Drawing the Boundary of Anxiety, for Staying Alive Matters More Than the Rate of Return

After building a rock-solid asset allocation and a sufficient cash defense line, investors often discover that what truly crushes them is not the market’s actual losses, but the ceaseless stream of anxiety and panic inside their own minds. In modern society, information is extraordinarily abundant, and anxiety often arises from a fear of the distant future, or from international events that have nothing whatsoever to do with one’s own life. Only by first establishing the right asset defense line does a person have the confidence to say no to this noise. The next step is to build, at the level of the mind, a combat-grade filtering mechanism that blocks out the ineffective inner drain of market panic and news noise.

The Physical Defense Line of Two Hours and Eight Kilometers

Over the course of evolution, the human brain developed a high sensitivity to crisis for the sake of survival. In the modern financial market, however, this mechanism becomes a breeding ground for “catastrophic thinking.” Many investors stare every day at wars, elections, or macroeconomic data on the other side of the planet, letting these uncontrollable variables rob them of their sleep and their peace of mind. To break this spiritual drain, the first order of business is to build the physical filter of “two hours and eight kilometers.”

The so-called “two-hours-and-eight-kilometers rule” is a set of psychological boundary tools this book borrows (it is not a formal law of psychology, but a practical framework to help investors quarantine anxiety):

• In terms of time, you must block catastrophic thinking: if the thing you are worrying about will not happen within the next “two hours,” then your anxiety right now is merely borrowing against future pain.
• In terms of space, you must limit excessive generalization: focus on the things within “eight kilometers,” within arm’s reach and directly relevant to yourself.

When you invest, you must enter a state of meditative calm. Do not mind the market, and do not mind the international situation. Never mind how the balloon drifts; it has nothing to do with us. (Video 00401)

When a problem really does occur within two hours and within eight kilometers, the human survival instinct will naturally activate to solve it, and one’s capacity to act at that moment is far more useful than the fear conjured out of thin air right now. Through this rule, you can release the brain’s computational resources from distant turmoil and unknown crashes, and focus on the life and work right in front of you.

Beyond isolating time and space, the digital age demands that you also establish a “physical device boundary.” The true long-term capitalist would never install a real-time quote tool on his phone. The phone should be a tool for enjoying life, not a source of anxiety that ticks 24 hours a day. Lock all trading down to a fixed computer workstation; then, once you leave the study and put down the phone, market movements are physically severed from your life. This hard boundary at the device level is the simplest and most effective first line of defense for guarding your peace of mind.

Beyond the physical defense line of space (eight kilometers) and time (two hours), you can add one more layer, a “time-buffer lock”: the 72-hour cooling-off period. This defense line is designed specifically against “greed and herd-following,” and is an extension of the physical-boundary rules.

Here is how it works in practice: when you see a hot theme (AI, semiconductors, a particular sector ETF), or receive a message about an “unmissable buying opportunity” from friends, family, or the media, and you feel the impulse to change your investment plan, force yourself to wait 72 hours before deciding. Write down the impulsive thought of the moment, and reread it three days later. In most cases, the target that felt like “I will regret it for the rest of my life if I do not buy it now” turns, three days later, into “why was I in such a hurry back then.” The 72 hours is not a law of neuroscience, but a practical and useful “delay lock”: you force yourself to wait until the emotional peak has subsided, then go back and check whether it still fits your original allocation discipline.

This rule is especially applicable to FOMO (the fear of missing out) in a bull market. When the market keeps climbing and every media outlet and chat group is shouting “if you do not get on board now, it will be too late,” the impulsive buying at this moment is often catching a falling knife at the top. Treat these 72 hours as a “delay lock you give yourself”: if after three days you still feel you should buy, then execute according to your original allocation discipline; if after three days you hesitate, that proves it was never a decision based on conviction in the first place. Holding to these 72 hours lets you avoid the retail investor’s most common trap, chasing the top and getting stuck with the bag.

The Separation of Tasks, for the Market’s Turbulence Has Nothing to Do With Me

After establishing the boundaries of time and space, you must also handle the boundary between “self and others.” Here you can borrow the concept of the “separation of tasks,” commonly found in the psychology of Alfred Adler, and pair it with the “three-minute action” rule. If you cannot change a thing through concrete action within three minutes, then your worry at this moment is merely a dead end, and you should put it down at once.

In the world of investing, almost all worries come from meddling in tasks that do not belong to you. Whether the market rises or falls, whether the Fed raises or cuts rates, how financial pundits predict a crash: these are all “the market’s task.” Preparing an emergency reserve fund, maintaining the discipline of your asset allocation, and holding your cash defense line: this is “the investor’s task.”

Teacher James distilled this “separation of tasks” into seven maxims that appear in every one of his briefings, drawing a clear line, sentence by sentence, around “the market’s task”:

The market’s turbulence has nothing to do with me! The international situation has nothing to do with me! Market analysis has nothing to do with me! Financial statements have nothing to do with me! The economic situation has nothing to do with me! All of it has nothing to do with me! Ignore the sights and sounds of the market’s ups and downs!

