00560 You're Not Losing to the Market, You're Losing to Your Emotions! The Truth About Retail Investing

I. Theme of the Session

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The core of this session is to explore emotional management in investing. James points out that the root cause of many retail investors’ failures is not the market itself, but their uncontrollable emotions of greed and fear. He compares the long-term holding strategy of “buy whenever you have money and never sell” with the “market timing” strategy of dynamically adjusting positions. He emphasizes that both have their pros and cons, and investors should find the method that best suits them and brings them inner peace. The ultimate view is that stable emotions are more important than returns; investing is for a better life, not to be enslaved by market fluctuations.

II. Briefing Content

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Investment Mindset and Emotional Management

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• The Core Mindset of an Investor: Investors should always be extremely optimistic, always face the sun, and focus on the profits they have already made, rather than dwelling on the money they haven’t earned.
• The Importance of Emotional Stability: Stable emotions lead to sustained profits. One should feel comfortable regardless of market ups and downs.
  • When the market goes up: Be happy that the capital still in the market continues to generate profits.
  • When the market goes down: Be glad to have cash on hand as a defense, allowing you to get through it peacefully.
• Avoid Losing Emotional Control: It’s acceptable to earn less in the market, but you must never lose emotional control. FOMO (Fear of Missing Out) and fear are the great enemies of investing, leading to chasing highs and selling lows.
• The Duality of Market Timing:
  • Pros: By reducing leverage or position size, it provides a psychological buffer and defense during potential major market downturns.
  • Cons: It may cause you to miss out on gains from a quick rebound and makes you overly focused on short-term fluctuations, which is also a form of torment.
  • Conclusion: There is no single best way. The key is to adjust your mindset and find the strategy that makes you most comfortable.

The Difficulty of Individual Stock Investing

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• Case Studies: Using Pop Mart, Starbucks, and Coca-Cola as examples to illustrate that investing in individual stocks is very difficult, even for good companies.
• The Difficulties:
  1. Timing Problem: It’s hard to judge which stage of the company’s life cycle you are entering at. The returns from investing early (e.g., Starbucks in 1994) versus late are vastly different.
  2. Information Asymmetry: It’s difficult for retail investors to know the best time to exit. They often react only when everyone else is panic-selling, by which time huge losses have already been incurred.
  3. Circle of Competence: Don’t invest in companies and industries you don’t understand.
• Conclusion: For most retail investors, index funds are a simpler and more reliable choice.

Retirement Planning and Asset Allocation Strategies

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• Analysis of Withdrawal Rates for Different Strategies:
  1. No Pledging & No Leveraged Funds: Relatively high risk, lower sustainable withdrawal rate. For example, an 80/20 portfolio (80% stocks / 20% cash) can sustain an annual withdrawal of about 2%. To withdraw 3.5%, the asset allocation needs to be adjusted to 35/65, which is inefficient. For withdrawal needs exceeding 3%, it is recommended to supplement with a high-dividend strategy.
  2. No Leveraged Funds & But Use Pledging: Can increase the withdrawal rate. For example, a 50/50 allocation can achieve a 4% withdrawal rate. For higher withdrawal rates, it is also recommended to supplement with a high-dividend strategy.
• Advantages of Stock Pledging:
  • Lower Risk: At the same withdrawal rate, using a pledged loan is safer than selling assets and depleting cash.
  • More Flexible Cash Flow: Pledging provides flexible cash flow, especially during market downturns, eliminating the need to sell assets at a low point.
  • Core Principle: Once you start pledging, you should plan to never sell your assets again and never repay the principal of the pledged loan, allowing the assets to grow continuously.

Investment and Life Philosophy

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• Live in the Present: James emphasizes that the past no longer exists, the future has not yet happened, and the only thing that is real is the “now.” Don’t regret the past or be overly anxious about the future. When you eat, focus on eating; when you’re with family, be fully present.
• Investment Knowledge and Practice: Theoretical knowledge (like reading books) is important, but without personally experiencing the market’s trials, knowledge is just words. Practical experience is indispensable.
• The Meaning of Wealth: Money itself does not bring happiness. Its greatest function is to reduce life’s troubles (e.g., no need to compare prices, freedom of choice). True happiness comes from doing what you love and spending quality time with family. Sacrificing present happiness for an uncertain future inheritance is not worth it.

