1. 债权人的损失
  2. 债务人的未来收入和支出削减


  1. Debt to Income Ratio
  2. Debt Service Payment to Income Ratio

Credit is "Money"

Most of what people think is money is really credit, and credit does appear out of thin air during good times and then disappear at bad times.

A big part of the deleveraging process is people discovering that much of what they thought of as their wealth was merely people's promises to give them money.



How to deleverage the Economy

Make income grow faster than debt, lowering the debt-to-income ratio. For the burdens from existing debt not to increase, nominal income growth must be higher than nominal interest rate.


The limitation of Market Valuation

Market valuation by stock price * number of shares is misleading, because not all shares can be sold on the same quoted market price at the same time. Once large volume of dumping emerged, the stock price is definitely going to drop significantly.

An estimation can be made by multiplying market value by a factor, say 0.7.

The Nature of Equity Investment

  1. Source of Income (dividend, earnings)
  2. Marketable Security

The underlying substance of knowledge

  1. Facts
  2. Cause-and-effect relationship among events
  3. Distribution of possible outcomes on certain event

The underlying utility of knowledge

  1. Prediction
  2. Analysis of the past, revealing what happened.

Economic Downturn Periods

  1. Financial Crisis of 2007 - 2008 (2008 Financial Crisis, lead to the Great Recession)

Strong Foreigh Capital Inflow can help keep long-term interest rate low despect the Fed kept raising short-term rate.

The Inherent Inevitability of Crisis

If the danger of crisis was fully recognized by related party, it would never happen. Crisi usually happens when situation looks good, when the potential of crisis was not be foreseen by the authority. Therefore, crisis is very likely to happen even when authority claims everything will be fine (out of true heart or not).

Financial Crisis happens when Big Financial Giant cannot meet obligations (fulfill contracts). To meet these obligations, large amount of financial assets have to be sold, which drives down asset price.

When yield curve flatten, holding short-term assets becomes attractive since their yield increases.

The contagious of 2008 financial crisis

European banks invested in the U.S. subprime mortage market sufferred great losses. The tightening money market in U.S. crippled some European banks who rely on the U.S. financial market to raise short-term fund and maintain liquidity.

Structured Investment Vehicle

Borrowing short-term to invest long-term, by entities established off-shore to avoid regulations

Mezzanine Capital

Any subordinate debt or preferred equity instructment that represents a claim on a company's assets which is senior only to that of the common shares.

The U.S government saved U.S. auto industry by providing loans from government fund

The ultimate Loss

Government assistantace and the act of bail out will ultimately impose the loss on taxpayers, non the less the currency depreciation. Those suffers also includes foreign U.S. currency and bond holers


货币贬值 --> 金价大涨(保值)


  1. 国内: 通货膨胀
  2. 国外: 大宗商品价格上涨(黄金、石油等),对一揽子货币贬值


  1. 短线为主,适合做空的股票往往波动性较大,大幅下跌后经常回撤上涨,短线宜以波动性即得收益为主。预期下跌后平仓等待股票回撤。待有合适回撤后继续做空。波段性操作。

The Underlying Cause of 2008-2011 financial crisis

  1. Tremendous misestimation and Ignorance of the Risk related to mortage related financial assets.
  2. Leveraged Investing

Classic Sign of Buble

New buyers flooded the market, many of them have no prior experience.

The Substance of Financial Crisis

The deveraging process is the process of contracting balance sheet for every participants in the credit market, as large scale credit defaults occuried.

As the overall capital in the economy stay unchanged, the real impack to the market is investor faith and the failure of systematically important institutions.

The collapse of faith is usually followed by a strain of liquidity, which spread the crisis to non-financial sectors.


It is organization, not medium of storage, that really matters in periodical recording of information.

Bonus Army Conflict


Recurrent Neural Network

  1. Simple RNN (Elman Network)
    The state of the Simple RNN cell is the output of the activation function, the output of the RNN cell is the same as the state

  2. LSTM
    The state of the RNN cell is different from the output of the cell. The LSTM cell has a seperate output gate.

  3. Batch Size

A batch contains the whole sequence in consideration, with all time steps included.
Batch size = 5, means 5 sentences, each with a number of #time_step features.

  1. Keras
    RNN class, model.fit()输入tensor的shape为(batch_size, timestep, feature_num)
    RNN(x, input_shape=(timestep, feature_num))
    timestep为bp gradient descent的步数(即RNN网络unroll为普通NN的长度)


Two Policies that Must be Followed to beat the Average

a. Inherently Sound and Promising Prospects for A Security
b. Not Popular on Wall Street

The Restrictions of Security Analysis

a. The conclusion of the study is only a nearly correct version of the past
b. The information used in the analysis may have lost relevance by the time acquired
c. The conclusion may become obsolete by the time the market is ready to absorbe it.

