Chapter 05 The Wall Street Con

Toxic Assets and Survivorship Bias

On the road of investing, most people step into the capital market full of hope, yet often, without realizing it, fall into a net meticulously designed by Wall Street and the traditional financial system. These institutions use complex financial jargon, theories that look academic and professional, and beautifully packaged derivative products to nibble away, step by step, at investors’ hard-earned savings. This chapter lifts the veil on these traps hidden beneath a professional sugar coating, and restores the cruel truth about single-stock investing, bonds, insurance, and finance textbooks.

The true capitalist manages wealth with extreme precision. Every dollar is clearly known to flow either toward the asset end or the consumption end. Those seemingly trivial small expenses (subscription services, emotional spending), magnified by decades of compounding, all become an enormous gap in your future freedom. Management is not merely bookkeeping; it is about eliminating financial fuzziness, so that every cent is put to the use it should be put to.

The Cruel Elimination Rate of Single-Stock Investing

Many investors, deeply drawn by stories of “overnight riches” or “thousandfold returns” in the market, place heavy bets on a handful of hot single stocks. Yet this strategy simply ignores an extremely severe survivorship bias. Across the long river of history, the overwhelming majority of companies eventually head toward decline or even extinction.

Even more cruel is that the “stop-loss” mechanism, on which retail investors so often rely when a single stock falls, is itself proof of the failure of single-stock investing.

When you find yourself using stop-losses, you are not suited to investing in single stocks. In the end, every stock you buy will get stopped out at a loss. When your holding drops 30%, you worry; when it drops 40%, you panic; when it drops 50%, you dare not add to your position — you are not suited to investing in single stocks. You never use the products of the companies you invest in. The companies you buy are ones you cannot understand. You do not intend to hold a company for more than ten years (let alone forever) — you are not suited to investing in single stocks. (Video 00095)

These words expose the true psychological path retail investors walk with single stocks: at a 30% drop, worry; at a 40% drop, panic; at a 50% drop, no courage to add. When what you buy is a company you truly believe in, whose products you use every day, a decline instead becomes a cheaper chance to restock; but the single stocks retail investors buy are mostly products recommended by others, products they have never used themselves, so any pullback immediately shakes their faith. The advantage of index investing lies precisely here: what you buy is the organism called “all the top enterprises,” which carries a built-in mechanism for weeding out the weak and keeping the strong. There is no need to develop faith in any single company, and therefore no need for the tool called “stop-loss” at all.

According to the research of Professor Hendrik Bessembinder on all US stocks from 1926 to 2016, the cruel mathematical truth is this: for the lifetime buy-and-hold return of a single stock, more than half cannot even beat the risk-free one-month Treasury bill (only 42.6% come out ahead), and the single most common outcome is, astonishingly, a 100% total loss to zero. What truly holds up the entire net-wealth growth of US stocks over nearly a century is merely the top-performing 4% of enterprises; the remaining 96%, taken together as a whole, only break even with Treasury bills. An even more intuitive stress test is this: randomly betting on a single stock and holding it for a full 90 years carries as high as a 96% probability of underperforming the market and a 73% probability of not even beating Treasury bills. To place a heavy bet on single stocks is no different from searching for treasure blindfolded in a minefield; the target you painstakingly picked is, with overwhelming probability, merely part of that mediocre 96% denominator.

▲ Figure 5-1 The extreme skewed distribution of US single stocks, where a handful of top winners hold up all the net wealth while most stocks underperform or even go to zero

Source: Bessembinder, "Do Stocks Outperform Treasury Bills?" (1926–2016)

More crucial still is that those 4% of winners cannot be identified in advance, and they are scattered among thousands of single stocks — to avoid missing them, you would have to buy nearly the whole market, which is realistically impossible for a retail investor researching and tracking one stock at a time. In other words, the path of single stocks does not work whether you try to “precisely pick the winners” or to “cast a wide net for stability”: the former has vanishingly small odds, and the latter’s engineering workload far exceeds what an individual can bear. A single market-cap index ETF (QQQ / 00662), bought in one go, is equivalent to instantly holding a basket of quality enterprises automatically screened by the weed-out-the-weak mechanism. You neither have to bet on which few will win, nor worry about how many you must assemble to be safe — the two hard problems of stock selection and diversification are solved by it at a single stroke.

If we pull the lens back to the fund industry, the answer is equally cruel. According to long-term SPIVA statistics, in global markets the proportion of active funds lagging their corresponding index can reach 93.65%, and in emerging markets it is even as high as 95.24%. Turning the lens back to the home market most immediate to Taiwanese readers, the situation shows no mercy whatsoever: per S&P’s SPIVA Scorecard (2024), over the past five years 84% of Taiwan large-cap active funds lagged the S&P Taiwan index, and in the most recent year this proportion shot straight to 100% — not a single one beat the market. Neighboring Thailand’s large-cap funds were equally brutal, with lagging proportions over 1, 3, and 5 years all above 84%.

Another statistic in the SPIVA report is even more chilling — it observes not only the “lagging proportion” but also the “survival rate of champion funds.” Taking the end of 2020 as the baseline, 512 active funds across the whole market ranked in the top 25% by performance. But one year later, only about 5% managed to stay in the top-25% leading group; another year on, this number dropped straight to zero. In other words, the probability that last year’s champion fund stays in the top tier for two consecutive years this year is zero. This result is entirely consistent across the three market categories of large-cap, small-cap, and mid-cap stocks, without any exception.

Active fund managers earn their performance bonuses by “consistently beating the market”; but this statistic reveals a cruel reality — their success is random. The one who performed well in a given year most likely reverts to the mean the next year, and returns to mediocrity the year after. Index investing does not need to pursue “champions,” because champions never live long to begin with; what index investing wants is “never getting knocked out” — as long as you are not eliminated, the compounding of time will naturally consume the “average” across all the rotating champions.

Many people assume that active funds lag the market because managers are not diligent enough or not smart enough. The truth is exactly the opposite — they are bound by three institutional pressures:

These three pressures force managers to trade frequently in order to “prove they are doing something.” What active funds pursue has never been the best outcome, but rather looking very professional. The reason index investing wins is precisely that it needs no self-justification at all — as long as it makes no mistakes, time and compounding will naturally weed out the frequently trading opponents.

In other words, even professional managers find it hard to beat the market over the long run, so retail investors chasing hot single stocks on emotion can only have even lower odds.

