Howard Max is a well-known value investor with 50 years of investment experience. Many friends have read his "The Most Important Things to Invest". His new book "Cycle" is a practical guide to behavioral finance and investment psychology, which has certain reference value for investors.

The big names in value investing talk about the perception of market psychology in their investment experience, which is quite surprising. After all, these are two schools. Value investors usually don't pay attention to the timing of investment. In their opinion, market prices will eventually return to the value center of the investment target. As long as the price is not too high at the time of purchase, the price fluctuation itself is not worth paying attention to. The value investor's discovery of the impact of investor psychology, sentiment, and decision-making on investment is unusual in itself, which is also a side example of the importance of behavioral finance to investment.

The logic given by Max is that "psychology affects behavior, behavior affects the economy, and causes short-term fluctuations in the economy." It can be understood as what you are thinking, you will do it, and finally you will get what you imagine. Prophecies or expectations are often fulfilled in this way. He believes that the psychology and emotions of many investors have led to cyclical fluctuations in the market. In fact, this view is the same as the view of Kostorani, known as the "European stock god" in the last century. The latter believes that investors' psychological and emotional reactions determine at least 90% of market fluctuations. This principle is very simple. Investment behavior is primarily human behavior. Human behavior comes from both subjective and objective aspects: subjective is the cognitive and emotional influence of investors, and objective is to have available funds. And subjective decisions determine the actions of investors. It is the buying and selling of funds that constitutes price fluctuations and trends.

The basic reason of market fluctuations, or the root of the market cycle, is that investors' psychology, emotions and decisions are highly unstable and random. This is the essential characteristic of human nature. People are obsessed, so they tend to go to extremes. This is determined by the brain's thinking mode and is the result of human evolution. Few people can avoid cognitive bias, and few people can always maintain emotional calm.

Investors' cognitive biases often manifest as "selective feelings, distorted interpretations", and incomplete perception is a common human problem. Although there are two aspects to the development of everything, few people can be impartial. This kind of cognitive bias will lead investors to make wrong judgments, and personal emotions as amplifiers will increasingly distort biased views and form obsessions. Investors acting based on this cognitive bias will inevitably go into extreme misunderstandings.

The corporate profit cycle, economic cycle, financial cycle and so on that we have observed are actually the external manifestations of human beings from psychology to action. For example, the Kitchin cycle often referred to in economics is the inventory cycle of an enterprise. This short-term fluctuation is often related to changes in inventory. As policymakers overestimate or underestimate demand, an increase or decrease in inventory results in short-term increases or decreases in economic output. All cyclical phenomena often have extreme conditions, which are caused by the psychology and emotions of the actor -the psychological cycle of the investor-swinging left and right.

Most of the time, the market cannot accurately measure the fundamentals valued by value investors. Taking Howard Max's 47-year investment as an example, only three years of rate of return is in the reasonable income range of 8% -12%. For more than half of the time, investment returns deviated significantly from reasonable levels The ups and downs of stock market investment performance are the real experiences of investors.

Why isn't the market a "weigher" of value ? This is because investor perception itself is difficult to accurately evaluate the value of fundamentals, and emotions as amplifiers, this misperception may be far from the true fundamentals. "The market is swinging back and forth between greed and fear". In fact, investors are swinging between greed and fear. If investors' psychological sentiment is viewed as a continuous spectrum, greed and fear occupy one side of the other. The actual emotions and psychology of people just swing back and forth in the middle, sometimes fast and sometimes slow, and rarely stay in the middle position for long.

The essence of Chinese culture is the doctrine of the mean, but keeping the balance is not in line with human nature. Investors are most prone to a combination of over-optimistic forecasts and greedy, so the bull market is progressing very fast. This is also the mentality of most investments. So for investors, the requirements are very high, both IQ requirements (reduce cognitive bias) and EQ requirements (try not to be emotional), but also have determination, cannot hesitate, dragged their feet. Where is your mental mood in the "mental spectrum"? Where is the market (emotion) cycle? As long as these two questions are answered correctly, the response plan is self-explanatory.