One of the most common questions we encounter is, what should we buy now to make money? What investments are profitable?

A few years back, around three to four years ago, many friends would undoubtedly answer "P2P". The returns were high, and there was no need to bear the risks of fluctuations, with fixed returns often reaching 15%, 30%, and even some pseudo-P2Ps like Tang Xiaoseng offering annualized returns of 50%-100%, making it seem like an effortless way to earn money.

However, in 2018 and 2019, many ordinary investors who were hesitant to invest in the stock market fared worse than some of the losing "leeks" in the market, because the "principal-protected high-yield" P2P they invested in had become synonymous with "explosions". They not only earned zero returns but also lost all their principal.

In addition to P2P, there are various scams involving original shares, Ponzi schemes, crude oil and foreign exchange platforms, and so on. Even in the legal and compliant stock market, one occasionally encounters companies with fraud that lead to market collapses.

Therefore, for investment and financial management, the first question we should ask ourselves is not how to achieve the highest return rate, but to understand our own cognitive boundaries: how to preserve our foundation in the long term amidst various schemes, scams, and investment risks. Your wealth's principal is your foundation, and only by preserving the foundation can you achieve preservation and appreciation in the long river of life's wealth.

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Thus, you need to understand how to avoid falling into pitfalls.

This may already be common sense to some, but many people still haven't figured it out even after losing everything.

01. How many issues do you see?

Firstly, when it comes to investment and financial management, you should not focus on a single issue—how to make money? Instead, you should divide it into three parts: first, understand the three aspects of the investment product: how is its safety, liquidity, and profitability?For any product, if you can clearly answer these three questions and the answers match your financial needs, then it can become one of your "self-selected stocks." Otherwise, just pass it by. For instance, people often ask me: Can I buy Bitcoin? Can I trade futures? Can I trade stocks? In fact, what the person is really asking is: Can buying Bitcoin make money? Can trading futures make money? Can trading stocks make money?

When asking this question, what you should really be asking is:

How is the security, liquidity, and profitability of Bitcoin?

How is the security, liquidity, and profitability of futures?

How is the security, liquidity, and profitability of stocks?

Among the three questions, the first is security. Security is your foundation, just like one's physical health. Health is the capital of revolution. As long as the principal is still there, even if the revolution has not yet succeeded, you can continue to strive, and the opportunity is still there.

Security includes two points. The first is legal security; the investment product must be legal and compliant, which is the most basic premise. The second is economic security, which means, under legal conditions, the possibility of losing the principal, and this varies for each investment type.

Why did P2P collapse completely? First, it is an internet novelty without legal protection, and its legal security is close to zero. After the industry expanded in an unregulated manner, the state began to legislate and regulate, and 99% of the platforms could not comply, leading to a blanket ban across all provinces.

Second, its economic security is also very low. The money you invest in P2P goes into the platform's fund pool without any rules to constrain it, and investors are completely unable to track the flow of funds. It might be lent to private enterprises, or to individuals, or to gray or illegal industries, and there is even the possibility of embezzlement, where the platform controller, under the guise of others, lends the funds to themselves.The legal security is close to zero, and the economic security is extremely low; this is the fundamental reason for the collapse of P2P platforms. What about the "blockchain" high-tech slogan air coins? They are even worse than P2P platforms. First, legally, they are definitely non-compliant; the country has already banned major domestic air coin network trading platforms in 2018. Second, economic security does not exist; the average cost of the issuers is infinitely low, and the regulatory constraint is zero. Whenever they can't continue the game, they can leave at any time.

There is a unique exception in air coins, and that is Bitcoin. Due to international consensus and global liquidity, it has a high recognition, and its value will not return to zero. Nevertheless, its volatility is too great, and trading is inconvenient, so it is not suitable for 99% of people to invest (speculate) in.

The second is liquidity. When you urgently need money, a property worth millions may not help, but a few hundred thousand in cash can. There are countless companies that hold a lot of valuable fixed assets and inventory on their financial statements, but when they are short of funds, they cannot be liquidated and are forced to apply for bankruptcy restructuring by creditors.

Therefore, it is essential to consider the proportion of liquid assets in the overall assets and also to consider the liquidity and cashability of individual assets. Avoid buying products that are locked for more than three years casually.

Return on investment can only be the third priority. However, many times our eyes are only focused on returns. When we see an investment type, the first thought that comes to our mind is: how much money can it help me earn? But in essence, returns are derivatives of the principal, and they must be based on the premise of the safety of the principal to talk about returns; otherwise, without the skin, where will the hair attach?

There are always a large number of people who earn 3 to 5 times a year, but those who can maintain an annual return of 20% for 10 consecutive years are few. Why is that?

