Investors have once again witnessed the frenzy of financial markets. On January 30th, the spot price of silver plummeted by over 30% at one point, marking its largest single-day decline since 1980. The panic-driven plunge in silver prices quickly spread to the stock market, with the nonferrous metals index dropping more than 12% in just three trading sessions. Some silver-related stocks experienced three consecutive daily limit-down declines.
Amid such extreme volatility, if an aggressive investor had used 1x leverage and unfortunately bought at the peak, their floating losses would have approached 60%. With a 130% maintenance margin ratio, just one more limit-down drop could have triggered a forced liquidation. Fortunately, by the fourth trading day, the limit-down restrictions were largely lifted. Regulators had already increased margin requirements for margin trading and securities lending in mid-January, capping new leverage at no more than 1x. Coupled with the overall low valuation of the stock market, this heart-stopping volatility was navigated smoothly.
Upon reflection, does escaping the "inferno" leave one with lingering fear? Memories of widespread liquidity suddenly vanishing date back to mid-2015 and early 2016. During that period, many leveraged investors were cornered, watching fortunes evaporate overnight, with some even ending up owing money to securities firms. Countless investors who lived through that harrowing volatility vowed never to let themselves face such an existential crisis again.
Looking ahead, market volatility remains unavoidable, as it is an inherent companion to securities trading. Moreover, the hotter the market rally, the greater the volatility is bound to be. In today's world, where information can reach the globe in seconds, sharp stock market fluctuations are inevitable. Therefore, learning to coexist with significant volatility, ensuring the safety of one's capital, and avoiding "catastrophic outcomes" are paramount in investing.
Liquidity tends to disappear precisely when it is needed most. Investors must remember the words of
Why should leverage be used cautiously? Because investors must guard against short-term sharp fluctuations. While financial markets reflect value over the long term, any short-term movement is possible. Even a market already considered low can drop another 20% briefly. During the 9/11 attacks in 2001 and the SARS outbreak in 2003, many Hong Kong stocks halved in value within a week. In the subprime mortgage crisis of September 2008, credit vanished overnight for many sectors of the U.S. economy, pushing the nation to the brink of danger. The 2015 A-share market crash gave investors a first taste of the brutality of leverage.
Undoubtedly, some have become very wealthy using financial leverage, but this approach often leads to ruin. The "Oracle of Omaha," Warren Buffett, aptly stated: "Leverage is addictive. Once you have profited from its miracles, few people retreat to more conservative practices. As we learned in the third grade, any positive number, no matter how large, multiplied by zero, evaporates entirely, returning to nothing."
How should one cope with major volatility? Any rational investor who has experienced a heart-stopping stock plunge and liquidity drought has silently sworn never to face it again. So, how can one withstand volatility and prevent tragedy from recurring? The answer lies in maintaining sufficient cash reserves, avoiding excessive debt, resisting the temptation of hot stocks, and adhering to an investment strategy that can be sustained even during difficult times.
Warren Buffett, Duan Yongping, and Chen Guangming have all emphasized the importance of being a "farmer" in the stock market, not a "hunter." For a farmer, a few days of bad weather in a year do not cause significant loss; even one or two years without a harvest do not prevent future yields. But for a hunter, they may become the prey; a single miss can lead to disaster. Duan Yongping likened investing to farming—a process of building solid foundations and fighting steadfast battles. Thus, investors are like farmers, while speculation is like hunting, a zero-sum game where speculators are each other's prey—thrilling but perilous. Many mistake investing for hunting, but it is actually farming. Hunting is a zero-sum game where participants are mutually predatory. Investing earns money from companies; the difference may seem slight short-term, but over time, it becomes vast. For those who farm, occasional bad weather has little impact. As Duan Yongping noted, viewing investing as farming leads to a better mindset, as one roughly understands their actions, despite occasional unfavorable conditions.
Reviewing Warren Buffett's investments, we see he always maintains ample cash reserves, ensuring he is never forced to sell stocks when cash is needed. He rarely uses leverage for investments, as debt erodes investor patience and can force sales at "rock-bottom prices" during major swings. He steers clear of the allure of seemingly promising hot stocks lacking a margin of safety, and avoids companies with fragile balance sheets constantly needing external financing.
Successful investors see themselves as farmers, while the capital markets are teeming with hunters. Farmers can endure occasional bad weather, but hunters risk becoming prey, suffering fatal blows. Major volatility does not harm long-term value investors, but it can devour leveraged speculators. Every rational person must prioritize what matters in life; nothing is more critical than avoiding catastrophic mistakes. To coexist with significant volatility, one must not overpay for investments, avoid companies prone to elimination or disruption, steer clear of fraudsters, refrain from excessive leverage, and not invest in unfamiliar territories.