People like certainty, but uncertainty is the norm in investment. How to deal with it? The solution is to be an investor with Bayesian thinking, constantly refresh your knowledge according to market changes, and adjust positions in a timely manner.
What is Bayesian inference
Thomas Bayes was an 18th-century British theologian, mathematician, mathematical statistician and philosopher. He was the founder of probability theory and the founder of Bayesian statistics. He used mathematical probability "inductively". The first person to deduce the general from the particular and the whole from the sample.
In 1763, Richard Price compiled and published Bayesian results "An Essay towards solving a Problem in the Doctrine of Chances", in which the Bayesian formula was proposed:
In the formula, P(A|B) represents the probability of A occurring given B. That is, if B happens, how likely is A to happen. vice versa.
Bayesian inference uses Bayes' theorem to update the probability of a specific hypothesis as more evidence and information becomes available. Bayesian inference is closely related to subjective probability and is often called Bayesian probability. Specific process: First estimate a "prior probability", and then revise this initial guess by continuously acquiring new information, thereby obtaining a new judgment/cognition that is more complete and has fewer errors, that is, the posterior probability.
Bayesian Reasoning and Investing
In actual investment, P(A) in Bayesian reasoning can be interpreted as the probability that this stock will rise under the current state; P(B) is the probability of a certain event B occurring in all stocks; P(B|A) Indicates the proportion of all stocks rising due to B; P(A|B) represents the probability that this stock will rise when event B occurs. When applying Bayesian reasoning to invest, you need not to pursue perfection, make reasonable assumptions, carefully verify, constantly adjust operating strategies according to market changes, operate decisively, and adjust positions in a timely manner
Estimating relatively reliable initial probabilities and accelerating iteration: By thinking about market conditions, fundamentals, business rules, company conditions and other information, we can obtain the prior probability, which is the current probability of the stock rising. This estimate is a matter of opinion and relies heavily on the investor’s accumulated experience, connections, daily reading and in-depth thinking. The more accumulated, the more accurate the estimate and the higher the investment success rate.
Revise original predictions at any time based on new information, and adjust posterior probabilities and positions in a timely manner. For example, improvements in the company's cash flow and gross profit margin, and changes in macroeconomic policies will have an impact on the company's valuation. Changes in these key signals require timely adjustments to the valuation model.
When the market has reversed, do not continue to add positions to increase costs, but stop losses in time. Don’t be a perfectionist. It’s better to be vaguely right than precisely wrong. Don’t presuppose a position and seek truth from facts.
Conclusion & Communication
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reference
https://baike.baidu.com/item/Bayesian Inference/833912
https://ruanyifeng.com/blog/2011/08/bayesian_inference_part_one.html
https://www.ruanyifeng.com/blog/2011/08/bayesian_inference_part_two.html
Think fast and slow
Do the right things repeatedly