This choice is no longer merely the preference of a few prophets; it has become the verified mainstream of the market. Twenty-five years ago, index funds accounted for only 14% of the total market’s capital scale; today, this proportion has climbed to 52%. More and more institutional and individual investors vote with their feet, proving that the effectiveness of passive investing has long been validated in practice.

Reading this figure, many advanced investors will worry: with passive indexing accounting for more than half, will it break the market’s price-discovery mechanism? The answer to this question lies in the key difference between “assets under management (AUM)” and “trading volume.” Long-term data from 2006 to 2024 show that although the “asset scale” held by index funds has reached over half of the whole market, the “trading volume” they actually generate each year accounts for only a little over 1% of total US trading volume — in fact slightly less than the trading volume of active funds.

In other words, although index funds own “a large amount of equity,” most of that equity is held passively for the long term and rarely moves in and out of the market. The market’s true pricing is still done by the vast body of active traders and institutional participants — they are still conducting “reasonable price discovery” for every stock every day. The same report also notes that even as index scale rises, about 70% of individual stocks still deliver returns at least 10 percentage points higher or lower than the market each year; the divergence among single stocks and the room for price discovery have never disappeared. “Index-fund bubbles will destroy price discovery” is a myth that has circulated for a long time but does not fit the data.

Investment scholars have taken this principle to an absurd extreme with an unforgettable experiment. In the “blindfolded dart-throwing” experiment recorded in “A Random Walk Down Wall Street,” the long-term stock-picking results of monkeys, ordinary members of the public, and professional fund managers were nearly indistinguishable, and the monkey group sometimes even came out ahead. This is not coincidence but a mathematical inevitability: active funds charge management fees as high as 1% a year, and if the expected return is 5%, the fees alone eat up one-fifth of the profit, so over the long run they must lag behind low-fee indexes.

Even retail investors who seriously study single stocks are shown no mercy by the numbers. Take the real case of an investor with a full ten years of investing: a total return of 3.105× converts to an annualized return of about 12%; seemingly impressive, yet it lagged the same period’s Taiwan Weighted Total Return Index at 13.58%, and fell even further behind holding 00662 directly at 14.63%. The arduous effort of stock-picking bought only a worse result than the market.

Single stocks make you busier, and you worry more. A single stock could drop 80% at any moment. (Video 00535)

Rather than expending mental energy guessing which company can become that rare minority of winners, it is better to directly buy the NASDAQ-100 index, which contains these top enterprises. The crashes and eliminations of single stocks are the market’s daily routine, while a top index possesses the organism-like advantage of automatically weeding out the weak and keeping the strong. This is the only scientific path to avoiding the cruel elimination rate of single stocks and steadily accumulating wealth.

The Proof That Indexes Automatically Weed Out the Weak and Keep the Strong

The speed at which single stocks are eliminated is jaw-dropping — let history speak. Among the top ten companies by global market value in 1990, IBM was an unrivaled tech giant; yet thirty-five years later, today, IBM has long vanished from the top ten, its market-value scale left far behind by the times. Intel, once the chip overlord, is now caught in a crisis of survival, and even needs to rely on TSMC’s advanced process to maintain basic competitiveness. Even more dramatic is that Nvidia, which did not even appear on the top-ten list in 2010, rode the AI wave to leap to the top in just a few years, its market value once surpassing US$2 trillion.

This violent generational reshuffling is precisely where index investing’s most powerful economic moat lies: holding 00662 is equivalent to letting the index mechanism automatically eliminate the declining old overlords while automatically incorporating the newly rising strongmen of the era, sparing the investor the arduous decision of expending enormous mental energy to judge which enterprise can survive the next ten years. A single-stock investor might have happened to bet right on IBM and missed Nvidia, but the index holder takes both.

If we pull the timeline back even earlier, this reshuffling is almost the norm rather than the exception. Looking back at the original constituent stocks of the NASDAQ-100 index in 1985, of those once-illustrious companies, precious few remain on the list forty years later, today; most have long been swept away by the tide of the times into oblivion.

This elimination mechanism is not limited to the US tech circle. Taiwan’s own traditional-industry leaders are equally unable to escape. The “four treasures” of Formosa Plastics Group were once a dividend-stock target that many Taiwanese believed in for a lifetime, but facing the structural transformation of the petrochemical industry, their share prices have been halved for the long term and struggle to recover, personally verifying the cruel essence that “survivorship bias makes us see only the winners, never counting the losers.”

Exposing the Toxic-Asset Traps of the Financial Industry

To maximize profit, traditional financial institutions often turn themselves into a “financial 7-Eleven” that sells everything, not only taking deposits and making loans but also branching into selling all kinds of funds and commercial insurance. These institutions most often exploit investors’ fear of market volatility, heavily promoting packaged structured derivative bonds and wealth-management insurance, prettifying them as safe harbors of “capital preservation” or “stable income.”

Long-term bonds and other financial derivatives are the junk food of the financial industry — even toxic assets. And the bond funds the ordinary financial industry sells are not simply US bonds. These carry higher gross margins, higher kickbacks, higher performance bonuses. For the ordinary person, though, they are toxic assets. (Video 00466)

These products, claimed to be low-risk, are in essence “toxic assets” packaged by the financial industry to erode your wealth. Under the merciless grinding of long-term inflation, a depressed rate of return is itself the greatest risk, because real purchasing power will be substantially eroded. What is more, many packaged corporate bonds and derivative products, when a liquidity crisis strikes the market, can fall as deep as 40% to 60% — even more brutal than the stock market. Locking your funds into these tools full of hidden risks not only fails to resist inflation but may also, at the critical moment, face the disaster of principal loss.

The fee structure is the very core of long-term harvesting. If an active fund’s annual management fees and hidden fees run as high as 2%, then over 30 years of compounding erosion, the fund company has in effect risk-free skimmed away half of the investor’s total profit! The investor bears all of the market’s volatility and loss risk, while the financial institution wins for certain and never loses. This is why bank wealth-management advisors always eagerly recommend high-fee products: what they collect is the investor’s blood-and-sweat money, not the market’s bonus.

For US tax residents, in an ordinary Taxable Account, traditional mutual funds hide yet another form of invisible exploitation — the Capital Gain Distribution. When a fund manager realizes gains by buying and selling constituent stocks within the year, these gains get “distributed” onto every holder’s tax bill at year-end, and even if the investor themselves never sold a single share, they may still have to pay tax on this “passively realized” capital gain. US ETFs, by contrast, thanks to the in-kind creation and redemption mechanism, usually distribute very little internal capital gain to holders, so their tax efficiency is markedly higher; each year one mostly only has to deal with dividend tax on a very small proportion (for example, QQQ at about 0.45%).

