The Truth About Investment Philosophy: Why 80% of Those Who Mistake Luck for Skill End Up Losing It All

I'm Howard Chen, a practitioner who has been deeply involved in quantitative trading and investment education for many years. Recently, I came across a question online: "What will be the next 10-bagger in the U.S. stock market?" This question had thousands of responses, filled with predictions and recommendations—quite a spectacle.

But honestly, every time I see questions like this, I feel a bit concerned—because the question itself exposes a fatal cognitive trap. If you keep thinking this way, you'll likely struggle with investing.

Today, I want to use real data and case studies to help you build a proper investment philosophy. This philosophy won't make you rich overnight, but it will help you go further and more steadily on your investment journey.

I. Why Chasing 10-Baggers Is the Biggest Trap for Investors

1.1. The Cognitive Trap Behind "The Next 10-Bagger"

When you're looking for 10-baggers, you're essentially asking: Which sector will explode? Which company will become the leader? Which stock will go from $50 to $500?

The problem is: no one can accurately predict these things in advance.

In 2017, some said Bitcoin would 10x. In 2020, some said Tesla would 10x. In 2023, some said NVIDIA would 10x. In hindsight, yes, some people got it right. But do you know how many got it wrong?

According to SEC statistics, during the 2020-2022 bull market, the average return for retail investors was only 8.2%, while the S&P 500 gained about 45% during the same period. This means most investors chasing hot stocks couldn't even beat the index.

Those who bet on Nikola (the electric truck concept stock) have seen prices drop 95% from the peak. Those who bet on Peloton (pandemic fitness equipment) are down 90% from the peak. Those who bet on "metaverse concept stocks" mostly saw their investments cut in half or go to zero.

1.2. The Truth About Survivorship Bias

Why do we always hear stories about "someone bought a stock and made 10x"?

This is the famous Survivorship Bias. Winners broadcast their stories everywhere, while losers quietly exit. You only see the successful ones and overlook the massive number of failures.

A Yale University study found that within any 10-year period, only about 4-5% of stocks in the U.S. market contributed all of the market's gains. In other words, over 95% of stocks performed mediocrely or lost money in the long run.

Do you think you can precisely identify that 4-5%?

II. The Essence of Investment Success: Luck or Skill?

2.1. Deep Dive into Duan Yongping's NetEase Case

Many people like to cite Duan Yongping as an example: "Look, he bought NetEase and made 20x—isn't that finding a 10-bagger?"

But what did Duan Yongping himself say? In an interview, he explicitly stated: "That return was largely due to good luck. I don't mistake luck for skill."

Let's analyze his NetEase purchase in depth:

Time Background: In 2001, NetEase's stock price plummeted to $0.51 due to an accounting scandal. The market panicked, and investors dumped the stock en masse.

Duan Yongping's Analysis:

• The company's fundamentals had no fatal issues
• The game business "Fantasy Westward Journey" showed strong potential
• CEO William Ding's capability and integrity were reliable
• Market cap was only $40 million—severely undervalued

His Actions:

• Bought heavily in the $0.51-$1.20 range
• Held patiently after buying, regardless of short-term fluctuations
• Never tried to "predict the top" during holding period

Result: NetEase stock eventually rose above $100, earning Duan Yongping about a 20x return.

But in this process, how much was luck?

• China's golden decade of internet growth (luck)
• "Fantasy Westward Journey" becoming a blockbuster (luck)
• Gaming industry's overall explosion (luck)
• Accounting scandal eventually cleared (luck)

Was Duan Yongping smart enough? Yes. But even he admits it was largely luck.

2.2. How Attribution Bias Destroys Investors

In psychology, there's a concept called "Attribution Bias"—human nature has this characteristic:

• When making money → Think it's because I'm smart
• When losing money → Think it's bad luck/the market's fault

During the 2020-2021 U.S. stock bull market, countless retail investors thought they were "stock gods." Buy Tesla—it goes up. Buy Bitcoin—it goes up. Buy tech stocks—they go up. Account balances kept inflating, and so did confidence.

Then 2022 arrived. The Fed raised rates, tech stocks crashed, and these "stock gods" instantly became "bag holders."

Nobel laureate Daniel Kahneman points out in "Thinking, Fast and Slow": "Humans naturally tend to overestimate their abilities and underestimate the role of luck." This cognitive bias is especially deadly in investing.

III. Data Reveals: What's the Cost of Mistaking Luck for Skill?

3.1. The Statistical Pattern of 80-90% Losing It Back

I can tell you very directly: if you mistake luck for skill, there's an 80-90% probability you'll lose it back, or even lose more.

This isn't fear-mongering—it's backed by substantial data.

Lottery Winners' Fate: Research by the National Bureau of Economic Research (NBER) shows that 70% of lottery jackpot winners go bankrupt within 5 years. Why? Because they think they're "rich now," start spending lavishly, and even make high-risk investments.

Professional Athletes' Financial Tragedy: A Sports Illustrated survey shows that 60% of NBA players go bankrupt within 5 years of retirement, and 78% of NFL players face financial distress within 2 years of retirement.