These seven sentences are not passive escape; they return “the market’s task” entirely to the market. The only thing the investor must attend to is his own cash defense line and allocation discipline.

Judging from real measured data, the cost of overstepping the boundary to meddle in “the market’s task” is extraordinarily high. Barber and Odean’s study of 66,465 U.S. household accounts (Barber & Odean, “Trading Is Hazardous to Your Wealth,” Journal of Finance, 2000; sample 1991–1996) found that the gross returns of the various groups were nearly identical, yet the “lazy” group closest to buy-and-hold had a net annualized return as high as 18.5%, while the frequent-trading group, with the highest turnover and trying hardest to predict the market, was pressed down to only 11.4%. That gap of 7.1 percentage points a year came almost entirely from trading costs, and placed on a compounding timeline of twenty or thirty years it is magnified exponentially. It is precisely the hidden tax paid for ineffective inner churn.

You must train yourself so that you can stand before a tiger without changing your expression. The tiger looks as if it is about to devour you, and still you do not change your expression, because you trust that it cannot get to you. You must imagine that there is a pane of glass in front of you. In the same way, no matter how far the market falls, you must trust that there is a safety net. (Video 00502)

When you completely strip the uncontrollable fluctuations of the market away from your own financial discipline, investing is no longer a heart-pounding gamble. This bulletproof glass, built out of cognition, shuts out the raging storms of the outside world, and lets the investor watch the cyclical ebb and flow of the capital markets with a calm, cool eye.

In practical operation, you can apply the concept of a “personal two-wallet system” to put the separation of tasks into effect: no matter how large your total assets are, first set aside a dedicated “defense wallet” (stored in short-term bonds or high-yield savings) to cover daily living expenses; the rest of the funds goes into an “offense wallet” for long-term participation in the market. This must be viewed in stages: those still working can start with one to two years of living expenses as the defense wallet; retirees, those using pledged loans, and those without any active salary inflow must still, according to the standard set out in the previous chapter, keep a 30% short-term-bond / roughly-15-year cash defense line, and cannot substitute one to two years for the fifteen-year get-out-of-death-free card. Once the physical defense line for living expenses is drawn, the market’s short-term turbulence is, in substance, completely decoupled from daily survival, and the sense of anxiety naturally dissolves as the boundary becomes clear.

For high-net-worth individuals, the test of psychological boundaries leaps up exponentially. When a 10% drawdown represents the “evaporation” of millions in cash, you must establish the cognition of a “numbers game”: the market’s drawdown is its task, and as long as you have reserved sufficient cash, quality of life is your personal task. Rather than relying on extreme imagination, it is better to routinely do three things: lower the frequency of watching the market, rebalance only at set times, and check each quarter whether the cash level still covers living expenses. The essence of the separation of tasks is to admit that you cannot catch the best few days of the market, and so you choose not to exit the market, and let time work on your behalf.

When funds are put into the market ahead of time through a wealth-management mortgage (a Taiwan revolving/home-equity mortgage), you are in essence bringing many years of future savings forward to compound in the present. Since the financial rhythm has already been brought forward, the pace of life must be slowed down all the more. Data show that if you pass NT$100,000 of investment down to the next generation and let it compound over decades, the terminal value can reach tens of millions. Once this long-term asset path is seen clearly, a few hundred points of short-term fluctuation no longer serve as the main axis of your decisions. Money and index funds (such as QQQ) are, in the end, only tools for building the ideal life, not the master of life itself.

The ultimate psychological defense is to regard volatility as the norm and discipline as the everyday. Assume that this crash, this anxiety, will recur again and again in the future; what you must do is not to pursue perfect prediction, but to keep executing your established allocation and cash defense line. When you no longer regard the market’s impermanence as an accident, but incorporate it as part of your existing routine, anxiety turns into manageable risk.

To thoroughly root out the anxiety brought on by social comparison, you can apply the “amusement-park fast-pass effect” to recalibrate yourself: imagine life as a vast amusement park, where everyone holds an admission ticket. Some people may have bought an expensive “fast pass” that lets them ride certain popular attractions earlier than others (for example, a temporary lead in the progress of their wealth); but as long as you walk steadily along your own itinerary, you can, in the end, ride all the wonderful attractions in the park just the same. The true capitalist never races against the visitor in the neighboring seat, but focuses on completing his own elegant and fulfilling map of the park.

Returning to the Essence of Life, for Money Is Only a Tool

The ultimate purpose of setting psychological boundaries and filtering out noise is not to make a person cold, but to reclaim the people and things that truly matter in life. Many people put the cart before the horse in the pursuit of financial freedom, consuming all their energy and emotion chasing candlestick charts and interpreting financial reports, while neglecting the family beside them and their own happiness.