III. Q&A Session

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Chris

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• Sharing: She shared her thought process in choosing to lower her beta (making adjustments). Having experienced the 2008 financial crisis and other market downturns, she knows how painful the process of a decline can be. Considering she plans to retire in two years, she felt it was unnecessary to endure a downturn “the hard way.” Reducing her position by 10%-20% leaves her with enough assets to live a prosperous life. This was done to find a state she is most comfortable with. Even if the market doesn’t fall as expected, she only earns a bit less but gains peace of mind.
  • James’s Comment: James agreed with this approach, pointing out that he teaches “market timing” to let everyone know there are other options besides “never sell.” Which method is more suitable is a personal discovery, like drinking water and knowing for yourself if it’s cold or warm. Investors need to find their own best method through practice.
• Sharing 2: She shared a method for dealing with negative emotions: when you are in pain or sorrow, don’t keep asking “why,” as this will entangle you with the emotion. You can change the question and ask yourself, “Who is the person in pain right now?” or “Where is this pain in your body?” This shifts you to an observer’s perspective, watching the emotion come and go, making it easier to get through.
  • James’s Comment: James extended this to the philosophy of “living in the present.” Life is a joke; the past and future do not exist. The only thing that matters is this present moment. Focus on the now, feel your own existence, for example, by feeling your breath.

Chen Feng

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• Sharing: He shared his perspective on market volatility from the viewpoint of someone who is still working. He went all-in at the low point in 2022, so he sees the recent pullback as a good opportunity for the market to “stop and pick you up,” allowing him to continue to “buy whenever he has money.” He believes that as long as asset allocation and rebalancing are done well, there’s no need to worry excessively. For retirees, the goal is to live a peaceful life. The core of investing is psychology, and adjusting one’s mindset is crucial.
  • James’s Comment: James reiterated that his teaching of “market timing” is a demonstration. There’s an 80% chance it could be wrong, but the purpose is to let everyone understand different approaches. Once a decision is made, you should “let it go” and not chase highs or sell lows. For retirees, holding a higher proportion of cash is for peace of mind, which is more important than the size of their inheritance.

Dickson

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• Sharing: As a new student, he shared the immense gains he has made since starting to learn the CLEC philosophy in January of this year, and he successfully convinced his father to buy QQQ. He also shared the profound impact and insights he gained from reading “The Richest Man in Babylon” and “The Long-Term Investor.”
• Question: He didn’t fully understand James’s statement, “When you start pledging, you should plan to never sell your assets again.” He imagined two scenarios where one might need to “sell assets while also pledging”: 1. A sudden large expense; 2. Assets need to be transferred from mainland China, where pledging is not possible, to Hong Kong, where it is. During this period, living expenses might require selling assets in the mainland.
  • James’s Reply: The core principle is that stock pledging is safer and superior to selling assets. Therefore, any funding need should prioritize using the pledge line of credit. In Dickson’s example, due to capital controls in mainland China, the amount of assets available for pledging in Hong Kong is limited, and the cash flow generated may not be enough to cover living expenses. In this special case, using domestic assets is necessary. But in theory, one should exhaust the pledge limit first. Once the pledged funds in Hong Kong are sufficient to cover living expenses, one should no longer sell domestic assets. Unexpected expenses should also be covered by borrowing from the pledge first, not by selling assets.