Retail Investors' Real Performance: According to DALBAR's 30-year continuous research, the average 20-year annualized return for U.S. retail investors is only 2.9%, far below the S&P 500's 9.7%. The main reason? Chasing momentum and frequent trading.

3.2. Analyzing Bankruptcy Data of the Suddenly Wealthy

Why do people who get rich quickly tend to go broke? There are three core mechanisms:

Mechanism 1: Risk Appetite Inflation

After making money, people think they "understand the market," and then:

• Position sizes get bigger (from 30% to full margin, adding leverage, even playing with options)
• Stock selection gets more aggressive (from blue chips to small caps and concept stocks)
• Decisions get faster (from deep research to "quick strikes")

Fidelity research shows that retail investors using leverage have a survival rate of less than 15% after 5 years.

Mechanism 2: Stop Learning and Reflecting

People who think they're "capable" stop learning. They no longer deeply research companies, no longer pay attention to risks, no longer listen to different opinions.

Buffett says: "Be fearful when others are greedy, and greedy when others are fearful." But people who mistake luck for skill become "forever greedy."

Mechanism 3: Market Mean Reversion

In statistics, there's a pattern called "Regression to the Mean." If you flip a coin and get 10 heads in a row, it doesn't mean you have the "ability to flip heads"—the next flip is still 50/50.

Investing is the same. Short-term wealth is often from catching a trend, but trends pass and bull markets end.

3.3. Typical Case: The Painful Lesson from $1.2M to $100K

Let me share a real case (anonymized):

In early 2020, a 30-year-old engineer invested $100,000 in Tesla stock. Tesla's stock price was around $150 (pre-split) at the time.

Stage 1: Luck Arrives

• In 2020, Tesla rose about 700%
• His $100,000 became $700,000
• Paper profit of $600,000

Stage 2: Confidence Inflates

• He thought he "understood investing"
• Early 2021, went full margin buying more tech stocks
• Account peaked at $1.2 million

Stage 3: Reality Strikes

• 2022, Fed raised rates, tech stocks crashed
• Tesla fell about 60% from peak
• Due to leverage, account rapidly shrunk to $300,000

Stage 4: Emotional Decision-Making

• He wasn't willing to accept it, wanted to "recover quickly"
• Started chasing hot stocks, frequent trading
• Early 2023, account was down to $100,000

From $100K to $1.2M back to $100K—the entire process took less than 3 years.

This isn't an isolated case. In my (Howard Chen's) years of observation, stories like this happen every day.

IV. "Slow Is Fast": The Proven Investment Philosophy

4.1. The Power of Compounding: 15% Annually vs. 50% Surge

Many people don't understand the mathematical principle of "slow is fast." Let me show you with numbers:

Scenario A: Chasing Surges

• Year 1: Surge 50%, $1M becomes $1.5M
• Year 2: Crash 30%, becomes $1.05M
• Year 3: Flat, still $1.05M
• Year 4: Drop 20%, becomes $840K
• Year 5: Rise 30%, becomes $1.092M
• 5-year total return: 9.2%

Scenario B: Steady Growth

• Steady 15% annual growth
• After 5 years: $1M × 1.15^5 = $2.011M
• 5-year total return: 101.1%

This is the power of compounding. 1.15 to the 10th power (10 years) = 4.05 (4x). 1.15 to the 20th power (20 years) = 16.37 (16x).

From 1965 to 2023, Buffett's annualized return managing Berkshire Hathaway was about 19.8%. This number doesn't sound sexy, but the 58-year cumulative return is: 3,787,464%—nearly 40,000x.

4.2. Buffett and Munger's Common Choice

These two investment masters never made money by "guessing 10-baggers." Their method is very simple:

1. Choose Companies Within Your Circle of Competence

Buffett says: "I only invest in businesses I can understand." He didn't buy tech stocks (early on) because he said "I don't understand them." It wasn't until Apple matured enough and its business model was clear enough that he started buying in 2016.

2. Wait for a Reasonable Price

They don't chase at high valuations; they patiently wait for market panics when valuations fall. Buffett says: "Be fearful when others are greedy, and greedy when others are fearful."

3. Hold Long-Term

In Buffett's portfolio, he's held Coca-Cola for over 30 years and American Express for over 25 years. He says: "My favorite holding period is forever."

Duan Yongping is the same. He bought Apple, Moutai, and NetEase because he understood these companies' business models, then held long-term.

4.3. How to Practice "Slow" in Reality

"Slow is fast" has three levels:

Level 1: Select Slowly, Profit Quickly

Spend several months researching a company, wait for a good price to buy, then hold for years—this looks "slow," but returns may far exceed those who trade daily.

Level 2: Rise Slowly, Rise Longer

Companies with 15-20% annual growth that steadily increase for 10 years ultimately bring you astonishing compound returns. Stocks that surge often aren't sustainable.

Level 3: Slow Pace, Fewer Mistakes

Slow down and give yourself time to think: Is this price reasonable? Do I really understand this company? How much drawdown can I tolerate?

Making one less big mistake is more important than making one more small profit.