Because those who earn several times a year are often using an extreme model that pursues current returns (such as high leverage gambling or betting on a single industry). They happen to bet on the market's hot spot in a certain year and make a fortune, but after several rounds, if they make a mistake once, they lose both the returns and the principal.

Those who maintain long-term stable profits are those who earn a moderate return while ensuring the safety of the principal. Although the annual return is not necessarily high, the snowball keeps rolling. Every year it rolls, the profits earned in the previous year become the principal for the next year. Although it is slow, it gets bigger and bigger.

Safety, liquidity, and profitability are not complicated issues. It is not difficult to think clearly about them before investing and managing finances. However, in life, many people only see profitability. As soon as they see high returns, they want to seize the opportunity that God favors themselves, fearing to miss the market trend.Why do people always fall for scams, schemes, and even Ponzi and pyramid schemes that seem crude at first glance? The combination of three factors is the biggest reason—using the promise of high returns on the surface to lure you, causing you to overlook safety and liquidity.

When it comes to investing and managing finances, if you can learn to divide the question "Does it make money?" into "How is its safety, liquidity, and profitability?", then you have already succeeded at least half the battle.

02. What kind of money can be used for investment?

There is a viewpoint that money in the bank earning interest cannot keep up with inflation. Therefore, many people, as soon as they have savings, feel compelled to invest and make their money work for them. Among P2P investors, there are quite a few who have invested their life savings.

The notion that you can't beat inflation is a false proposition. Why? Because inflation is universal; whether your money is in the bank, invested, or exchanged for cash and locked in a safe, it faces the same inflation rate. What we should consider is not the universally present inflation, but rather the comparative advantages between different investment methods: a comparison of the three characteristics (safety, liquidity, profitability) between keeping money in the bank and investing it.

If there were a regret pill, P2P investors today would definitely have chosen to keep their money in the bank.

So, what kind of money can be invested? Funds that are expected to be idle for a long time.

How to distinguish this money? From a subjective feeling, it means that even if all this idle money is lost, you may feel heartache, but your consumption and family planning will not be affected.

Specifically, you can use the process of elimination. There are two types of money you should not invest: the first is for basic living expenses, including clothing, food, housing, transportation, mortgage payments, travel, and leisure expenses; the second is for large expenditures planned for use within the next two to three years, such as housing payments, car payments, renovation costs, and foreseeable educational expenses in the coming years.

The money from these two categories should not be used for investments that carry the risk of losing principal and should only be used for truly principal-protected, highly liquid financial management, such as purchasing money market funds that have no loss records in the last five years, to ensure the safety of the principal and the ability to convert into cash within three days. If you really can't tell what is safe, then just keep it in the bank or a money market fund like Yu'e Bao, which is safer than blindly meddling.The money used for investment that carries the risk of capital loss can only be funds that are idle for a long term. The importance of this principle lies in its determination of your risk resistance when holding investment vehicles, as well as your mindset when facing short-term losses (paper losses). For instance, if you hold a stock for the long term, even a long-term bull stock like Kweichow Moutai or Gree Electric Appliances, there have been significant declines. For example, Moutai's stock price fell by more than 60% in 2013, and Gree Electric Appliances' stock price dropped by 40% in 2018. When you use funds that you don't need for the long term, you can remain calm in the face of such short-term declines and enjoy the eventual profits. Otherwise, if you invest money needed for consumption or home renovation, you will become anxious and restless when the stock price falls, because you don't know how long it will continue to drop or how long you will be stuck. Your time to recoup the funds is limited, but the duration of being stuck is uncertain.

When you face uncertain investment holding periods with a limited time to recoup your funds, anxiety is inevitable. In a state of anxiety, it is difficult to endure paper losses and make rational decisions. Once your mindset is off-balance, you can only become a frequent trader who chases gains and cuts losses, like a "chopstick" in the market.

03. Why can't you use high leverage?

Corresponding to the use of idle funds is the avoidance of high leverage. For ordinary investors, using high leverage is almost like digging one's own grave.

Some people think that using high leverage to multiply the return rate is not good? With a principal of 100,000 yuan, you could only buy stocks worth 100,000 yuan, and a daily limit up would earn you 10,000 yuan, a return rate of 10%. With 5 times leverage, you could buy stocks worth 500,000 yuan, and a daily limit up would earn you 50,000 yuan, a return rate of 50%. Isn't that very exciting?

It is indeed exciting, but when it comes to losses, the "excitement" is even greater. The biggest feature of high leverage is not that it simultaneously amplifies profits and losses (in fact, this is easy to understand, both profits and losses are magnified by 5 times), but it reduces the ability to withstand risk fluctuations by 5 times.