Looking back from the extreme vantage point of a matter of life and death, all the worries about short-term stock-price fluctuations, work pressure, and financial anxiety instantly reveal their empty nature. A well-known YouTuber was once suddenly told during a routine health check that he had colorectal cancer, and afterward he shared in a video how his state of mind changed in that moment:

Suddenly the test report came out, and he had colorectal cancer. When he was suddenly told this, all the things he had worried about before, about work and about finances, no matter what they were, completely and utterly stopped. Now the one thing he had to face was the critical matter of life and death. So in the face of death, all your worries stop; they are gone. You do not need to worry about your assets, about whether your QQQ investment is going up, and you do not need to worry about work. There is, in the end, not a single thing in a whole lifetime worth worrying about. (Video 00565)

The reason this realization shakes people to the core is that it places the investor’s daily anxieties on the other side of the “scales of life and death” to be weighed: QQQ dropped 5% today, you got chewed out by your boss, you were set up by a colleague, your credit-card bill suddenly grew by NT$80,000, your retirement fund earned NT$1 million less. Place these “important things” before death, and in an instant they all become irrelevant.

All the discipline the CLEC system builds (the 433 allocation, the 2% withdrawal rate, the 15-year cash cushion, automatic rebalancing) exists, in essence, so that the investor “does not have to be anxious about these things every day.” Once the system has already calculated the worst scenarios into account and stress-tested every possible crash, all that remains is to return your precious life energy to family, health, experience, and learning. Compressing financial anxiety from eight hours a day down to a single discipline check once a year is the greatest gift the CLEC system can give the ordinary person. This does not mean literally spending only one minute a year (assets, cash levels, maintenance ratio, and rebalancing still need to be verified regularly), but rather bringing investing down from daily anxiety to an annual review. It is not about earning more money, but about giving your life back to yourself.

Life is not for money. Life is for “love.” Money is only a tool. (Video 00351)

In the same episode, Teacher James put forward another core belief: happiness is a human right. Wealth is a means, not an end; true freedom is the ability to keep inner peace in any circumstance. Facing the endless clamor of the outside world, there is an extremely simple mental method:

You should actually dwell in a state of mind that is: it does not matter, it is all right, anything is fine. Toward any person, thing, information, or relationship, you must know that it is emptiness. And since it is emptiness, then it does not matter, it is all right, anything is fine. (Video 00351)

“It does not matter, it is all right, anything is fine” is not passive resignation, but a deep self-anchoring: because you know clearly what is important, you can naturally let go of what is unimportant. This state of mind is essentially the same as the investor’s principle of “never sell, come what may”: it is not that there is no feeling, but that you do not let feeling drive your decisions.

By way of conclusion, in an age full of noise, learning “spiritual energy conservation” is an essential survival skill. Draw the boundary of anxiety through the “two-hours-and-eight-kilometers rule,” let go of the urge to control the market through the “separation of tasks,” and face the disturbances of life with the state of mind of “it does not matter, it is all right, anything is fine.” When you no longer wear yourself down over distant bad news and short-term turbulence, you can devote all of your precious life energy to experiencing the beauty of the present and accompanying the ones you love.

Having drawn the boundary of anxiety and put money back in its place as a tool, you must still, at the level of allocation, answer a more fundamental question: when the worst scenario truly arrives, can this system let a person survive.

Staying Alive Matters More Than the Rate of Return

On the road to financial freedom, defense always outweighs offense. The core purpose of asset allocation is not to earn the most profit in a bull market, but to guarantee that the investor comes through unharmed when the unavoidable black-swan event descends. Survival is the precondition for obtaining long-term compounding; as long as you can stay in the market, the growth of wealth is only a matter of time.

This is the true meaning of the metaphor that the investor Howard Marks repeatedly cites, “a six-foot man drowning in a river that is two feet deep on average.” An adult standing 181 centimeters tall (about six feet), standing in a river with an average depth of 60 centimeters (about two feet), is theoretically absolutely safe; the water does not even reach his knees.

But the depth of this river is never evenly distributed: on the surface it averages two feet, yet in reality one spot may be one foot and another may be a ten-foot-deep pit. The investment market’s “9% annualized return” is the same mathematical trap. It does not mean the market rises a steady 9% every year, but that “some years it rises 40%, 50%, or even more, and some years it falls 30%, 40%, or even 80%, and averaged out the annualized figure is 9%.”

An investor with no cash defense line and no Beta control, seeing “9% on average,” strides confidently into the market with his full position; and when he hits that “ten-foot-deep pit” of a 40% or 80% drop, he is just like that six-foot man: the average depth cannot save him, and he will drown in that pit. When the CLEC system repeatedly emphasizes the disciplines of the “cash defense line,” the “maintenance-ratio floor,” and the “2% withdrawal rate,” it is, in essence, telling the investor: do not trust the average, prepare for “the deepest pit.”

A Good Allocation Is One That Survives 2008

To test whether an allocation makes the grade, you must place it into a historical market crash for a stress test. Taking the “lost 15 years” of 2000 to 2015, spanning both the dot-com bubble and the financial crisis, and running a backtest, the result is highly counterintuitive:

• The aggressive 442 allocation (Beta 1.2): a cumulative 15-year return of only about 1%, with a maximum drawdown as deep as about 66.7%.
• The steady 433 allocation (Beta 1.0): a return of about 18%, with a maximum drawdown of about 55.4%.
• The 316 allocation with the thickest cash and short-term bonds (30% underlying + 10% 2× leveraged + 60% cash, Beta only 0.5): thanks to the 60% defensive position buying the dip at the bottom, its cumulative return was in fact as high as about 56%.

