Only things you know bring you trouble - 2025-01-16

"Only things you know bring you trouble." - Mark Twain

This quote, often attributed to Twain. It's not the unknown that trips us up; it's what we think we know that can lead us astray. It's about the danger of clinging to inaccurate or outdated information, even when we're convinced we're right. As the saying goes, "It ain't what you don't know that gets you into trouble. It's what you're sure you know that just ain't so."

Think of someone who's confident in their public speaking skills because of past successes, but their style is now outdated. Their misplaced confidence could lead to a disastrous presentation. They're not failing because they lack knowledge; they're failing because their knowledge is flawed.

A Chinese Fund Manager's Story: The Perils of Overconfidence

The story of the YunMeng Fund (云蒙基金) perfectly illustrates this point. This fund manager, despite deep knowledge of Chinese banks, aggressively used leverage (borrowed money) to buy bank shares. While their research might have been solid, their overconfidence in their "knowledge" led them to take on excessive risk. The result? Massive losses.

My Friend's Brush with Leverage: A Lesson Learned

My friend has had his own experience with this. He knew that margin loans (borrowing money to invest) were risky, but he also figured that borrowing at 3% to buy shares with a 7-8% dividend yield was essentially 'free money,' right? It made him feel smart!

Despite his reservations, he used margin, albeit cautiously, limiting it to about a year's salary. But for five years, this account lost money, even though the dividends covered the interest. The lack of capital gains and falling share prices created pressure and dampened his spirits. He told himself it was a long-term game and that share prices would eventually recover. The leverage risk was theoretically low for him, as the total share value was six times the amount he borrowed. But rising interest rates changed the equation, almost eliminating the advantage. Finally, at the end of 2024, one of his holdings, Bank of China (BOC), saw a 17% capital gain. But he remains very cautious, as he also had cash reserves that could cover almost 50% of the margin loan. This limits his risk.

The Key Takeaway: Risk Management is Paramount

This experience taught my friend a valuable lesson: You must understand the risks you're taking. Limit your exposure. Your goal is to survive and thrive, not to gamble everything on a single idea, no matter how "smart" it seems. As Warren Buffett wisely advises: avoid margin. It's difficult enough to make money in the stock market without the added pressure of leverage, especially given the many unpredictable factors at play.

In essence: Be wary of what you think you know. Challenge your assumptions. Manage risk diligently. And remember, patience and long-term perspective are crucial for successful investing.

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