them are already extinct, some of them are still alive, and some even prosperous. Litecoin, for example, is the most famous example of an altcoin, and Dogecoin is another.
At first, many people thought of these crypto currencies as "copycats", with no intrinsic value at all. Later on, witnessing that what they thought to have no value persisted or even flourished, they started using another term, "altcoin". Perhaps the world needs more than one world bank, who knows? And... who cares.
Here is what I think:
In the markets, people are buying two kinds of value: the intrinsic and the superficial. An undeniable fact is: for those who are buying the superficial, it looks exactly the same as the intrinsic.
By MBAcoins, I mean coins issued by Meaningful Blockchain Applications (MBA). By Meaningful, I mean the applications are solving real problems, not problems that have already been solved by Bitcoin.
Honestly, I don't think altcoins have solved any problem that bitcoin didn't. And I wish (not believe), at the end of the day, one world bank would be enough.
The truth is, this world needs more than one blockchain application. Perhaps the second MBAcoin is Namecoin, a blockchain application trying to offer a decentralized domain service. Ethereum is another successful MBA that is built upon blockchain technology to offer new functions including smart contracts.
At the time of publishing (June, 2017), many MBAs have been running for more than 6 months and are performing pretty well. For example, Sia provides decentralized storage service just like Dropbox. Steem is another young MBA that creates, discovers and distributes content with a public ledger built upon blockchain technology.
In the past few years, Bitcoin has dominated the blockchain world with its single largest market cap. In April 2017, however, Bitcoin's dominance dropped to 52%, although its price had been surging along with other blockchain assets.
This is an important signal that the blockchain world is transforming into a forest, not a piece of land with a single tree anymore. If this is the case, this prediction might well be true:
In the future, Bitcoin Dominance will continuously drop, and even drop to less than 5%...
I'm a large bitcoin holder. Since I take BTC as the stock of a world bank, it's quite natural for me to spend as little BTC as possible.
Before 2014, we invested Bitshares, yunbi.com and I have been personally maintaining bitcoinsand.com, a bitcoin bank, for years. Since the last quarter of 2015, my team and I started to invest in MBAs in earnest, but with a rigorous set of principles. We have invested in Sia, Steem, Zcash, QTUM, EOS and numerous others. Often, we invest both in startup equity and also in the blockchain assets they issue. We are actively participating ICOs around the world.
Investment is by far the most risky activity, because every aspect it requires cannot be genetically inherited.
The birth of every true innovation is followed by many copycats and frauds. This is especially true when the innovation comes with inherent financial functionality.
Investing in blockchain startups and their assets is extremely risky in that people are often attracted by the tremendous profits they have heard about, rather than by any thorough understanding of the value that the application creates.
By publicizing our investing principles, we are trying protect ourselves. At best, this altruism serves selfish motives: the less fraud happens, the safer we are.
Sometimes asking questions is much more effective than describing principles: by struggling to get an absolute answer of appropriate questions, principles are adhered to. Here are major questions we have asked ourselves again and again before we decide to invest any blockchain startup or blockchain asset:
- Is this truly needed by the world?
- What otherwise unsolvable problem does it solve completely?
- Is decentralization truly needed?
- Is an open ledger truly necessary?
- Can an open ledger truly boost the efficiency of the business model?
- To what extent is it a DAC (Decentralized autonomous corporation)?
- If we decide to invest, what percentage of our fund should we use exactly?
That's all; the simplest questions tend to need the toughest thinking to get to an accurate and concrete answer.