The lower the Beta, the higher the return instead, which precisely illustrates that in an ultra-long bear market, “the confidence to stay alive” is worth more than “the slope of the attack.” (Backtest model from the Sergeant Major’s Lying-Flat Finance Notes 00002; the leveraged position is synthesized from daily index returns, and the start/end dates and the treatment of dividends and fees follow the original source.)

Just as one community member shared as a lesson written in blood and tears, during the “Trump tariff” episode the market fell 20% in three days, and had he not shored up his position with a personal loan in time, his pledged position would already have been forcibly liquidated by the market. A truly excellent allocation assumes that the market will go through a bear market lasting several years with an extremely deep drawdown, and prepares a sufficient safety cushion for it.

An allocation that can truly survive is not the one that pursues the highest return, but the one that still lets the investor keep breathing in the worst years. Cash is not a drag; it is the survival guarantee that lets the investor avoid selling assets at fire-sale prices when the market is at its darkest. Keeping this buffer is what makes one the true winner who carries the “never repay the principal” strategy all the way through.

The Three Extreme Tests of Risk

To ensure the allocation is impregnable, it must pass the three most stringent extreme tests:

• The money market pays no interest at all
• Pledge interest suddenly rockets to the sky
• Stock prices fall to near zero and the market closes for as long as ten years

Before entering any capital market, the investor must also first honestly put himself through another stress test, a set of “three soul-searching questions.” These three questions are not rhetorical; they are the hard threshold for eligibility to enter the market:

• If the funds you put in fall 70% tomorrow, can you still live normally? (Testing whether the “proportion of funds invested” is too large, whether it affects daily bottom lines such as eating and paying bills)
• If the market falls for three straight years without rebounding, can you go those three years completely without touching your investment, without selling a single share? (Testing whether the “stability of cash flow” is sufficient to survive a real consecutive-decline history on the order of 2000–2002)
• If your portfolio is halved, and then halved again from the halved price, that is, falls 75%, can you still stay calm and take no action? (Testing whether your “psychological fortitude” can hold to the discipline under a feeling of extreme despair without acting rashly)

If you cannot answer even one of these three questions, or if, facing yourself honestly, you would collapse and sell in the moment, then it means you should not yet enter the market, or your current invested amount is already too large. The value of the three soul-searching questions lies in this: they move all the “breakdown points you would only discover after the fact” to before the fact, letting the investor calibrate, rationally and before emotion is triggered by the market, all three defense lines of invested proportion, cash level, and psychological fortitude. Any entry that does not pass these three questions is, in essence, betting on a drawdown you fundamentally cannot bear.

Loan interest keeps compounding every day, and cash is the ammunition to meet it. With enough ammunition, you can hold out through a bear market; when the ammunition runs dry, you are forcibly liquidated and knocked out before the market has even come back. Through a Monte Carlo backtest of twenty thousand runs, the 433 allocation in the most extreme scenario had a minimum maintenance ratio of about 132%, only 2 percentage points above the 130% forced-liquidation line. This number must be viewed honestly: it represents not “safety,” but “barely not dead.” The truly steady approach is to raise the cash / short-term-bond level higher still, so that the minimum maintenance ratio after stress testing retains a clear buffer, rather than surviving right up against the liquidation line.

To make the abstract concept of “keeping cash equals buying the right to survive” concrete, you can use the “Person A versus Person B comparison” that Teacher James gives to thoroughly shatter the traditional myth that “being debt-free is being carefree”:

Suppose both Person A and Person B own a piece of real estate worth NT$30 million. As for Person A, he now has only NT$2 million of the loan left to repay, but he holds no cash position at all. As for Person B, he still owes the bank NT$15 million on his mortgage, but he holds NT$13 million in cash. When disaster strikes, when a fire comes or an earthquake comes, and he has also lost his job, then Person A cannot go and pay his loan, and he goes bankrupt. Person B is different: his house has collapsed and he has lost his job, but he holds NT$13 million in stocks and cash, so he can slowly look for work again, and just keep repaying his loan. So he can weather the crisis with composure. (Video 00699, short)

This case shatters the traditional belief that “paying off the loan quickly means safety.” On the surface Person A looks as if he is “almost done paying, with only NT$2 million left,” but because he holds no cash at all, once he encounters one of the extreme events of fire, earthquake, or unemployment (or several at once), he not only cannot keep paying his mortgage but cannot even scrape together basic living expenses, and the bank will soon forcibly auction off his house, leaving him bankrupt in the end. Person B looks as if he is “still heavily in debt, owing NT$15 million,” but because he holds NT$13 million in stocks and cash, when the same disaster strikes he can pay his mortgage with composure, slowly find a new job, and does not have to sell his assets at a fire-sale price, weathering the storm in the end. The difference between the two lies not in “how much debt” but in “how much cash position.” Keeping cash is not wasting opportunity cost; it directly buys the right to survive, the right “not to be thrown out on the street in the worst case.” When the CLEC system repeatedly emphasizes the principle of “do not rush to pay off the mortgage, do not throw all your cash into the stock market,” it is built precisely on this real-life comparison of survival.