V. How Do Real Investment Masters Think?

5.1. The Deep Meaning of the Circle of Competence Principle

Buffett's "circle of competence" doesn't mean you can only invest in your work industry, but rather: you must truly understand a company's business model.

What does "truly understand" mean? You can answer these questions:

• How does this company make money?
• What's its competitive advantage?
• Will this advantage still exist in 5 years?
• Is management trustworthy?
• Are the financials healthy?

If you can't answer, it's outside your circle of competence.

5.2. Focus on Certainty, Not Explosiveness

Investment masters don't focus on "which stock can 10x," but rather "which companies can continue creating value over a 5-10 year horizon."

They focus on:

• Business model sustainability
• Width and depth of the moat
• Management's integrity and capability
• Financial indicators' robustness
• Reasonable valuation ranges

Rather than:

• Short-term stock price fluctuations
• Market sentiment and hot topics
• So-called "doubling opportunities"
• Various concepts and themes

5.3. Three Levels of Staying Humble

Duan Yongping has a great quote: "I try not to make big mistakes, but small mistakes will definitely happen. When luck is good, small mistakes won't be devastating; when luck is bad, at least I haven't made big mistakes."

Level 1 Humility: Acknowledge the Role of Luck

Attribute good results to "luck + a bit of skill," not entirely to yourself.

Level 2 Humility: Acknowledge the Limits of Knowledge

Don't touch what you don't understand. "I don't know" are the four most powerful words in investing.

Level 3 Humility: Acknowledge Future Uncertainty

Even the best analysis can't predict the future. Stay humble and manage risks well.

VI. The Cognitive Upgrade Path for Ordinary Investors

6.1. From Chasing Momentum to Value Investing

Most retail investors' investment journey looks like this:

Stage 1: Blindly Following Trends

• Listen to tips, chase hot stocks
• Buy when it rises, sell when it falls
• Frequent trading, account shrinks

Stage 2: Technical Analysis

• Learn various technical indicators
• Try to predict short-term movements
• Still lose more than win

Stage 3: Value Investing

• Start researching company fundamentals
• Focus on long-term value
• Wait for reasonable prices to buy
• Returns gradually stabilize

Stage 4: Investment Philosophy

• Build your own investment system
• Define circle of competence boundaries
• Maintain humility and patience
• Long-term compound growth

6.2. How to Build Correct Investment Expectations

Many investors have distorted expectations:

Wrong Expectations:

• Hope to double every year
• Hope every stock rises
• Hope for no drawdowns
• Hope to get rich quickly

Correct Expectations:

• 15-20% annualized is already excellent performance
• 30-40% of stocks in your portfolio may lose money
• Drawdowns are part of investing; the key is controlling magnitude
• Wealth accumulation takes time—there are no shortcuts

According to JP Morgan research, the S&P 500's annualized return over the past 20 years has been about 9.5%. If you can achieve 15% annually, you've already beaten the vast majority of professional investors.

6.3. Core Principles of Risk Management

The most important thing in investing isn't "how much to make," but "how much to lose."

Core Principles:

• Position Management: No single stock exceeds 10-15% of portfolio
• Diversification: Hold at least 8-12 stocks across different sectors
• Cash Reserve: Maintain 20-30% cash or cash equivalents
• Stop-Loss Discipline: Set clear stop-loss criteria (e.g., 15-20% loss on individual stocks)
• Regular Rebalancing: Adjust portfolio quarterly or semi-annually

Charlie Munger says: "Avoid situations from which there's no return. Don't give yourself the chance to lose everything."

VII. From Theory to Practice: Building Your Investment Philosophy System

How to go from theory to practice? Continue learning other articles in the "Investment Philosophy: Concepts and Practice Guide" series.

Remember: Investing is a marathon, not a sprint.

Final Thoughts

Today we've explored core issues in investment philosophy: Why is chasing 10-baggers a trap? Why does mistaking luck for skill lead to losses? Why is "slow is fast"?

True investment wisdom isn't about predicting the future or chasing hot stocks, but about:

• Building the right cognitive framework
• Defining your circle of competence
• Focusing on certainty rather than explosiveness
• Maintaining humility and patience
• Controlling risk, compounding long-term

Duan Yongping says: "If you mistake luck for skill, you'll definitely lose it back." This sentence is worth every investor's remembrance.

Buffett says: "Investing is simple, but not easy." Simple because the principles are clear; not easy because you need to overcome human nature.

If you can start today, let go of fantasies about 10-baggers, focus on building your own investment philosophy system, and practice and refine it over 5, 10, 20 years—

Then you're already on the right path to financial freedom.

I'm Howard Chen, focused on interpreting investment wisdom through data and logic, helping ordinary people build correct financial thinking. If this article inspired you, welcome to follow Howard Chen as we explore the essence of investing together.

Reflection Questions:

1. Looking back at your investment history, which successes were skill and which were luck?
2. Is your current investment strategy pursuing "fast" or "slow"? Why?
3. If your account drops 30% tomorrow, what would you do? This answer reflects the maturity of your investment philosophy.

Let's become more rational, more mature investors together.

Please let me know your specific needs.