As for retirement accounts such as 401(k) and IRA, the tax logic is entirely different: the buying and selling, dividends, and capital gains of the funds inside the account are usually deferred and not taxed in the current year (traditional accounts are taxed as ordinary income only upon withdrawal, while qualified Roth withdrawals are tax-free). So the real problem with a 401(k) is not “being taxed on capital gains every year,” but rather “internal fees as high as 1% to 2%, and rigid target options (often no QQQ).” After leaving a job, one may consider rolling the 401(k) over to an IRA and switching to low-fee ETFs such as QQQ, reclaiming the choice of target and reducing fee erosion; however, whether to convert should still be based on comparing the target, fee ratio, creditor protection, and personal tax planning, and one should not simply “roll everything over immediately” across the board.

If we stretch the time scale to two hundred years, stocks and bonds are no longer a matter of a few percentage points, but an order-of-magnitude chasm reaching hundreds of times.

The statistics of investment scholar Jeremy Siegel further reveal the “twenty-year law of invincibility”: from 1802 to today, for any holding period exceeding twenty years, the real return of stocks has always been positive and has never suffered a loss; whereas bonds held for over twenty or even thirty years still carry the possibility of loss. The wealth-management advisor’s line to investors that “if your risk tolerance is low you should buy bonds” simply cannot hold up in the face of two hundred years of historical data.

The list of toxic assets must also extend to the most rampant speculative product of the modern era — cryptocurrency. Charlie Munger once summed up the essence of Bitcoin in a single sentence: “I try to avoid things that are stupid and evil and make me look bad, and Bitcoin does all three.” The threefold negative essence of cryptocurrency can be systematically broken down:

Sunk Cost Looks Only to the Future, Not the Past

To crack sunk cost, CLEC explains it most thoroughly with the analogy of “changing trains”: the ticket in your hand is an ordinary train that cannot beat the market, yet on the platform beside you stands a high-speed rail (00662). A rational person will not, because “the train ticket has already been bought and throwing it away is a waste,” stubbornly stay on the slow train and burn time away; instead they immediately switch to the high-speed rail — because what decides when you arrive is “the speed of the road ahead,” and has nothing at all to do with how much that ticket originally cost, how much penalty was paid, or how many years you were locked in. This is precisely the essence of sunk cost: the only thing worth comparing right now is “the funding slope of each future year”; the purchase price of the past, the surrender penalty, and the transaction fees are all already irrecoverable history and should no longer serve as decision variables. The reason investors cannot bear to switch from an insurance policy, a junk stock, or a locked-in single stock to 00662 is, in essence, not that they cannot be persuaded by the math, but that they are hijacked by the emotion of “unwillingness to accept the loss” — the discipline of changing trains is to strip emotion out of the decision and force yourself to stare only at the fact that “the future expected value is the only thing worth comparing.”

The logic of changing trains can be reinforced with one more everyday scene — “the broken elevator.” In daily life, if you walk into an elevator only for it to malfunction and get stuck, no one would say: “I have already waited in here for 10 minutes, and if I get out now those 10 minutes are wasted, so I choose to keep waiting for the repairman.” A normal person will surely rush out the moment the door opens and switch to the elevator beside them that is certain to go up.

But move the same scene into the investment market, and most people do the exact opposite: even though the single stock, endowment insurance, or junk fund in hand has already been proven by the market over several or even more than ten years to be a “broken elevator,” the investor will insist “not selling means not losing,” “I will only leave once it rises another 10%,” “I have already waited this long, I cannot just accept the loss like this,” and keep their precious funds trapped in that broken-down elevator with no growth momentum, sitting and waiting for a miracle.

A broken elevator is simply broken; it will not fix itself because of your patience or your feelings; a basket of rotten, stinking apples will not turn back into good fruit no matter how long you keep it. There is only one correct solution — change elevators immediately, right away: sell all the bad targets at market price the next day, and put all the remaining funds directly into the “good elevator” (QQQ, 00662, and other long-term upward indexes). The moment of stop-loss is not accepting the loss, but letting the remaining funds “switch to an elevator that can truly reach the destination”; the past loss is a sunk cost that can never be recovered, but as long as you stay on the good elevator for the long term, compounding can often make up these losses within a few years (the actual break-even time depends on the market cycle and is not guaranteed). Persistence and waiting have never been virtues in the investment market, but rather a pointless drain on capital.

The True Return of Investment-Linked Policies

“Insurance is insurance, investment is investment” is an iron law that cannot be crossed. The “investment-linked policies” peddled on the market are the most exquisite capital trap for exploiting the wealth of laborers. Deducing from real data: if the funds paid into an investment-linked policy each period were instead put directly into 00662 (QQQ), then over the same time dimension, the two would create an astronomical gap.

The salesperson’s habitual sales pitch often misleads people into thinking the policy’s rate of return is decent. Take a classic sales scenario as an example: “You put in NT$100,000 at the start of each year for 3 consecutive years, and at the end of the 3rd year you can take back NT$331,000 — quite a considerable return.” But if you use a financial calculator to precisely compute its internal rate of return (IRR), the actual annualized return is only about 5% — far short of the high return the salesperson’s pitch implies. The investor, without realizing it, is blinded by the sales packaging, paying time cost and opportunity cost to help the insurance company earn the interest spread.

Do not say, “I have already paid for two years, can we do it this way.” The earlier you surrender the better. Just suffer three years, and after three years you turn positive. (Video 00407)

Many people will ask: “I have already paid the first year and the second year, and now the surrender penalty is very high — should I hold out past the sixth year before surrendering?” Answered with math, the conclusion is actually quite clear: the earlier you surrender, the better. Investing is like setting out from Zuoying to Taipei; with the same funds, should you choose to ride the high-speed rail or the ordinary train? If the annualized return of the policy or single stock in your hand cannot reach QQQ’s 12%, then you are riding the slow train. Do not fret over that bit of surrender fee or transaction cost; switch to the “high-speed rail” 00662 quickly, so that your assets can race toward the destination at the highest efficiency.

