Recently, the A-share market has experienced severe fluctuations, with the average daily trading volume across the market steadily maintaining above 1.5 trillion yuan. The market's dramatic ups and downs have attracted the attention of the entire population. The bull market expectation has also attracted the funds of many new and old retail investors, significantly increasing the overall market's risk appetite.

Whether it is new retail investors or "old leeks" who have been in the A-share market for a long time, it may not be a pleasant experience in the recent market's dramatic rises and falls. Starting from opening an account at Jianghai Securities in 2010, the author has been in the market for nearly 15 years and can be considered a standard "old leek." This article is a personal reflection combined with the recent market situation.

Firstly, the first thing to do when entering the stock market should be to mentally prepare for the possibility of a stock's value falling by more than 50%. For most people, the timing of entering the stock market should be when the market is booming, because only when the stock market soars and sparks widespread discussion, even when friends and relatives around are "average stock gods," will it arouse a strong desire to enter the market. When the market is sluggish and ignored, it is neither possible to generate widespread discussion nor will anyone be envious of the huge losses suffered by stock market investors, thus prompting them to enter the market.

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However, history has proven countless times that those who enter the market when it is ignored have the greatest chances of winning and the best odds. When the market soars, both investors and media focus on the one with the highest increase and the most profit. Because of this, the profit effect in the stock market is magnified layer by layer. People who enter the stock market for the first time often start with the mentality of "making a little money" and leaving, but once they enter the stock market, they should be mentally prepared for the possibility of "potential losses exceeding 50%."

Taking the CSI 300 Index as an example, from its highest point in 2021 to its lowest point in 2024, the CSI 300 Index's maximum drawdown was about 48%; if looking at the average stock price of the Wind All A, from 2021 to now, the average stock price across the market has fallen by more than 50%; and if focusing on the most watched sectors at the time such as consumer goods, pharmaceuticals, and new energy, the maximum drawdown exceeded 60%. For the most popular sectors in the market recently, such as semiconductors and chips, the maximum drawdown also exceeded 60%.

Although such a decline occurred over more than three years of a bear market, even in a bull market, there are countless examples of indices falling by more than 30% and individual stocks by more than 50%. Taking the National Chip Index (980017.SZ) as an example, during the great bull market from the end of 2018 to 2021, the chip index fell by nearly 40% at most, with three periods where the maximum decline exceeded 30%. The saying "bull markets have many sharp declines" is true, as there are countless significant pullbacks during market rallies, and individual stocks falling by 50% is also very common.

Secondly, regardless of the expected future bull market's magnitude or duration, not using leverage should always be a principle that ordinary investors adhere to. Or, the premise of using leverage must be based on the ability to bear the loss of the leverage multiple. For ordinary investors, the principle of investing with idle money and not using leverage should be applied throughout any investment period.

In investment, there is a "tail risk" that seems to have a low probability of occurrence but is actually a high-probability event. When this risk occurs, it is often when leverage explodes. Generally speaking, tail risk is an extremely low-probability event in investment, but if we review history, we can find that if a person invests long-term, then what should be a low-probability event, the tail risk, becomes a high-probability event for an individual.

For most people, investment should be something that needs to be done throughout their lives. In an average investment career of 40 years, one will inevitably experience "tail risks" triggered by various black swan events, such as wars, terrorist attacks, natural disasters, and large-scale diseases. Once such risk events occur, leveraged losses can wipe out all past gains. There was a classic Hong Kong drama called "The Greed of Man," in which the protagonist, Ding Xie, used leveraged trading in the stock market to make a fortune, but ultimately, due to a failed showdown with Fang Zhanbo, he ended up with his family ruined. The double-edged sword effect of leverage is vividly reflected in the protagonist.

Thirdly, preparing expectations in advance is the best way to gain and hold onto the fruits of victory in the market. In a bull market, achieving paper profits should be an extremely simple matter, and examples of doubling or even multiplying profits several times within a year are also numerous in a great bull market. However, few people can ultimately preserve such profits, and it is often the case that more people exit with losses.Preserving paper profits and retaining the fruits of victory can best be achieved by managing one's expectations effectively.

Taking my own experience as an example, in 2014, I was still a student and had been dabbling in the stock market due to my major. In the frenzied market of 2015, I invested all my personal savings from my student days into the stock market. At one point, my account showed a paper profit of nearly four times the initial investment. During that period, when the market experienced daily fluctuations from thousands of stocks hitting the lower limit to thousands hitting the upper limit, many bold investors were able to achieve a daily increase of over 20% (a fluctuation from -10% to +10% represents a 22.2% increase). However, by the end of 2015, my account only had a 20% profit when I exited.

Many people have asked me a classic question: "Why not exit when your account doubled or even made a 50% profit?" Looking back now, we can clearly analyze the irrational exuberance of the stock market at that time, and even determine that it would have been wise to exit during the peak of the frenzy, or at the very least, after a significant downturn. However, being in the midst of it, everyone had extremely high expectations, which now seem somewhat laughable. My goal at the time was to use my personal savings from scholarships, internships, and living expenses to earn enough for a down payment on a home in a second-tier city, to settle down after graduation. Yet, among the people around me, there were many fellow investors who expected to "earn enough to be financially free" from this investment. This would have required a return of dozens or even hundreds of times the initial investment. Looking back, such goals seem very ridiculous, but at the time, many people firmly believed in them.

Setting a reasonable expectation is crucial to understanding what we need to buy in the market and what risks we need to take. Without a clear goal, we will inevitably be caught in constant dilemmas. For those who make money in the stock market, how much is enough? 30%, 50%, or even doubling or quadrupling the investment? Without a clear target, the paper profits are likely to remain just that—on paper—and not translate into actual gains.