Topics that Must be Covered in the Study of Corporate Income

a. Accounting aspect: What are the true earnings for the period studied ?
b. Business aspect: What indications does the earnings record carry as to the future earning power of the company ?
c. Invest Finance aspect: What elements in the earnings exhibit must be taken into account, and what standards must be followed, in endeavoring to arrive at a reasonable valuation of the shares ?

Tests for determining "bargin" issues

  1. The indicated value by appraisal is at least 50% more than the current market price
  2. The value of the business to a private owner, the realizable value of the assets.

Tow major sources of undervaluation

  1. Currently disappointing results
  2. Protracted neglect or unpopularity.
  3. The market's failure to recognize its true earnings picture.

Timing and Pricing

  1. Timing: The endeavor to anticipate the actions of the stock market
  2. Pricing: The endeavor to buy stocks when they are quoted below their fair value and to sell them when price rise above such value

About Market Timing

Market forcast is by itself meaningless.
The general market is unpredictable.

The Effectiveness of Investment Theory

  1. New conditions has emerged that is not in the old formular over time
  2. The popularity of a theory cast an adverse effect on its performance as more people applies it.

The paradox of market valuation

The more successful the company, the greater are likely to be the fluctuations in the price of its shares. The better the quality of a common stock, the more speculative it is likely to be. Gambling and speculation is about the betting on uncertainty with a potential high return. The uncertainty component can be if the company can succeed in the future, or if it is definitely going to succeed, how big success it can reach. The market price for hight quality stocks is highly speculative because the public can not reach consensus on the potential about the future of a company, even if they agree on genenral its success or failure future, they surely cannot agree on how success it will be.

Graham's Lifetime of Experience

The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits hisself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment.

Distinction Between Investor and Speculator

Intention of Stock Purchase

  1. Speculator
    The speculator's primary interest lies in anticipating and profiting from market fluctuations. (Price Orinted)

  2. Investor
    The investor's primary interest lies in acquiring and holding suitable securities at suitable prices. (Earnings Orinted)

Although a change of earnings will eventually reflect on price movement, the intention is different.

For investors, the market quotations are there for his convenience, either to be taken advantage of or to be ignored.

The Two Components of Profitability

  1. Operating Performance: operating margin
  2. Financial Performance: net margin

Factors to be considered when making a investment decision

  1. Do I have more information than my trading counterparty ?
  2. Do I know this company as well as I thought to be ?
  3. How much should this security go up to make even taking into account the tax and trading cost ?


  1. 成交价总是order book里的卖1或买1价格
  2. 只考虑限价单,卖1大于买1则无成交
  3. 卖1是买入证券时的可能最低价,买1是卖出证券时的可能最高价

Security Analysis读书笔记

Portfolio Theory and Value Investment

The core difference is the definition of "Risk". Portfolio theory takes "Risk" as the price volatility of securities. In contrast, value investment treats "Risk" as the inappropriate valuation of securities.

The underlying logic for defining "Risk" as volatility is the need of frequent measurement of asset portfolio in market value. The emphasis on the liqudity of security.

Value investor does not focus on market value of their holdings but rely on long-term value realization instead.

About The Timing of Selling

It is questionable that a value investor should sell a security when it reaches full value. As good asset provides long-term cash flows that are difficult to completely converted into current value based on available information. A value investor may rely on such assets to survive different economic conditions, especially downturns.

Invest for Certainty

A good value investment should involve certain judgement for key elements.

Uncertainty of future falls into several categories, internal uncertainty and external uncertainty.

Principal Obstacles to Success of the Analyst

  1. The inadequacy or incorrectness of the data
  2. The uncertainty of the future
  3. The irrational behavior of the market

Two Assumptions of Analytical Work

  1. The market price is frequently out of line with the true value
  2. There is an inherent tendency for these disparities to correct themselves

Market Modelling: Voting Machine instead of Weighing Machine.

The market price will not reflect the value of each securities in an exact and impersonal mechanism. Rather, it reflects the choices of countless individuals partly of reason and partly of emotion

Trend Essentially a Qualitative Factor

No limit may be fixed on how far ahead the trend should be projected; and therefore the process of valuation, while seemingly mathematical, is in reality psychological and quite arbitrary. For this reason we consider trend analysis as a qualitative factor in its practical implications, even though it may be stated in quantitative terms.

A Test of Distinction Between Investment v.s. Speculation

Safety: An asset is only safe only if it is assured, or at least strongly indicated, by the application of definite and well-estabilished standards.

Definition of Investment

An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.

Past Performance V.S. Future Assessment

The traditional view was that prudent bond investing must be based on solid inference from past data as opposed to speculation regarding future events. However, the motivation of inferencing from past data was exactly trying to has know about the possibility of future.
Thus the real difference is really about whether we should judging a firm's future perspective based exclusively on historical data (concervative); or we can forward-looking at the quality and possibility of business.


Forward-looking analysis can be profitably applied to instruments of all sorts.