The market looks only at the current price and does not care at all about the investor’s “mental accounting” or book cost. Suppose two people hold the same stock, one having bought at NT$100 and one at NT$10; when the current price falls to NT$70, the risk and equity of the two are completely identical. Sunk cost should not be an excuse for refusing compounding; every day funds stay in a low-efficiency asset is a compounding opportunity being stripped away. Even if surrendering in the first two years incurs a clear haircut, as long as you immediately transfer the residual value into an index asset, there is usually a chance to recover the loss within one to three years.

According to the logic of practical projections, what should truly be compared is not “whether the book has broken even,” but “whether the funding slope of each future year is sufficient.” The high front-end and internal fees common to investment-linked policies substantially weaken the workable principal in the early years; even with long-term holding, the annualized return mostly falls in the 2.x% range, a clear gap from 00662’s long-term annualized return. When this slope gap is stretched to ten or twenty years, the result is not a matter of earning a little less, but of overall asset growth being locked down for the long term.

Therefore, the handling of a policy must return to first principles: separate sunk cost from future opportunity. Even if early surrender may incur a high penalty loss (for example, about 54%), one must also simultaneously assess the complete path after “stopping the bleeding immediately and transferring into a high-growth asset.” Though it hurts in the short term, only when the direction is correct is there a chance to reconnect to the compounding curve.

In addition, according to the practical backtest of an annual analysis table for an investment-linked policy, the cumulative return of the policy in year 1 is -54.47%, and in year 5 it is still -5.03%; even stretched to year 20, the annualized return is only 2.38%, and by years 46 and 50 it is about 2.87% and 2.89% respectively. These numbers prove once again: an investment-linked policy is not “steady investing,” but a tool that suppresses capital efficiency over the long term with a high-cost structure.

Years held Cumulative return Annualized return
1 year -54.47% -54.47%
5 years -5.03% -1.03%
10 years +16.29% +1.52%
20 years +60.08% +2.38%
46 years +267.39% +2.87%
50 years +315.87% +2.89%

Using the year-by-year disclosure table to look this number squarely in the face reveals its cruelty: even holding for 46 to 50 years, the annualized return falls only in the range of 2.87% to 2.89%, unable even to fight off long-term inflation of 3%. By contrast, 00662’s annualized return over the same period exceeds 15%.

▲ Figure 5-2 The measured annualized return of an investment-linked policy, where holding it into old age still loses to inflation, a chasm apart from the index

Source: Chengfeng Linghang, "EP03-03 — The Great-Way-Is-Simple Investing Method"

Take a policyholder able to recover NT$400,000 in residual value as an example: if, under the sunk-cost delusion, they keep holding and, living into old age, draw NT$150,000 every five years, the final total assets are about NT$23 million; whereas if they decisively surrender and roll that NT$400,000 into an index ETF at 12% annualized for 40 years, the final assets can reach about NT$37.22 million — a full NT$14.2 million more. The moment of stop-loss is not accepting the loss, but letting the funds switch to an elevator that can truly reach the destination — while stubbornly holding the position is trapping yourself in a broken elevator, sitting and waiting for a miracle.

▲ Figure 5-3 The decision on a policy's sunk cost, where decisively surrendering and switching to the index beats stubbornly holding on by the final tally

Pulling the view to the most extreme endgame: if, after facing a 54% haircut on surrendering in the first year, one immediately transfers into the index, the assets at age 99 can reach over NT$3 million; if one chooses to stubbornly hold the position all the way to the end of life, at age 99 only NT$72,000 remains — a difference of more than forty times.

When exploring the toxic assets of the financial industry (such as insurance and bonds), the most common trap is not “not understanding the product,” but “understanding it yet being unable to bear the stop-loss.” The financial industry exploits precisely this sunk-cost psychology, continually packaging low-efficiency products as steady solutions, trapping investors’ funds for the long term in a high-fee, low-return structure. Please remember: sunk cost should not be an excuse for refusing compounding. Every day funds stay in an investment-linked policy is a compounding opportunity being stripped away.

Policy Loans Are a Trap That Crushes the Residual Value

Facing hesitation over whether to surrender a policy, many investors are blocked by another of the salesperson’s pitches: “Do not surrender; just use a policy loan to take out cash for turnover, no need to pay interest.” This pitch sounds like the best of both worlds, but is in fact the last straw that crushes a policy’s residual value:

Where is there such a thing as borrowing money from a bank or an insurance company without interest? You do not pay interest every month, but interest is charged. You do not go and pay the interest each month; they add the interest onto your outstanding balance, or else deduct it directly. Suppose your policy’s residual value is NT$200,000 now, and you borrow out NT$100,000 — that interest gets deducted. Once the residual value is deducted away, you owe another NT$100,000, and the result is your insurance is effectively zeroed out; keep deducting and it becomes a debt, and then they will say your insurance needs a top-up, or else the policy will lapse. (Video 00700, short)

Let us do the math on the trajectory of this trap: originally the policy’s residual value is NT$200,000, and you borrow out NT$100,000, seemingly using only half the quota — but the insurance company will “internally deduct” the interest due each month from the remaining NT$100,000 of residual value. As time accumulates, the residual value is nibbled away month by month by interest, possibly deducted to nothing within 3 to 5 years; once the residual value hits zero, the policyholder not only loses the entire policy but also receives a notice from the insurance company demanding a “top-up” (because the loan quota plus accumulated interest has exceeded the residual value, which amounts to the policyholder owing the insurance company). The most ironic part is that many people are only forced to top up money at this stage; the original intent of “not wanting to lose the sunk cost” instead gets them cut once more. The correct approach is always only one: bear the pain and surrender immediately to stop the bleeding, take back the residual value and put it into QQQ / 00662, and absolutely do not go down the dead-end road of a policy loan.

The Whitelist and Blacklist of Insurance

After clarifying which financial products are toxic assets, we must give “insurance” a pragmatic classification, to avoid readers, because of extreme argument, running naked in daily life amid real risk. The sole legitimate function of insurance is “to transfer, at extremely small cost, a catastrophic risk that an individual cannot bear on their own,” and not investment. Once an asset scale is large enough, it is itself the best insurance. Before reaching that scale, the principles of the whitelist and blacklist must be strictly enforced:

To truly see through endowment insurance, you must first dismantle its biggest sales pitch — that “interest rate” on the policy is simply not your rate of return. When the insurance company calculates the premium, three assumptions are hidden behind it: your probability of a claim (the assumed mortality rate), how much interest it assumes this money can roll out in the future (the assumed interest rate), and the cost it deducts from your premium up front (commission, policy-issuance, medical exam, back-office salaries, collectively called the assumed loading). In other words, the “assumed interest rate” is merely an internal assumed value the insurance company uses to back-calculate “how much premium you should pay”; it is locked in the moment the policy is established, and is an entirely different matter from the interest a bank deposit gives you. As for the “declared interest rate” on an interest-sensitive policy that varies year by year, it is even more merely a number the insurance company announces itself each year, can set high or low, and can adjust at any time, with no guarantee. Seeing “interest rate 3%” and assuming you can earn 3% a year is the most common — and most expensive — misunderstanding.

