It is a very simple idea to use the power of compound interest

It is a very simple idea to use the power of compound interest  Smart people are easily attracted by complex things, and underestimate the great influence and importance of simple ideas. But Monish Pabrai is a full pragmatist, and he will not fall into this trap. "It is a very simple idea to use the power of compound interest, a very simple idea to imitate, and a very simple idea to be honest." He said. However, when you apply some powerful ideas with great enthusiasm, the cumulative effect is "incomparable".

There is no shortage of opportunities for long-term investment, but lack of money.

In economic activities, there are many periods.

However, for the stock market, the three cycles have the greatest impact:

• fundamentals;

• capital cycle;

• emotional cycle.

  • fundamental cycle

The first cycle, which also has the greatest impact, is the fundamental cycle.

The development of the real economy is not plain sailing, and there will be ups and downs.

For example, in 2007, the economy was very prosperous. At that time, the annual profit of listed companies increased by 20% - 30%, which was a very high stage.

But not every year.

There has also been a case in history that in a certain year, the overall profit of listed companies did not increase, but decreased.

After a prolonged period of time, the overall profits of listed companies will grow in the long run.

The long-term average annual growth rate is about 10% - 11%.

Of course, long-term growth does not mean uniform growth every year.

The growth of corporate profits is the same as the rise and fall of stocks. Some years have more growth, some years have less growth, and even some years will have negative growth.

  • Capital cycle

The second cycle is the periodicity of capital.

This can be seen by observing the interest rate cycle.

Interest rates will fluctuate, with an average of 3-4 years, a round of upward downward cycle of interest rates.


• the second half of 2016 to the beginning of 2018 is the last round of the upward interest rate cycle.

• the period from the second half of 2018 to the first half of 2020 is the period of interest rate decline.

• from the second half of 2020 to now, it is the upward cycle of interest rate.

Of course, the interest rate cycle of each country is not completely synchronized because of its own policies.

Interest rate fluctuations will have an impact on bonds, stocks, and other assets.

• the rise and fall of interest rates have a great impact on the performance of the bond market.

• lower interest rates are good for stocks; The rise in interest rate is bad for the stock as a whole.

But there are many factors affecting the stock market, not just interest rates.

This is only one factor.

  • Emotional  cycle

The third cycle is the emotional cycle.

This is also the shortest cycle.

The emotional cycle often occurs in the middle and late stages of a bear market or bull market, which is when investors are too panicked and greedy.

For example, when the bull market in 2007 rose to 4000 points, the stock market was already very expensive.

However, driven by investors' greed, the stock market still rose rapidly to more than 6000 points.

For another example, in March 2022, China concept stocks fell 19% in two days, and then rose 22% in one day.

In such a short period of time, neither fundamentals nor capital has changed much, and it has become the emotion.

Why do "bear market and bull market" appear repeatedly

The above periodicity is always repeated.

Sometimes, several cyclical factors are at the top of the cycle, which will promote a big bull market.

For example, the bull market in 2007 is the top of the fundamental cycle, superimposing the top of the emotional cycle.

The bull market in 2015 was a leveraged bull brought by interest rate cuts, with the top of the capital cycle superimposed on the top of the emotional cycle.

Similarly, the bear market is also a superposition of several factors.

For example, in the bear market of 2013, both the capital side and the emotional side were at the bottom of the cycle.

The repeated occurrence of different cycles will bring us countless "bear and bull markets" in the future.

Take the last 20 years as an example:

(1) In 2003, after the SARS incident, shares and Hong Kong shares remained depressed for more than a year;

(2) In 2008, due to the global financial crisis, the S & P 500 fell by more than 50%, and the global stock market generally entered the five-star level;

(3) In 2012, due to the European debt crisis, European stock markets fell sharply, and the P / E ratio of stock markets in Britain and France was less than 10 times;

(4) In 2013, the largest bear market of shares in history, with a 5-star rating and a P / E ratio of fewer than 10 times in Maotai;

(5) At the beginning of 2016, after the A-share crash, Hong Kong stocks also plummeted, the most undervalued value in history, and the P / E ratio of the H-share index was less than 6 times;

(6) In 2018, due to trade frictions, shares fell by more than 30% throughout the year, and 5-star investment opportunities appeared at the end of the year;

(7) In March 2020, due to the impact of the epidemic, the global stock market fell by more than 30% in the short term.

(8) In April 2022, shares fell sharply for a short time and reappeared as five-star.

Totally: There is no shortage of opportunities for long-term investment, but there is a lack of money.


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