Lynn

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• Sharing: As an obedient student, she liquidated all her leveraged funds the day after James’s alert in March. Her current beta has dropped to 0.4.
• Question 1: After selling her leveraged funds, she has a large amount of cash and plans to adjust to a 70/30 non-leveraged allocation. She asked how the 70% of funds should be invested. All at once, or in batches?
  • James’s Reply: There are two ways: 1. Buy in immediately with half the funds, and use the other half for dollar-cost averaging over six months. 2. Invest half the funds in batches, and wait for James’s signal that “the market has stabilized” to invest the other half in a lump sum. James reminded her that waiting for a signal could have three outcomes: buying at a higher price than now, a lower price, or the market dropping deeply, requiring a longer wait. Since she has chosen to wait, she should patiently hold the cash.
• Question 2: She heard about a case where a family member’s cancer required huge medical expenses (5-10 million), which made her worry if her planned retirement funds need to account for such extreme risks. This made her hesitant about retirement.
  • James’s Reply: Don’t worry excessively about things that haven’t even happened an hour from now. If you’re worried about your family’s health, you should take them for early screenings like a “low-dose CT scan” now. It costs a few thousand dollars to solve the problem, rather than worrying about tens of millions in medical bills after a problem arises. Truly effective treatments like immunotherapy are far less expensive than rumored (James cited his cousin’s case, who was cured for 2.5 million). Life planning should not be held hostage by these “possible” fears.

Jenny

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• Sharing: She was introduced to James’s method through a colleague (Xu from Kaohsiung) and felt a great sense of inner peace. She, her colleague, and other students organize weekly offline meetups in Kaohsiung and have found that people who agree with James’s philosophy share similar values and have great conversations. She believes this community connection is very valuable and invited James to visit Kaohsiung when he has the chance.
  • James’s Comment: James strongly encourages such offline meetups. He believes the channel’s purpose is to promote health, care, and wealth. When people with similar values gather to share, learn, and spread positive energy, it makes life more enjoyable. This is one of the most important goals of the channel.

Tao

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• Sharing: He strongly agreed with James’s opening point of “be happy when it rises, be happy when it falls,” believing this is the true investor’s mindset, which requires a deep understanding of the investment vehicle to achieve.
• Question: In the backtesting software, what does “two units” mean in the “rebalancing” strategy?
  • James’s Reply: “Two units” refers to 2%. James advised him to read the corresponding PPT slides for the backtesting software, which provide detailed explanations of various rebalancing strategies (such as mindless rebalancing, smart adjustment, flexible rebalancing, etc.).
• Sharing 2: He realized that the healthy, worry-free life that James emphasizes is actually the best way to achieve long-term compounding. You have to live long enough for the compounding effect to be maximized. Being anxious over short-term gains and damaging your health is counterproductive.
  • James’s Comment: Absolutely correct. Living five more years could double your assets. This is far more important than fussing over a 2%-3% difference in return rates.

Lucy

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• Question 1: Regarding Lynn’s question, when James mentioned “buy over six months,” does that mean buying once a month?
  • James’s Reply: Yes, divide it into six portions and buy one portion each month.
• Question 2: She noticed that different software (like Moomoo and bank platforms) show different price quotes. Why is that?
  • James’s Reply: There are three reasons: 1. Time lag, different platforms have delays in their quotes; 2. Platform difference, different brokers connect to different exchanges, leading to price discrepancies; 3. Slippage, some free platforms profit from the bid-ask spread, resulting in poor execution prices. “Free is the most expensive.” It’s recommended to choose large, reputable brokers (like Charles Schwab) who will find the best quotes for their clients.
• Question 3: James doesn’t recommend buying a house, but she’s worried about being discriminated against when renting at an old age, with landlords unwilling to rent to the elderly.
  • James’s Reply: This depends on the region. In the US, as long as you have good credit and the ability to pay, age is not an issue. This might indeed be a problem in Taiwan. But the core issue is that you should focus on accumulating assets when you are young. When you are old and have wealth in the tens of millions, buying a house is as easy as buying slippers; you won’t need to worry about renting at all. The root of the problem is not having enough money, not whether you own a house.
• Question 4: She bought a growth stock with dividends and feels good about it because the dividends are automatically reinvested, letting her experience compounding. She questioned how a non-dividend-paying ETF like QQQ reflects compounding.
  • James’s Reply: Compounding is a concept of total return; it doesn’t necessarily have to come from dividends. James used the example of a primary residence: a house that appreciates from 1 million to 2 million, even without receiving a single cent in rent, has a compound annual growth rate of 7%. That is compounding. The growth in QQQ’s value is itself a manifestation of compounding.
• Sharing: She shared her experience from attending Dr. Huang Wei-Jen’s “Intimate Journey” course, where a classmate’s story deeply moved her. The classmate had attempted suicide due to his mother’s overbearing nature. Later, through learning, he came to understand his family of origin, reconciled with his mother, and used his experience to help many others. She shared this to encourage Ana, who has similar struggles.