How much the policy actually earns for you can only be found by laying out all of “the money paid out each year” and “the money you can finally take back,” and calculating the true annualized return (in finance called the internal rate of return, IRR). And this account must first deduct that earlier layer of cost — the commission and various expenses are all deducted first from your premiums in the early years, which is precisely why endowment insurance “surrendered in the first few years must lose principal.” Calculated seriously, the true annualized return of most endowment insurance is far below that pretty number on the policy, and cannot even beat a time deposit. Even more deadly is “whether you can take it back at any time”: for a time deposit surrendered early, at most a little interest is docked and the principal is barely touched; but endowment insurance surrendered in the first few years bites straight into the principal — locking the money down for several years, and still not producing the full amount when you urgently need it, is the most crucial difference between it and a time deposit.

Looking at both sides together — return (the true annualized is often lower) and flexibility (surrender bites the principal) — endowment insurance is in fact not even as good as a time deposit. But one word of caution: a time deposit itself is also only “a temporary storage box that loses to inflation,” and the correct answer to escaping endowment insurance is not to switch to a time deposit, but to put this money into 00662 and let compounding roll on losslessly within the net asset value. (A brief discussion of insurance concepts, “[The Essence of Endowment Insurance 2] — How Is Endowment Insurance Different from a Time Deposit?”)

An even more cruel legal truth is this: the savings-type and investment-type policies on the blacklist are, when an investor meets a debt crisis, simply not asset protection; on the contrary, they will be forcibly surrendered by the court to pay off the debt. Taiwan’s Supreme Civil Court Grand Chamber has already established a ruling: the enforcement court may issue an order to terminate a life-insurance contract in which the debtor is the policyholder, ordering the insurance company to pay the surrender value directly to the creditor. In other words, when you think endowment insurance is your “future retirement fund,” a single order from a creditor can strip it all away.

By contrast, the whitelist insurance — property insurance, health insurance, accident/travel insurance of one year or less, small whole-of-life insurance for the elderly, life insurance with combined coverage under NT$1 million, and small portions with a single surrender value within NT$100,000 — is listed by the Financial Supervisory Commission as one of the “eight major exemption” categories, protected by law from forced enforcement. This layer of legal contrast verifies once again: what can protect assets is “pure protection-type insurance,” not “savings-type policies.” Put the money in the right place, and even the court cannot touch it.

Another commonly misused “insurance tax-saving myth”: many people hear that “life-insurance death benefits have an NT$37.4 million tax exemption” and assume that buying endowment insurance can avoid tax, which is a dangerous misunderstanding. The NT$37.4 million exemption applies only to “death claims” — if the person does not die, the insurance company will not pay out. If it is insurance money taken back at the “maturity” of an endowment policy or annuity, then because the insured is still alive and the condition for a death benefit has not been triggered, this money must be counted in full into that year’s personal income for taxation, without even NT$100 of exemption. Insurance salespeople will use “the exemption has been raised” as a sales pitch, but whether you can use this layer of exemption is premised on “the person having to go first” — this is no longer tax-saving, but planning for money that others will collect after your death. Buying pure protection-type life insurance and leaving the money in 00662 to roll up compounding is the true freedom you can use while you are alive.

Look this gap squarely in the face with numbers: for the same NT$3 million coverage of life insurance, a 20-year whole life insurance costs about NT$50,000 a year in premiums, while a 20-year term life insurance requires only NT$5,000 a year, a monthly difference of NT$3,750. If you choose the low-premium term insurance and continuously put the monthly difference of NT$3,750 into 00662 at a 12% annualized return, after 20 years you can accumulate about NT$3.71 million — still higher than the fixed NT$3 million coverage ceiling of whole life insurance, and moreover a liquid asset that can be used at any time.

▲ Figure 5-4 For the same NT$3 million coverage, term insurance puts the saved premium into the index, and the final value surpasses whole life insurance while remaining usable at any time

This is not empty talk; using a real premium-rate table makes it more tangible. Take Bank of Taiwan Life’s “New One-Year Term Life Insurance” as an example: a 35-year-old male insuring NT$1 million of coverage pays only about NT$1,790 a year in premiums (NT$179 a year per NT$100,000 of coverage), an average of less than NT$5 a day; a woman of the same age pays even less, about NT$1,020 a year for NT$1 million of coverage. Pure protection-type term life insurance is just this cheap, and the younger you insure, the more worthwhile it is:

Age at enrollment Male (annual premium per NT$100,000 coverage) Female (annual premium per NT$100,000 coverage)
Age 20 NT$140 NT$56
Age 30 NT$152 NT$68
Age 40 NT$280 NT$144
Age 50 NT$634 NT$322
Age 60 NT$1,434 NT$723
Age 70 NT$3,729 NT$1,991

(Source: Bank of Taiwan Life “New One-Year Term Life Insurance” GT, 2025 rates; the table above is an excerpt of representative ages, and the complete age-by-age rates are subject to the announcement on the Bank of Taiwan official website.) That premiums rise exponentially with age precisely illustrates that “in the prime years, when assets have not yet grown and family responsibilities are heaviest, buying pure protection-type term life insurance and throwing the saved premium into 00662” is the correct answer — once assets are large enough, you need not even spend this small sum any longer, for the assets themselves are the strongest insurance.

Medical insurance has an institutional trap that is rarely pointed out. When a patient meets a major illness and urgently needs to seek a top specialist, they often find that these famous doctors are simply not on the insurance company’s approved claims list; and if they seek treatment on their own, the insurance company refuses the claim on the grounds of non-compliance with regulations. This reveals the fundamental risk of entrusting health to the insurance system: true medical protection is possessing sufficient liquid assets, so that at the critical moment you can freely choose the best medical resources without restriction.