For young investors who have just entered the market, an extreme drawdown can in fact bring a rarely discussed “offensive advantage”: it is a free shock education you can attend even if you cannot afford the tuition. Take the day the Taiwan index futures hit the down-limit on August 5, 2024, as an example: Taiwan’s 2× leveraged products (such as 00631L / 00675L, cited here only as an example of the market down-limit phenomenon, not as recommended investment targets; this book’s leveraged mainstay is 00670L) fell a single-day 20%, that is, twice the underlying. For young people still in the accumulation phase, with limited capital and decades still to go before retirement, a single-day plunge of this magnitude does not mathematically destroy anything (after all, the total position is still small), but it can rapidly compress experience at the psychological level, letting the investor “personally experience what a 20% evaporation in a single day feels like” before the age of 30, so that when he meets a crash again in the future he will not easily panic-sell.

By contrast, someone who buys a highly diversified global index such as VT may never see a single-day 20% drop in his entire life, which instead leaves the investor perpetually lacking the real experience of “sitting still amid extreme volatility.” This is precisely one of the offensive reasons the CLEC system recommends the 442 allocation (containing 40% QLD / 00670L) to young people: not only for the high expected return that high Beta brings, but also to let young people complete the mental discipline of “keeping a still heart in the face of a crash” early, while their capital is still small. This psychological fortitude will become a crucial survival ability when their asset scale is later magnified tenfold or a hundredfold.

When you have prepared a 15-year cash safety cushion, even if the worst situation occurs, you still have enough cash flow to come through safely. This is what it truly means to “ignore the volatility.” (Video 00537)

The Four Conditions for Identifying a Macro Bubble

Beyond guarding their personal allocation defense line, investors also need to build the ability to identify a “macro bubble.” Teacher James has organized the four common conditions for the formation of a bubble. These are not used to “time” entries and exits from the market (the CLEC system always buys whenever there is money), but to preserve a measure of calm judgment when facing an extreme market, so as to avoid being swept along by mania at the last moment and breaking discipline.

The four conditions are: low interest rates, technological or financial innovation, a distance of at least several decades from the last mania, and the abandonment of traditional financial metrics.

Breaking down the four conditions one by one:

• “Low interest rates”: when the central bank maintains a low-rate environment for a long time, cheap money drives investors to chase risk assets, forming the breeding ground for a valuation bubble.
• “Technological or financial innovation”: every bubble comes with a “this time is different” new story, the internet of the 1990s, the subprime CDOs of 2008, the cryptocurrencies and AI concepts of recent years. The new story makes people ignore traditional valuation.
• “A distance of at least several decades from the last mania”: a bubble needs a new generation of investors to have completely forgotten the pain of the last one; if the memory is still fresh, no one is willing to catch the final baton.
• “The abandonment of traditional financial metrics”: when the market mainstream begins to say “PE is outdated,” “cash flow does not matter,” “growth is king,” it is often the final stage of a bubble.

One point that needs clarifying: the fourth condition, “abandoning traditional metrics,” does not contradict this book’s repeated emphasis on “discarding old-era academic metrics such as CAPE and PE.” The key difference between the two lies in “the motive for abandoning.” The CLEC system abandons PE because it “redefines value based on first principles”: the tech empire of zero marginal cost was never suited to the earnings-multiple valuation of the industrial age. The abandonment during a bubble, however, is “the market blindly discarding the yardstick in order to rationalize an overvaluation”: any metric too troublesome to measure or too pessimistic in its conclusion gets thrown out, leaving only “imagination” and “story” to prop up the share price. The former is switching to a more suitable ruler; the latter is throwing away all the rulers.

For the application to the CLEC system: the four conditions are not used to predict the timing of a bubble bursting (no one can do that), but to actively lower overall leverage and raise the cash position when all four conditions light up at once, ensuring that “even if the next ten years are a lost period, the portfolio can still survive.” This is the risk-control philosophy of being “roughly right”: do not predict, but be prepared.

Better to Earn Less Than to Go to Zero, Roughly Right

Investing is in essence a “loser’s game”: as long as you do not commit a fatal error and are not carried off the field, you will in the end become a winner. To buy survivability in an extreme environment, the investor must build a high-water-level cash defense, and this is bound to drag down the overall annualized return a little. Yet this “earning less” is a wholly worthwhile price.