When you use your own funds, no matter if the stock falls by 20% or even 99%, you can continue to hold on. When you use 5 times leverage, if the stock falls by 20%, your principal is wiped out (a margin call). After your principal is wiped out, who would be willing to finance you? You can only cut your losses and leave, even if the stock price doubles later, it has nothing to do with you.

Therefore, the greatest harm of high leverage is that it prevents you from withstanding market fluctuations. As long as there is a minor black swan event, or Trump casually sends a tweet, you may face a margin call. This means that your investment direction can only be right, not wrong. Once you are wrong, no matter how many times you were right before, it will all be wiped out in one go. But in the investment market, who can achieve a 100% win rate besides God?

It's all about leverage, many masters of leverage and futures have become capital tycoons due to leverage, and they have also lost everything overnight due to leverage.Perhaps from time to time we see news about someone achieving a 3x return in a year or a 10x return in 3 years. There is a misconception here called survivorship bias. The case you see is one that has survived among countless investors using high leverage, and it has only reached your ears after surviving. Behind this one success story, there are many more who have adopted the same model and lost so much that they are ignored. The saying "one general's success is built on the bones of ten thousand" is because it has survived and spread to the public, not because its model is correct and it was certain to survive from the beginning.

So, what are some common leveraged models that we should avoid?

The first type is to invest all liquid assets, which means investing not only long-term idle funds but also funds needed for large expenditures in the next three months. This is the mildest form of leverage. If you need money in three months and the stock market has fallen, you either sell some stocks (realizing the loss) or borrow money. So, don't think that just because you are using your own funds, there is no leverage; some leverage is hidden.

The second type is borrowing money to invest, such as financing through private (illegal) financial companies, margin trading with brokers, or using credit cards to trade stocks. These are obviously leveraged.

The third type is trading futures or stock index futures. Futures trading is based on margin, where 10,000 yuan can buy 50,000 yuan or even 100,000 yuan worth of securities assets. Leverage is its inherent natural attribute. While stocks can be stuck for years, futures are difficult to be stuck for years because if the direction is wrong, you might lose everything in a few months. Futures are not unplayable, but they are indeed not for ordinary investors. Unless you are a highly skilled professional, you must avoid them.

If you have no savings and need to borrow money to trade stocks, the best course of action should be to give up stock trading, arm yourself first, earn principal through work, and in the life stage lacking capital, the best investment is to invest in your own abilities, not in leverage.

There was once the most formidable hedge fund on Wall Street - Long-Term Capital Management. The company was established in February 1994, and they only invested in bonds, yet they achieved a 28% return in 1994, a 59% return in 1995, and a 57% return in 1996. In 1997, despite the impact of the Asian financial crisis on the global economy, they still achieved a 25% return.

What kind of team was behind such an impressive fund? The team was incredibly formidable. The founder was the renowned John Meriwether, a titan on Wall Street at the time, who helped the major investment bank "Salomon Brothers" establish its reputation. The team included the best talents, such as former Federal Reserve Vice Chairman David Mullins, Harvard Business School finance professor Eric Rosenfeld, and Nobel laureates in Economics Robert Merton and Myron Scholes (inventors of the option pricing model).

All were top financial and mathematical talents. They built a unique bond arbitrage trading model based on the concept that "market spreads will eventually converge," making a fortune and accumulating over 10 billion dollars in profits over four years.

However, the company suddenly collapsed in 1998. Why so quickly? Because since its establishment, it had been using high leverage.Long-Term Capital Management (LTCM) engaged in arbitrage by trading different types of bonds, with a direct return rate that was very low. If they traded solely with their own capital, the return rate per transaction was at the level of a few per ten thousand, and the annual return did not exceed 3%. Due to their model's extremely high win rate (almost approaching 100%, with no previous failures), they used leverage at an average of twenty to thirty times to amplify their returns, and at most, the leverage was as high as 100 times, with the fund's positions reaching up to 1.2 trillion US dollars.

"Market spreads eventually converge," and for four years, everything went smoothly. However, in August 1998, due to a decline in oil prices and a slide in the Russian economy, Russian bonds were dumped by international capital. LTCM held Russian bonds that were dozens of times their own capital, and in just one month, they suffered losses that left them insolvent, with all their achievements going down the drain.

There is a saying in investing, "Profits and losses come from the same source." If your profits today come from leverage, then your destruction tomorrow will also come from leverage. The biggest feature of leverage is that it takes away your chance to make mistakes; one wrong step, and you lose everything. Do you dare to take on such leverage?