The Failure of Academic Financial Theory

The reason these financial cons can spread so widely owes much to the endorsement of traditional academic finance. Many financial advisors and fund managers uphold textbook theories and champion traditional asset-allocation models such as “stock-bond balance.” Yet these doctrines, built on historical backtests and theoretical assumptions, often prove unable to withstand a single blow in real extreme markets.

Textbooks always claim that stocks and bonds are negatively correlated and can provide protection when the stock market falls. But real data mercilessly shatter this illusion. In real financial crises or periods of surging inflation, situations where stocks and bonds fall together are common; bonds not only fail to serve a hedging function but may fall even deeper than the stock market, becoming a drag that pulls down the portfolio.

Our content is all original; we never refer to any book — that is all useless. Operate according to the book and you are guaranteed to go bankrupt. (Video 00462)

The PhDs and experts of the financial academic world often remain only at theoretical discussion, lacking the real combat experience and numerical verification of actual capital operation. Blindly believing the predictions of these academic authorities or financial pundits is equivalent to handing your wealth over to paper talk that lacks real combat verification, and in the end it is hard to escape the fate of loss or even bankruptcy.

Take Taiwan’s most authoritative “Business Climate Signal” as an example. This indicator, published monthly by the National Development Council, could in theory help investors judge “buy on blue light, sell on red light.” But the long-term backtest from 2003 to 2024 gives an extremely cruel answer: the strategy of entering and exiting the market according to the climate signal has an annualized return of only about 7.01%, far below the 8.89% of simply buying and holding the Taiwan stock index for the long term; moreover, the maximum drawdown the two experienced was almost identical, indicating that relying on the climate indicator did not successfully avoid risk. This confirms that the climate signal is in fact a lagging indicator; by the time you see it turn red or blue, the market has often already run a large stretch, making prediction ever harder. (Source: CLEC “Economic Indicators and the Market” lecture, presented by Wen Chang, Video 00350)

Breaking this down reveals that “operating by the signal” is a lose-lose strategy:

This data thoroughly proves an iron law: “macroeconomic indicators = lagging indicators.” By the time the red light comes on, the market has already finished falling a large stretch, and by the time the blue light comes on, the market has already finished rebounding. Any strategy that tries to time the market with “objective macro indicators” is, in essence, chasing a shadow that has already fled.

The failure of academic indicators is equally laid bare on the most widely cited valuation model. The “Shiller CAPE ratio” is a long-term valuation indicator proposed by Nobel laureate Robert Shiller, where in theory an excessively high value represents a market bubble. Yet if an investor had, because CAPE stayed persistently high during 2017 to 2021, fully exited the stock market and hidden in cash, they would have personally missed over 60% of the gains. Mean reversion is a real statistical phenomenon, but “when it reverts” is a question no academic formula can precisely predict. Using a static academic indicator to fight dynamic compounding, in the end compounding often wins.

The most typical case of an academic indicator being abused by the financial industry is the Alpha/Beta factor derived from the CAPM model. There are ETFs on the market that flaunt selecting stocks “with an Alpha-Beta momentum strategy,” but in practice they use the price data of the past 20 days (about one month) to run a linear regression, calculate the Alpha and Beta of each single stock, and then decide the holding list for the next 3 months accordingly. From a statistical standpoint, running a regression on 20 samples is merely “barely usable”; at the 95% confidence level, the Alpha and Beta are usually insignificant — meaning these carefully hand-picked “high-Alpha” targets are statistically no different from a random draw. Using a month of noise to predict a three-month trend is less reliable than rolling dice. Yet the investment trust can, by means of the halo of the academic term “Alpha-Beta,” package junk stock-picking logic as a scientific quantitative strategy and sell it to retail investors.

Another classic abuse is the “value factor.” The academic Value Factor truly measures “Book-to-Market”; the higher the value, the more undervalued the share price is relative to the enterprise’s net worth, and the “cheaper” it is, the more worth buying. But some Taiwan-stock ETFs directly treat the “price-to-earnings ratio (P/E)” as the value factor, which is mathematically completely backwards — the higher the P/E, the more expensive the share price relative to each dollar of earnings, and it is not “value” at all but rather “expensive.” If one really wants to use the P/E to measure value, one must at least take the reciprocal E/P to conform to the value-investing core of “the cheaper the better.” Selecting stocks with an indicator pointed in the wrong direction is like stepping on the accelerator as if it were the brake, and the final stock-picking result runs counter to the original intent of “selecting undervalued stocks.”

The abuse of the “low-volatility factor” is even more outrageous. Certain ETFs flaunt screening constituents by “low volatility,” but the volatility-estimation method their base layer uses is astonishingly the EWMA (exponential smoothing) of the 1990s, with the lambda parameter directly applying the textbook constant 0.94. Yet RiskMetrics under JPMorgan had already abandoned EWMA back in 2006 and switched to the Long Memory model, because it found that EWMA decays historical information too quickly and cannot capture the true persistence of volatility. When a mathematical model that top Wall Street institutions discarded nearly 20 years ago is treated by Taiwanese investment trusts as the latest marketing selling point, retail investors think they are buying “scientific stock selection” but in fact receive an expired mathematical tool.

Most absurd of all is the “multi-factor optimized” ETF: it weights and synthesizes different factors such as dividend and quality. But break it apart, and within the dividend factor the “dividend yield” is a percentage while “days to fill the dividend gap” is a number of days, two completely different dimensions; within the quality factor the “ROE” is a percentage while “EPS” is an absolute amount, differing by several orders of magnitude. Directly weighting numbers with inconsistent units is a basic logical error in a quantitative model, and the “composite score” obtained has no financial meaning whatsoever. But these details are too technical for the ordinary investor, and the financial industry, relying precisely on information asymmetry, uses seemingly professional terms to sell flawed products at high prices. Investors should maintain extreme skepticism toward any packaged “multi-factor quantitative strategy” — if the public information contains no clear factor-calculation formula and unit-handling explanation, it is most likely marketing patter rather than genuine scientific quantification.