Wass

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• Question 1: He just started doing Roth Conversions, and since the amount is small, he has put it all into TQQQ. He asked if he should still keep everything in TQQQ when all his Traditional IRA assets are converted to a Roth IRA in the future, and his assets reach several million.
  • James’s Reply: During the conversion process, when the funds in the Roth account are much less than in the Traditional IRA, the Roth should be fully allocated to high-growth leveraged funds (like QLD/TQQQ), while the Traditional IRA should hold a corresponding amount of risk-free assets (like BNDX). This maximizes tax advantages. Once all assets are in the Roth, you can then perform an overall asset allocation based on your personal situation, such as a 433 allocation. At that time, the cash portion should be kept in the Roth account.
• Question 2: He hasn’t bought Long-term Care Insurance, believing that when his assets are large enough in the future, he can directly pay for care expenses. He asked for James’s opinion.
  • James’s Reply: He believes this type of insurance is not very useful. The payout amount is limited and not enough to cover all expenses. Having your own money is the most reliable protection.

Cindy

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• Sharing: She missed James’s “market timing” alert. By the time she saw the message, the market had already dropped to a low point, so she decided not to act and weathered the downturn peacefully with her pre-existing “40% cash” allocation. She believes that as long as you have your asset allocation set up correctly, you can remain calm during a downturn because the loss is only a portion of last year’s profits. She contrasted her experience with the many retail investors who chased highs and sold lows in 2022, concluding that by following James’s principles, even doing nothing is better than making rash moves, as it at least allows you to stay in the market calmly.
  • James’s Comment: James concluded that the ultimate goal of investing is to find a way that brings you peace of mind and no emotional fluctuations. He provides many tools and strategies, but how to use them depends on the individual. Mental and emotional stability is more important than profit.

Ana

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• Sharing: She shared her journey since starting to learn from CLEC last November. She went from initial excitement and confidence to experiencing a market downturn, during which she read Howard Marks’s books to reflect on and understand her own psychological changes. She felt this process was wonderful.
• Question: Due to verbal and physical abuse from her mother during her teenage years, she has psychological trauma. Even though her life is good now, painful scenes from the past often uncontrollably surface in her mind, preventing her from truly “living in the present.” She asked for advice on how to overcome this subconscious trouble from the past.
  • James’s Reply: James first expressed his respect for her strength and pointed out that this experience is also a “gift” that has shaped the wonderful person she is today. He suggested: 1. Hypnotherapy; she could listen to some relaxation and self-suggestion audios, telling herself that everything in the past has created the beautiful present and served as nourishment for growth. 2. Transform the pain into energy, learning to treat others with more kindness and love. 3. Practice “living in the present,” recognizing that everything from the past no longer exists; it only exists in her mind because she allows it to. She can choose not to listen, not to see, not to think about it, and let it disappear.

Damon

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• Sharing 1: He was inspired by Howard Marks’s book “Mastering the Market Cycle” and combined it with his own investment experience from 2022-2023. He realized that life, like investing, is full of cycles. What people perceive as a “stable average” is actually very rare; most of the time is spent in large fluctuations. Getting emotional over one or two weeks of ups and downs is meaningless for a 40-year investment career. He believes one should be grateful for all the processes experienced, as they have shaped who he is today.
  • James’s Comment: James agreed on the importance of reading. Reading a book is like living through someone else’s life, a highly cost-effective way to learn. He recommended that after reading Howard Marks’s books, students can advance to Nassim Taleb’s four books (like “The Black Swan,” “Antifragile,” etc.) for a deeper understanding of risk and opportunity.
• Sharing 2: He discussed the true meaning of “retirement.” Citing Naval Ravikant, he argued that true retirement (freedom) is not about stopping work, but about having control over your own time to freely do what you want. Many people long for retirement because their work is painful, and they want to use money to compensate for it. This process generates greed and fear. He believes that choice is more important than effort. If you can find something you are interested in and can stick with for the long term, life will be more meaningful.
  • James’s Comment: James added that money is just a tool. It can reduce trouble, but it cannot bring happiness. Happiness is a skill. When you have enough money, you should bravely leave toxic environments and do things that make you happy. Spending time with family, listening attentively—these are more important than making money.
• Sharing 3: He believes that after a certain stage of learning, students should cultivate the ability to think and judge independently, rather than asking the teacher about everything. By forming one’s own logic and decision-making system through learning and practice, one can truly achieve self-improvement.
  • James’s Comment: James strongly agreed. He hopes that after two or three years of learning, students will be able to think independently and form their own systems. Happiness is a skill; simplicity, letting go, and being indifferent are also skills. Regardless of the asset allocation used, one should look at it from the bright side and find a way to be happy.