About Investment Risk

The supposed acturial computation of investment risk is hardly practical. Investment losses are not distributed fairly evenly in point of time, but tend to be concentrated at intervals, which is incalculable.

Four Principles for the Selection of Issues of the Fixed-value Type

  1. Safty is measured not by specific lien or other contractual rights, but by the ability of the issuer to meet all of its obligations.
  2. This ability should be measured under conditions of depression rather than prosperity
  3. Deficient safety cannot be compensated for by an abnormally high coupon rate
  4. The selection of all bonds for investment should be subject to rules of exclusion and to specific quantitative tests corresponding to those prescribed by statute to govern investments of saving banks.

Old Equity Investment (Common Stock) Theory - Threefold Principle

  1. A suitable and established dividend return
  2. A stable and adequate earnings record
  3. A satisfactory backing of tangible assets

P/E Ratio and Bond Interest Return

A PE ratio of 25 is equivilent to a 4% coupon ratio corporate bond. Both pay 4% on yield plus face value of the security when held to maturity/sold.

U.S. Economy Cycle

1929 - 1933, down
1934 - 1937, up
1937 - 1938, down
1939 - 1943, up
1944 - 1947, down

Dividend Policy

Liberal Dividend: A policy to distribute a major part of earnings as dividend to shareholders

Conservative Dividend Policy

Conservativem means following the current tradition.

Three Traits of Human Nature:

  1. aversion to boredom
  2. a tendency for emotions to overwhelm reason
  3. greed

Three Approach for Value Investment

  1. Secular Expansion as Basis
  2. Individual Growth as Basis of Selection
  3. Selection Based on Margin-of-safety Principle

Intransic Value

Intransic value only concerns about the earning power of the business, not including the growth potential. Value investing is about buying at a bargin price (compared to intransic value) with enough margin of safety. Invest in certainty.

Investing in growth potential is speculation and add more factors on top of the intransic value and current price level (bargin or not). More factors, higher uncertainties.

Current Earnings Should Not Be the Primary Basis of Appraisal

The market level of common stocks is governed more by their current earnings than by their long-term average. This fact accounts for the tremendous fluctuations in common stock prices. The mistake of the market lies in its assumption that in every case changes of this sort are likely to go farther, or at least to persist, which is doubtful.

Earning Power and Losses

Net losses should not be included in the average profit to represent a company's earning power.

Losses represents only the loss potential. Earning power and loss potential should be split apart.

Capital Structure

A speculative capitalization structure may give the common stock a definite speculative advantage even though it will turn the common stock unsuitable for investment.

PE ratio and Earning Basis

A PE ratio of 20 means the stock is expected to generate earnings of 5% per year of the investment for the time forward.

The relationship between Profit per Value and Output per dollar of stock value

Profit per value is inversely related to output per dollar of stock value

Valution of a Company by Summing Up The Valution of Parts With Different Ratio

Discrepancies between price and value

  1. Causes of Price Discrepancies
    A. Exaggeration
    B. Oversimplication
    C. Neglect

Factors for the Market Valuation of Secondary Issues

  1. If professional market operators are interested in the issue
  2. If professional investor are interested in the issue
  3. The interests of genneral public torwards the issue
  4. If there are sponsors of the issue

Market Behavior of Top Issues and Secondary Issues

  1. Standard of leading issues almost always respond rapidly to changes in their reported profits, so much so that they tend regularly to exaggerate marketwise the significance of year-to-year fluctuations in earnings
  2. The actions of the less familiar issues depends largely upon what attitude is taken towards them by professional market operators. If interest is lacking, the price may lag far behind the statistical showing. If interest is attracted to the issue, either manipulatively or more legitimately, the opposite result can readily be attained, and the price will respond in extreme fashion to changes in the company's exhibit.

The composition of the market-leader group has varied greatly from year to year, especially in view of the recent shift of attention from past performance to future prospects

The paradigm shift of stock valuation was primarily driven by the growing impact of business renovation, especially its destructive power against existing market participants.

Bargin Purchase of Common Stock

  1. The bargin rate needs to be increased when the general market is statistically at a high level

The definition of Market Analysis

  1. Predicting future prices based on market price movement and signals, including macroeconomic and microeconomic factors without reference to the company fundementals.


Operating Leverage

OL = %Change in EBITA / %Change in Sales

PPE investments will result in fixed assets. An expansion of PPE investments will increase the per year depreciation expense together with production capacity. However, the bottom line will be hurt if the production capacity is not reached due to lack of sales. In this case, the depreciation expense become the fixed cost in production.

Analysis Framework

  1. Industry Life Cycle
  2. Sector Rotation
  3. Business Cycle

JF读书笔记 – 2018年8月

Unscheduled News and Market Dynamics

In a limit order market, the price information (limit orders) are the only information that market participant can be efficiently used to communicate with others.

Optimal Order Submission

  1. Order Price
  2. Execution Probability
  3. Pick-off Risk

The optimal order submission is a trade-off between these three factors.