P/E is a surface appearance, very easy to understand, but a completely useless thing — completely useless. If you keep, keep focusing on P/E, you probably could never have bought Amazon, and you could never have bought Google. If you cannot forecast how much money they will make in the future, then your P/E is garbage. (Video 00494)

These words first require a distinction of terms, lest readers be confused. The CLEC system once strictly defined the term “value investing” as “Wall Street’s traditional Value Investing” — the old-era method that emphasizes precise financial-statement calculation and pursues buying low-P/E stocks — and this approach has been clearly discarded in this book. But the “value investing” that Teacher James speaks of here refers to value in another sense: “the value of human progress itself.” When an investor gives up precisely calculating the P/E of single stocks and instead embraces the first principle that “humanity as a whole will keep progressing,” they simultaneously grasp the growth dividend of all top enterprises. This is the true meaning of “value” — not to hunt for cheap junk (cigar butts), but to buy at a reasonable price the entire species that keeps progressing.

The Falsity of Technical Analysis

Another wrong turn of market timing is “technical analysis” — believing that from candlestick patterns, moving-average arrangements, and volume-price relationships one can predict the next step of a stock price. The problem is that most of these tools are products of the last century: the concept of the moving average is over a hundred years old, and KD, MACD are all designs of forty or fifty years ago, yet they are treated by generation after generation of retail investors as a crystal ball for predicting the future.

The most representative of technical analysis is the “Eight Rules” proposed by Joseph Granville in the 1960s, which uses eight relative positions of the stock price and the moving average to summarize four buy signals and four sell signals, with the core assumption that “after a stock price deviates from the moving average it will eventually revert toward the trend.” It sounds very scientific, but Granville himself is the biggest counterexample to this method. In January 1981, with the Dow at about 1,000 points, he issued an overnight “sell everything” order to subscribers, triggering the next day the largest single-day trading volume in the history of the New York Stock Exchange at the time; then he stayed bearish all the way to 1982, predicting the Dow would fall to the 600s and telling people to short. As it turned out, August 1982 was precisely the starting point of the longest bull market in history, and he not only missed it entirely but also stubbornly clung to the short side without turning. Thereafter his stock-picking advice long languished at the bottom in independently tracked investment-newsletter rankings (per Hulbert’s tracking, his advice from 1980 to 2005 was annualized at about -1%, while the market over the same period was about +12%), his reputation plummeted, subscribers fled in droves, and in his later years he had almost no influence on Wall Street. A man who invented the most famous technical rule spent his life personally proving that technical analysis cannot predict the market.

This is not an isolated case but an academic consensus. Eugene Fama, the proposer of the Efficient Market Hypothesis (EMH) and the 2013 Nobel laureate in economics, pointed out as early as his 1970 paper “Efficient Capital Markets”: under “weak-form efficiency,” stock prices have long reflected all past price and volume information, so predicting the future purely from historical prices and trading volumes (which is the entire material of technical analysis) is doomed to be ineffective; the further “semi-strong-form efficiency” explains that even public financial statements and news are already reflected instantly, which is precisely the root of why active stock-picking struggles to sustain excess returns. In other words, the money technical analysis wants to make has, mathematically, long since ceased to exist.

Placing the climate signal (macro timing), technical analysis (volume-price timing), and frequent day trading (short-term timing) side by side, one sees the same conclusion: all efforts to predict the market’s short-term direction ultimately lose to the dumbest method of all — “not predicting, holding for the long term.”

Diligent Trading Is the Reverse Engine of Wealth

After exposing the various cons of the financial industry, there is yet a wealth-killer hidden even deeper — “diligent trading” itself. Many investors believe that frequent operation signifies seriousness, unaware that every short-term buy and sell is quietly “donating” to the tax authority.

And this is not a matter of feeling but a statistical fact. According to the Taiwan Stock Exchange’s 2023 statistics on same-day spot-stock day trading, the full-year total loss was as high as NT$52.476 billion, far exceeding the total gain of NT$23.349 billion. Even more cruel: 47% of investors were in a loss position, of which ninety percent of the losses were concentrated among the 13% who traded frequently. The market looks lively, yet the losses are highly concentrated among that group who operated most diligently.

▲ Figure 5-5 Taiwan day trading as a whole is a negative-sum game, where the whole market nets a loss and the losses are highly concentrated among the most diligent frequent traders

Source: Taiwan Stock Exchange 2023 spot-stock day-trading profit-and-loss statistics

Academia nails this conclusion down with complete trading records. According to the paper “The Cross-Section of Speculator Skill: Evidence from Day Trading,” co-authored by Barber and Odean of the University of California with Yi-Tsung Lee and Yu-Jane Liu, an analysis of transaction-by-transaction data across the whole market of the Taiwan Stock Exchange from 1992 to 2006 found that about 360,000 people engaged in day trading each year, and after deducting transaction fees and securities transaction tax, the proportion of top day traders who can truly “stably beat the market over the long term” is less than 1% — the diligence of the overwhelming majority ultimately converted into a negative return.

Moving the lens abroad, the data are equally cold. A study targeting Brazilian stock-futures day traders, tracking heavy day traders who kept trading for over 300 days, found that as high as 97% ended up losing money, and of the remaining 3%, fewer than 1.1% earned more than the minimum wage. Day trading has never been a realm where “effort yields reward,” but rather one where 99% of people foot the bill for the fewer-than-1% of the gifted few and for government tax revenue.

The Barber and Odean team also has a study that directly quantifies “exactly how much less is earned” on US home soil. According to their co-authored classic paper “Trading Is Hazardous to Your Wealth,” they analyzed the complete trading records of 66,465 household accounts at a large US discount broker from 1991 to 1996, sorting investors into five groups by monthly turnover rate, and reached a chilling conclusion: the “gross return” of each group was almost identical, all falling between 18.5% and 18.7% — meaning frequent trading simply did not exchange for a better stock-picking result.

But the “net return” differed by heaven and earth: the group with the lowest turnover, closest to buy-and-hold, had a net annualized as high as 18.5%; the group with the highest turnover, whose annual turnover exceeded 250%, had its net annualized pressed down to only 11.4%, even lagging the same period’s market at 17.9% by 6.5 percentage points. And this 7.1-percentage-point net-return gap between the buy-and-hold group and the frequent-trading group, since the gross returns were identical, came entirely from transaction costs (fees and the bid-ask spread), with nothing to do with the intelligence of stock-picking. Put this annualized gap into a compounding timeline of two or three decades, and the final-value gap will be exponentially magnified into several times — the price of diligent trading is to buy, with the cost of real hard cash, a result of running in place or even going backward.