IV. Insightful Quotes

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You can earn less in the market, but you must never lose emotional control. – James

Background: When discussing investment mentality, James emphasized that emotions are the retail investor’s greatest enemy. Chasing highs and selling lows often stem from greed and fear. Maintaining emotional stability, even if it means missing some gains, is far better than losing control and incurring losses.

Borrowing money will make you wealthier; borrowing money is safer. – James

Background: When explaining the advantages of stock pledging, James used a credit card cashback example: borrow $100 for a purchase (6% annual interest), get $2 cashback and invest it in the market (15% annual return). After 40 years, the $100 debt might become $1600, but the $2 investment could grow to $2000, resulting in a net profit. This vividly illustrates how using low-cost leverage can make assets grow faster and more safely.

Anything that hasn’t happened two hours from now is not something we should be concerned about. – James

Background: In response to a student’s question about worrying about potential future massive medical expenses for family, James used this sentence to emphasize the importance of “living in the present.” He believes that excessive anxiety about a distant and uncertain future will ruin one’s present life and is not worth it.

Money won’t bring you happiness; money will only help you reduce your troubles. – James

Background: When discussing the relationship between wealth and happiness, James pointed out that the true value of money lies in providing convenience and freedom of choice, liberating people from trivial matters. However, the root of happiness is in doing what you love and having high-quality relationships.

Happiness is a skill, simplicity is a skill, being able to say ‘whatever’ is a skill, and forgetting the past and ignoring the future is also a skill. – James

Background: In the summary part of the course, James elevated the relationship between investment and life. He pointed out that regardless of the market or the strategy used, the ultimate goal is to achieve inner peace and happiness. This sense of happiness does not come from external money but is an internal skill that needs to be cultivated.

If you don’t think, I don’t even know if you exist. – James

Background: In response to a student’s sharing about independent thinking, James emphasized the importance of active learning and self-improvement. He hopes his students will not just passively receive information but will build their own investment systems through thinking, transforming from learners to independent decision-makers.

If you live five more years, your assets will double. So a two or three percent drop in the rate of return is not even worth considering. – James

Background: In response to a student’s dilemma about choosing an investment strategy, James emphasized the ultimate significance of health and longevity for compounding. He pointed out that being anxious over minor differences in return rates, which harms health and ultimately shortens one’s lifespan, is the greatest loss.

The past is completely non-existent, just as if the outside world doesn’t exist apart from ourselves. … Why does it exist in your heart? It’s because you let it exist. – James

Background: When counseling a student with childhood trauma, James explained from a philosophical perspective how to reconcile with the past. He pointed out that past events themselves no longer have substance; it is our thoughts that keep them alive and affecting the present. Learning to let go, to make it “non-existent,” is the key to healing.

V. Summary

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This session delved deep into the core of investment psychology—emotional management. By comparing different investment strategies, James clearly articulated that there is no one-size-fits-all “holy grail.” The key is to find a personal optimal solution that allows you to be “happy when it rises, and happy when it falls.” Whether it’s steadfast long-term holding or flexible cyclical adjustments, the ultimate goal should be to serve inner peace and a happy life. The Q&A session in the latter half of the course extended investment concepts to life philosophy, discussing profound topics such as facing trauma, defining retirement, and finding happiness. It emphasized that “living in the present” and cultivating the “skill of happiness” are far more important than simply accumulating wealth. This was a class about investing, but even more so, a class about how to live wisely.