You would rather not make money than go bankrupt. This is the market-sequence risk that all investors must face. (Video 00539)

Rather than pursue an allocation that is mathematically precise to the extreme, with an extremely high return but an extremely low tolerance for error, it is better to choose one that is “roughly right.” Keeping ample cash may look like a drag on performance in a bull market, but when a bear market arrives it is the life-saving antidote. As long as the direction is right, even if the return is discounted a little, so long as you never go to zero over the long run, the power of compounding can still create astonishing wealth. It is better to give up the temptation of the highest return than ever to expose yourself to the edge of destruction.

The principle of “never go to zero” is especially crucial when facing bond-type assets. Many investors are drawn by the 7% to 10% high yield touted by “non-investment-grade bonds (commonly called junk bonds or high-yield bonds),” mistakenly believing they are more stable than the stock market. But the real default data will wake everyone from their illusion: according to the long-term statistics of the international credit-rating agencies, non-investment-grade bonds rated BB+ to B- have a 5-year cumulative default rate averaging between 2.95% and 22%. Just holding for five years, with a little bad luck, you could step on a default.

Even though a bond after default does not go entirely to zero, and you can still recover part of the principal through the “recovery rate,” in practice the average recovery is only about 30% or even less, meaning that after NT$1 million of principal defaults you can get back only about NT$300,000. To earn an extra 5% to 8% of coupon yield, exposing your principal to a zero-out risk often exceeding 10%, this math, however you calculate it, is slow-motion suicide.

The CLEC system strictly requires that the cash defense line use only tools backed by national credit with an effective default risk approaching zero, such as short-term U.S. Treasuries (like BOXX, SGOV, 00865B). This is precisely the concrete execution of the “better to earn less than to go to zero” principle in bond allocation. Any product on the market that packages junk bonds or high-yield bonds as a “cash upgrade” or “steady dividend” is, in essence, trading destructive risk for a meager coupon rate, thoroughly violating the CLEC philosophy of survival.

An apple is a metaphor for this discipline of “better to earn less than to go to zero”: when you want to eat an apple (adopt a certain strategy), one is fine to eat, two is also fine, and someone who eats up to three does so because he is hungrier; but eating three carries the risk of choking, so what do you do? The answer is to chew slowly and carefully. Translating this metaphor back into the language of investing: investing in an index is fine, moderate leverage is fine, and someone else running 3× leverage may be doing so because his asset scale is larger or he is at a different life stage; but any strategy, once it exceeds the amount you can digest and lacks the discipline of “chewing slowly and carefully” (risk control first, cash defense line, executing rebalancing), will choke you in some extreme market condition. This metaphor compresses the whole chapter’s philosophy of survival into a colloquial closing line: risk control first is always the highest guiding principle, and it is not a choice of “whether you can eat three,” but the discipline of “chewing slowly and carefully no matter how many you eat.”

The Filter of Time Keeps the Organic Index Forever Young

Time is the market’s most merciless screen: it eliminates single enterprises that lack competitiveness, but keeps the organic index that can evolve on its own. The long-term elimination rate of individual stocks is astonishingly high: according to Bessembinder’s (2018) study of all U.S. stocks since 1926, only about 4% of individual stocks created all of the entire stock market’s net wealth, and only about 43% had a lifetime return that beat Treasury bills. Wealth is highly concentrated in the very few survivors that can keep evolving, while the majority of individual stocks are eliminated by the market over the long run.

The “Nifty Fifty” is the most clear-headed living lesson in this truth. In the 1970s, 50 companies such as Coca-Cola, IBM, Kodak, and Xerox were seen as tomorrow’s stars that could absolutely never fail, just like today’s FANG. Fifty years later, most of those companies had disappeared, fallen behind, or lost their pricing power. Yet if you had held all 50 at the time, the overall return would still have been roughly equal to the market index. The reason is simple: a few survivors (such as Philip Morris International Inc., abbreviated PMI) rose enormously and pulled up the overall average.

In the end only one company was left in the Nifty Fifty, and that was Philip Morris. But when you held all 50 of them, your overall return was still quite OK, still the same as the index. (Video 00382)

Here is the power of the index: it does not require the investor to guess which company will win, because the index itself is an organism that automatically eliminates losers and brings in winners. Today’s FANG may in the future follow in the footsteps of the Nifty Fifty, but the NASDAQ-100 index will keep evolving, forever holding the 100 strongest enterprises of the moment.

The NASDAQ-100 index, since its launch in 1985, has over 40 years broken through 25,000 points, accumulating an astonishing gain over the long run.

Time is the best diluent of risk. Hold for 10 years, and you may still step on the tail of some bear market; hold for 25 years or more, and in history you can hardly find a case of loss. This is not because the market has become gentler, but because, over a lengthened timeline, every crash is merely a brief episode within a larger upward trend. As long as you are not washed out, time is the most brutal but also the most loyal economic moat.