▲ Figure 5-6 The real return gap of frequent trading vs buy-and-hold, where the gross returns are nearly identical and the gap in net return comes entirely from transaction costs

Source: Barber & Odean (2000), "Trading Is Hazardous to Your Wealth," Journal of Finance (sample: 66,465 household accounts, 1991–1996)

Even fund investors who hand their money to professional managers and do not day-trade themselves cannot escape this fate. Morningstar’s 10-year statistics on 25,000 US funds reveal the same cruel conclusion. Morningstar proposes two core measurement indicators: “Total Return” is the fund’s own pure performance, assuming the investor buys in on day one and then never moves in or out; “Investor Return” considers all the cash flows moving in and out of the fund, measuring the true return performance of the average investor over that period.

The “Behavior Gap” between the two is the best indicator for measuring “the damage of human nature to compounding.” According to Morningstar’s long-term tracking, investor return in the US fund market averages 1.2% annualized below total return — this seemingly tiny number, accumulated over 10 years, will shrink the investor’s final assets by about 11% out of thin air. In other words, even if you picked the right target, purely because of the action of “moving in and out, chasing highs and cutting lows,” about 11% of the return that should have belonged to you will automatically vanish over 10 years.

Even more of a warning is that this behavior gap is especially severe on “sector funds” — investors chasing hot trends (such as AI, EVs, and semiconductor themes), because of their large emotional swings and inability to hold, have an average gap as high as 1.5% a year, the most disaster-stricken of all fund types. When retail investors think “following the hot trends is how you make big money,” the data reveal the opposite truth: the hotter the target, the larger the gap between what retail investors “actually pocket” and what they “should have earned.”

In US tax law, gains on assets held for less than a year are deemed “short-term capital gains” and taxed jointly with ordinary wage income, with a top rate that can reach over 30%; while the long-term capital-gains tax rate for assets held over a year drops to 15%, and even 0% when income is lower. The gap between the two, over the long river of compounding, will create an astronomical wealth chasm. Taiwanese investors likewise cannot be spared: any dividend over NT$20,000 is subject to a 2.11% second-generation NHI supplementary premium withholding, and must also be combined into the comprehensive income tax, with middle-to-high-income earners facing rates from 3.5% up to a maximum of 28%; if holding US stocks, non-US residents are further subject to a 30% withholding on dividend tax. Every dividend distribution, every frequent profit-taking, is actively shrinking the principal available to keep compounding in the future.

Even more cruel is the “Wash Sale” trap: when an investor sells a stock at a loss and, within 30 days, buys back the same or a highly similar stock (intending to snatch the bottom), the US IRS will rule that this loss “may not be deducted from tax” — but if the price happens to rise during this period and one sells, the profit still must be taxed in full. In other words, “wins belong to the tax office, losses belong to the investor themselves.”

But for investors with US tax status, the flip side of the wash-sale rule is the legal tool of “Tax-loss Harvesting.” Before year-end, if there is a book-loss position in the portfolio, one can actively sell to realize the loss while simultaneously buying a “similar but not identical” target (for example, selling an S&P 500 fund and buying a total-market index fund) — thereby both avoiding a wash-sale violation and converting the book loss into a deductible real loss. This loss can be used first to offset the year’s capital gains, and the remaining portion can further offset up to US$3,000 of ordinary income (wages and other general income), with losses exceeding US$3,000 carried forward indefinitely to continue offsetting tax in future years. This tactic applies only to the US “Taxable Account”; losses within tax-deferred retirement accounts such as IRA / 401K cannot be deducted. Taiwan tax residents, because overseas income has no such deduction mechanism, are not eligible for this tactic.

The most common application in practice is the legal shortcut of “VOO to QQQ”:

The Wash Sale rule refers to your selling a security at a loss but, within 30 days before or after, buying the same or substantially identical security, in which case that loss cannot be used to offset tax when filing. The key lies in “the same or substantially identical”: VOO is an S&P 500 ETF, QQQ is a NASDAQ-100 ETF, the indexes the two track are completely different and the constituents are also different, so they are usually less likely to be regarded as the same or substantially identical securities. However, the IRS still has gray areas in its judgment of “substantially identical” and has not issued a whitelist declaring “VOO to QQQ is absolutely safe”; when actually conducting tax-loss harvesting and ETF conversion, one should still consult a qualified CPA, EA, or tax advisor.

The reason this path is especially valuable is that many investors already hold VOO / SPY but are at a book loss, and want to shift positions to QQQ to enjoy the high-growth engine at the core of CLEC, yet are hijacked by the sunk cost of “unwillingness to sell at a loss price.” The fact is: selling the loss-making VOO not only will not trigger the wash-sale rule (because VOO tracks the S&P 500 and QQQ tracks the NASDAQ-100, and the intersection of their constituents is only about 60%, not substantially identical), but can also convert this book loss into a deductible real capital loss. For example, selling VOO with a book loss of US$10,000 directly to switch to QQQ immediately obtains a US$10,000 tax-loss deduction quota — of which part offsets the year’s capital gains, and the remainder can still take US$3,000 to offset wages, with the excess carried forward indefinitely. The result of the whole operation is that “the sunk cost becomes a tax-saving dividend, and the asset is simultaneously upgraded onto the QQQ high-growth track” — one of the few tax tools by which US investors can perfectly reconcile “unwillingness” with “the discipline of shifting positions.”

True financial suicide is not failing to invest, but actively donating to the tax office through diligent trading. This is the client behavior Wall Street most welcomes, because frequent trading contributes both transaction fees and taxes at once, being of no benefit whatsoever only to the investor themselves.

After seeing through the layers upon layers of traps of Wall Street and traditional finance, the investor must awaken. Discard the beautifully packaged toxic assets, cast aside the ineffective textbook theories, and no longer cling to the sunk costs of the past. Only by focusing on indexes that possess real productivity and an organic growth mechanism, paired with strict discipline, can one steadily sail toward the true financial endgame amid the wind and waves of the capital market.

Finally, we must redefine debt: the simplest way to distinguish class is to look at one’s attitude toward debt. The poor see debt as a shackle, because their debt flows toward depreciating consumer goods; the rich see debt as a ladder, because their debt flows toward self-reproducing productive assets. In the game of capitalism, the amount of debt does not represent the size of the risk; it is the “direction” of the debt that determines whether one’s status is enslaved or liberated. As long as the direction is correct, plenty of debt is no worry, because the growth rate of assets will eventually crush the interest on the debt — provided the interest rate is controllable, the cash flow is stable, the maintenance ratio is safe, and the debt does not flow toward consumption.