Derivatives, Devil's Red Dance Shoes

 

Unlike most courses, my topic on derivatives has only one sentence: Don't participate. If you add another sentence, try not to participate. Correspondingly, this section only has two sections, mainly focusing on the disadvantages of ordinary investors investing in derivatives.

 

Why don't I suggest investing in derivatives? This is determined by the three essential characteristics of derivatives, namely:（1）Zero sum games; （2）Time frame; （3）Leverage risk. These three characteristics make derivatives not friends of time, but enemies of time.

 

The zero sum game refers to the trading of derivatives where both parties are competitors, and the money you earn is the money that others lose. The corollary here is that in this cruel zero sum game, no one can guarantee victory, let alone sustained victory. As an amateur investor, your chances of winning are lower. Think about this clearly, and you won't touch derivatives.

As a comparison, what is investment? Investment is the money that earns performance growth. If you choose the right stock, as long as the company's performance grows, the long-term stock price will rise. At this point, you are the friend of time, lying down to earn money, rather than taking money out of someone else's pocket. If you buy the right property, as long as the city or region is developing, your property will also share the benefits from this development and become a friend of time.

 

The second characteristic of derivatives is the time period. The time limit means that derivatives have an expiration date, after which your derivative must be settled, otherwise it will be invalidated. Why is this important? Because there is a time difference issue here. Sometimes, you are right about the trend, but the timing of fluctuations may not necessarily be right. Before the expiration, the trend you have determined may not have been realized. In this way, your derivatives are no longer worth money, which is a common occurrence.

 

In other words, although you have seen the right trend, you have seen the wrong fluctuations and still haven't been able to make money. The time limit of derivatives is equivalent to adding a time constraint, making it difficult for you to comfortably see the trend and then lie down to make money and be a friend of time.

 

The third characteristic of derivatives is leverage risk. Leveraged risk refers to the use of leverage in derivatives, which amplifies both returns and risks. After adding leverage, your assets will fluctuate greatly, and you need to keep an eye on the capital market, which can inevitably distract you and affect your career development.

 

Derivatives are like the devil's red dance shoes. Once put on, it's difficult to take them off, so it's best not to wear them.

 

There is a successful entrepreneur in China named Duan Yongping who has also been very successful in investing. He once said this sentence, which is worth deeply understanding: if you can invest, you don't need to add leverage. If you don't know how to invest, you shouldn't add leverage. The meaning of this sentence is that if you can invest, your wealth will increase over time, and you don't need to take risks and leverage. If you don't know how to invest, adding leverage will only result in greater losses. Many respected value investors, including Buffett and Munger, have a deep aversion to financial derivatives and have said many serious things. I have quoted many of their original words in the course, which is worth your careful consideration when you go back.

 

If you must add leverage, I recommend a method for you, which is to usefutures。 Futures can be extended, and the cost of extension is also very low. Because of the function of this extension, you can only look at trends and not fluctuations. When using futures to leverage, the leverage should not be too high, otherwise the fluctuations will be too large and it is easy to fall asleep.

 

In these two lectures, I also introduced some other derivatives, including treasury bond bond futures, graded funds, and commodity futures. My suggestion is still that sentence, don't touch it.

 

In this part of the course, I transformed into Tang Seng who was verbose and warned about risks, and in the next part, I changed back to Xu Yuan. Many people in the message expressed 'don't touch what you don't understand' and 'don't buy financial derivatives'. If that's the case, I'm also at ease, and you're worth the ticket price.

 

 

The answers to many questions can be found in the comment section of the course ("Little Goose Assistant")APPIt can be played continuously in the background, making it easy to find courses. It is recommended to download and use it. Here, we focus on answering representative questions.

 

Q1: Teacher, when talking about bonds, treasury bond futures futures are also one of the important ways to invest in bonds, but bonds are also financial derivatives. How can the contradiction between investing in treasury bond bond futures and not touching financial derivatives be broken?

 

Short answer: When talking about bonds, I also stressed that "treasury bond futures are very risky, and beginners are not recommended to participate". I have many years of experience. When I operate treasury bond bond futures, I also maintain a great margin of safety. The leverage is controlled within10Times.

 

Q2Teacher, since financial derivatives are a zero sum game and do not create any value, why do they still exist?

 

Short answer: One of the basic functions of financial derivatives is risk hedging. For example, if you are a soybean farmer, you will8Monthly Harvest10Tons of soybeans, but worried that a drop in soybean prices will affect your earnings, then you can sell them8Monthly expiration, subject matter quantity is10Tons of soybean futures. here we are8Even if soybean prices decline in the month, you can still benefit from the futures market and avoid the risk of soybean price decline. In this way, you can pay no attention to the fluctuation of market price and concentrate on your own planting. In this example, you used futures to avoid risks.

 

Generally speaking, the underlying assets of financial derivatives can be any asset with price fluctuations, and derivatives can be used to hedge against any fluctuations. However, in the current derivatives market, the purpose of many traders is not to hedge or avoid risks, but to speculate and pursue high returns and risks. If you are not the farmer in the example just now, holding relevant basic assets and participating in it is not to avoid risks, but to increase risks.

 

Q3Teacher, regarding graded fundsAShare, which sounds like a bond fund, can I buy it as a bond fund with slightly higher yield?

 

Short answer: Graded fundsAThe shares can be approximately regarded as bond fund, and the Yield to maturity is relatively certain. howeverAShare also carries the risk of loss, as discussed in the course for details.

 

Q4Teacher, is the graded fund unlimited liability or limited liability? I bought itBDo you still need to pay after the principal loss?

 

Short answer: Graded funds are limited liability, with losses not exceeding the principal amount.

 

Another reminder, according to current regulatory policies, by the end of this year（2020At the end of the year, the graded fund will be discontinued and its existing shares will be converted into ordinary fund shares.

 

Q5Gambling does not generate value, why are so many people gambling?

 

Short answer: This is a question that touches the soul. Let's think together. There are many needs in human nature that cannot be simply summarized by reason. This is an investment course. From an investment perspective, we can ask: Are we investing, gambling, or looking for a long-term algorithm that suits us to maintain and increase value?