This is seen most clearly in QQQ’s “rolling annualized return” statistics. Laying out each holding interval in history: hold for only 1 year, and the annualized return swings violently between -64.5% and +105%, purely a gamble on luck; hold for 10 years, and the worst scenario still steps on a bear-market tail of -8.7%; but once you stretch the holding period to 15 years, the worst scenario has already turned positive to +3.4%; and by 25 years, the gap between best and worst narrows to a slim band of only +8.7% to +9.7%. In other words, once you have held for 15 years or more, a negative annualized return has hardly ever appeared in history. (A note is needed: the QQQ ETF was only established in 1999, so the 25-year sample is quite limited; the long-interval statistics above are calculated using NASDAQ-100 index reconstructed data, and are an index backtest rather than the long-term actual record of the QQQ ETF.) This is the most concrete numerical evidence that “time simmers violent volatility down into certainty,” and it is why the CLEC system uses a 15-year-class cash cushion to buy the confidence of “never having to sell stocks at a low point.”

▲ Figure 22-1 QQQ's rolling annualized return across holding periods: the longer you hold, the more the best and worst intervals converge.

Source: Chengfeng Linghang, "The Great-Way-Is-Simple Investing Method," QQQ rolling annualized return statistics.

Concrete historical figures let the investor form a calmer judgment about “time dissolving risk”:

Looking back over 200 years of stock history (based on long-term U.S. stock return statistics, commonly compiled in long-term data collections such as Jeremy Siegel’s “Stocks for the Long Run”), even if you land in the worst 5-year interval, you lose an average of about 2.58% a year, a situation that has indeed happened; but as long as you lengthen the horizon, the 10-year period loses only 1.47%, and at 15 years there is no longer a loss, but even a positive return of 4.21%.

Breaking this set of figures apart:

• 5-year time frame (worst scenario): annualized -2.58%, and this is already the worst 5-year interval result in 200 years of stock history
• 10-year time frame (same worst scenario): the annualized loss converges to -1.47%, with time helping absorb half the damage
• 15-year time frame (same worst scenario): the annualized figure turns from loss to gain at +4.21%, meaning that even if you buy at the most unlucky high point in history, as long as you hold on for 15 years you can turn positive

The value of this set of figures lies in this: it quantifies “the concrete damage of the worst scenario” down to a range the investor can accept. Most people’s fear of a crash comes from “an imagined bottomless abyss,” but the historical data tell you that even if you buy at the worst 5-year starting point in 200 years, you lose only 2.58% a year; and as long as you stretch the holding time to 15 years or more, even the worst historical path turns positive. This is why the CLEC system emphasizes the iron law that “the longer the time, the lower the risk.” It is not optimism, but the mathematical ironclad proof that emerges once 200 years of stock history is laid out.

The War Black Swan and the Fear Discount Coupon

Facing the black swan of geopolitical tension or the outbreak of war, retail investors often clear out their positions in panic. Yet the historical data prove that war is often the market’s “fear discount coupon.”

The CLEC system’s standard answer to “how to handle a QQQ position in wartime” has, over the past few years, completed one important evolution. An early version once advised “the moment a single bullet lands in East Asia, immediately cut the QQQ position by 50%.” At the time this was a passive defensive strategy based on an insufficient cash defense line and the absence of a high-leverage allocation. But as the CLEC system upgraded to “keep 15% to 20% cash,” “a mature 433 / 442 ratio,” and “an established pledge system,” this old solution has been completely retired:

What I often ask everyone is not whether there will be war in Southeast Asia; that does not matter. What I ask you is: if the market closes for 10 years, 20 years, or closes for 10 to 15 years, will you still be alive? This is the risk an investor must ask himself every day. (Video 00391)

The new ultimate solution is not to predict when war will break out, nor to prepare to sell off stocks when the event occurs, but to use the CLEC mainstay of a high-water-level cash defense line (10 to 15 years of living expenses) to simply “lie flat.” Even if the stock market really does close for 10 or even 15 years, the cash position is enough to support the entire family through it safely, and there is no need at all to sell a single share of QQQ. The value of this shift in thinking is that it moves the investor entirely off the unsolvable track of “anxiously predicting geopolitics” onto the controllable risk-control metric of “ensuring that I can survive 15 years of market closure.” Once the cash moat is built, war news can no longer disturb investment discipline. This is far simpler, and far more reliable, than predicting which day war will come.

The Liquidity Freeze and War’s Short-Term Drawdown

But more terrifying than “war making stock prices plunge” is the liquidity-freeze scenario of “the market simply closing, so you cannot sell even if you want to,” and this is no hypothetical scenario in history. In 1914, when the First World War broke out, the New York Stock Exchange closed outright for about 4.5 months (trading stopped at the end of July and stock trading did not resume until December), and all holders were completely unable to cash out; in the 1929 Great Depression, the stock market crashed by nearly 89% and took several full years to climb out of the trough. Throughout history, war and regime change have also caused securities markets in various places to suspend trading for months or even years, with trading interrupted or liquidity vanishing. Consider a real-world problem: if you held only stocks and had no cash reserve at all, and the stock market suddenly closed for 2 to 3 years, what would you rely on to cover your living expenses? Only two answers remain: passively wait in misery for the market to reopen, or sell off other physical assets (property, vehicles, jewelry) at below-market fire-sale prices in exchange for cash. This is precisely the historical basis for the CLEC system’s repeated emphasis on “a cash reserve of at least 6 months to 15 years of living expenses” and “never go ALL IN on stocks.” The market can plunge, but as long as it is still open, the person who holds to discipline wins; once the market closes, the person with no cash cannot even obtain the ticket to get back in. This is also why a true philosophy of survival never looks only at the “extent of the decline,” but must also count the extreme scenario of “liquidity going to zero” into the stress test.

Below are the concrete effects of several representative military conflicts on the S&P 500:

▲ Source: First Trust / Bloomberg (same source as Figure 22-2 at the end of this section). The drawdowns in the table are the maximum retracements of the S&P 500 from the day of the event; days to recover is defined as the number of trading days needed for the index to return to the closing price of the day before the event.

Even the most severe 1973 oil crisis took about six years to recover, but placed within a 20-year investment horizon, it is no more than a passing cloud. The iron law of the capital markets is: war and chaos will ultimately pass, and the market will ultimately rise. When the crowd sells off in panic, quality assets appear at extremely unreasonable discounts. The wise regard these pullbacks as discount coupons, buy whenever there is money, never sell come what may, and do not let news headlines disturb their long-term capital deployment.

The Actual Global Stock Market Returns in the Years of War

The previous table shows the “short-term drawdown at the moment of the event and the days to recover.” Pull the lens back to “the actual annual global stock market return over the entire year in which war broke out,” and what you see will be completely opposite, counterintuitive data. This historical material compiled by Ken Fisher in “The Only Three Questions That Count” is the most solid backing for the argument of the “war fear discount coupon.”

▲ Source: Ken Fisher, “The Only Three Questions That Count.” 1970–2010 uses the MSCI World Index (covering 24 developed countries, not deducting dividends and withholding tax); 1934–1970 is a simulated calculation by Global Financial Data based on a world index, also not deducting dividends.

This data thoroughly shatters the intuition that “the market must crash in wartime.” Apart from 1949 (the communist unification of the mainland, the Soviet Union’s nuclear test) at +5.4%, which is a relatively low value, the global stock market’s single-year return in most major war years falls in the +15% to +40% range. In 1986, the year of the Chernobyl disaster and the U.S. bombing of Libya, the market rose 41.9%; in 2003, the year of the Iraq conflict, it rose 33.1%. If these two figures were used to sum up the whole picture in one sentence: the decline on the day war breaks out can in no way define the return of that entire year.

Pull the timeline out to “the number of consecutive up years after the event” and it becomes even clearer. After Hitler seized France in 1940, the global stock market rose for 4 consecutive years; after the Korean War broke out in 1950, it rose for 7 consecutive years; after Kennedy was assassinated in 1963, it rose for 3 consecutive years; after Chernobyl in 1986 rose 41.9%, the streak was not broken; in 1998, the year of Russia’s debt default and the Asian financial crisis, it still rose 24.3%; and after the European debt crisis in 2010, the market rose all the way to 2017. The evidence of 80 years of history is strongly consistent: adding to a position or staying still at the moment of an extreme geopolitical event is closer to a true survival strategy than fleeing in panic.

One red line that must be drawn clearly is this: this is not the market-timing slogan of “buy when war breaks out” (that violates the CLEC core discipline of “buy whenever there is money, do not watch the news”), but the long-term argument that “when war comes, there is no need to panic-sell, no need to interrupt compounding.” The difference is this: the former is watching the news to chase the trade, while the latter is letting the existing allocation keep operating amid the news. Guard this line clearly, and Ken Fisher’s data will be the backing for discipline, not an excuse for market timing.

Turning from gunfire to the modern day, the form of the “war black swan” has also expanded. It is not only real military conflict, but may also be tariff policy and currency war. Trump’s tariff policy is, on the surface, trade friction, but behind it lies the “invisible hegemonic war” of forcing every country to appreciate its own currency and take on U.S. Treasuries. Taiwan therefore faces the pressure of the New Taiwan dollar appreciating, the profits of export enterprises are eroded, and short-term turbulence is extremely violent. Yet the conclusion does not change: whether gunfire or tariffs, holding top-tier technology assets with global pricing power, together with a sufficient cash buffer, is the only path to survive under any geopolitical shock.

▲ Figure 22-2 The long-term growth trajectory of the S&P 500 (1970–2024, logarithmic scale): through every crisis, compounding never stopped.

Source: First Trust / Bloomberg

The Philosophy of Survival in One Sentence

To compress the whole chapter’s philosophy of survival into one colloquial reminder, Teacher James, in video 00459, gave the survival-bottom-line sentence that is repeatedly quoted within the 00662 community:

Interest rises to the sky, stock prices fall to zero, and you can still stay alive in the market: that is investing. Knowing what you are doing is what lets you sleep in peace. (Video 00459)

This sentence treats “whether you can keep living in the worst scenario” as the only definition of investing; every other argument about the rate of return takes second place before this premise. Allocation, rebalancing, withdrawal rate: the purpose of every one of these designs is only to satisfy this bottom line.