[Red Envelope] Hundredfold Brother reads Chapter 40 of the "Tao Te Ching": Retail investors focus on ups and downs, experts look for patterns

Chapter Forty
Original Text

Reversal is the motion of the Way;
The weak is how the Way works.
All things under Heaven are born from “being,”
and “being” is born from “non-being.”

This is also a chapter with very few words.

In the previous chapter, we talked about taking “one” as the right way, holding “one” without disorder, valuing what is low as the foundation, and what is lower as the base. We explained that the root of stable, profitable investing lies in focusing on the essential: unity, holding the foundation, humility, and calmness.
By守ing the one great Way and its rules, the account will naturally remain stable and endure for a long time.

But Chapter Forty is a very concise chapter in the Dao De Jing, one that goes straight to the essence. These lines are well known to everyone. Laozi uses only four short lines to reveal the market’s rise-and-fall cycle and the method for trading profits.

I. Reversal is the motion of the Way

The Way’s operation is always cyclical, moving in the opposite direction; when things reach the extreme, they必然 transform into their opposite. This is the unchanging law of Heaven and Earth: as everything develops to its peak, it must turn toward the contrary direction.

Put into investing, this is the most fundamental law of the market’s rise and fall. Once a trend forms, it tends to continue, but it will eventually reverse. In this market, there has never been an endless, ever-rising bull market, and there has never been a bear market that cannot bottom out. There are also no stocks that can rise to the sky. Our core task as ordinary investors is not to precisely predict every turning point, but to use our quantitative trend analysis system to identify the opening, continuation, and end of trends—never stand on the opposite side of a trend, and never bet on the extreme of one-sided movement.

The higher it rises, the harder it falls;
the deeper it falls, the stronger the rebound;
when a bull market reaches the extreme, it must turn into a bear market;
when a bear market drops to an ice point, new life must be born;
the more extreme the trend, the faster the reversal comes;
the more疯狂 the emotions, the more violent the pullback.

The行情 will not keep going up, and it will not keep going down. Every one-sided trend will, in the end, meet the opposite motion. Never develop some “faith” that the housing market will keep rising forever, or that a certain sector or theme stock will keep rising forever. Any extreme rally that departs from fundamentals, departs from valuation, and departs from trends will ultimately come to a return to the norm—this is the law of Heaven, and it is also the market’s law.

Many investors lose money because they cannot understand the Dao’s law of “reversal is the motion of the Way.” In the bull market at its most狂 and frenzied, when the stock price is driven up to the sky, they are swept along by greed, mindlessly chase at high prices, and jump in right at the historical high point. In the bear market, when it has dropped to an ice point and the market is dead silent, they are ruled by fear, sell out in despair at the very bottom where the行情 is about to start—perfectly missing every rhythm.

True trading professionals who can survive the cycle of bull and bear markets have always understood the cycle. They don’t chase extremes and they don’t bet on one-way moves. When an uptrend reaches its extreme, they know it will eventually reverse, strictly follow take-profit rules, and never grab the very last copper coin. When a downtrend falls to its ice point, they know it will eventually give birth to something new; they hold on to their principal and patience, and they absolutely will not let panic derail their timing. They are never fooled by the short-term rise and fall in front of them, and they are never swept up by the market’s extreme emotions. Once you understand the Dao’s opposite motion, you can stand on the correct side of the market’s laws.

II. The weak is how the Way works

The Way’s way of taking effect is never through hard strength, ferocity, showiness, or争夺, but through softness, humility, calmness, non-doing, and non-contention. This softness is absolutely not weakness or incompetence. Instead, it is following the momentum—without contending with Heaven, without opposing the market. This is the Way’s strongest and most lasting mode of作用.

Applied to investing, we can clearly see two completely different kinds of traders, and their outcomes are vastly different. One is the person who shows strength—aggressive, fully invested, chasing highs and throwing everything in at once. They fight the trend, refusing the market, insisting on defeating it. In the end, trying to conquer the market with their own hardness often leads to the market strongly反噬 them, and they lose miserably. The other is the person who守 weakness—patiently waiting, following the momentum, strictly cutting losses, humble and reverent, knowing where to stop so as not to go wrong. They appear soft and non-contentious, yet they can steadily survive through the bull-and-bear轮回, achieving long-term, stable profitability.

A trader of the Way not only follows the trend and grasps strong upward trends, but also has enough patience and composure. When the market is muddled, they quietly wait. They patiently wait, and within the rules they accumulate positions at low prices to lay out their plan. The market never eliminates people who quietly wait and strictly keep the rules; it only eliminates people who stubbornly display strength and act recklessly against the trend. It does not punish those who follow the momentum and hold humble restraint; it only punishes those who are arrogant and look down on everything.

Here, “weakness” means守 stillness to wait for the right time;守 clumsy simplicity and return to the true; strictly guard the risk-control bottom line; hold reverence for market laws. It means taking the position of退 as进, using stillness to control motion; using non-contention as the great contention, and using not acting recklessly to achieve everything through “non-doing.”

The line “the weak is how the Way works” tells us this: the long-lasting power that truly lets you cross bull and bear markets is never a momentary windfall from being brave and aggressive, or from going all-in to gamble. Instead, it is the steady progress enabled by softness and non-contention—following the trend and going far, along with long-term compounding.

III. All things under Heaven are born from “being”

Everything under Heaven that can be seen and touched is born from “being.”

In investing, “being” is everything we can see—
K-line price moves, price fluctuations, changes in trading volume, rotations of market hotspots, policy news, and even the one-time gains and losses in an account.

Everyone can see “being,” and almost everyone, throughout their entire investing career, chases these appearances of “being.” Many investors stare hard at red and green K-lines at the open, and at the close they翻 through all kinds of news interpretations. Their eyes only see short-term rises and falls and the immediate one-time gains and losses in front of them. They are led by the market’s appearances, chasing highs and selling lows, constantly trading and frequently meddling—yet they never truly grasp the real core of trading profits.

These visible “beings” have always been only the result of how the行情 runs, not the root cause of why prices rise or fall. They are the appearances presented by the market, not the essence of trading. If you trade by only watching the appearances of “being,” you will always be led by the market, and you will never break out of the cycle of chasing highs and selling lows and repeatedly losing money.

IV. “Being” is born from “non-being”

All visible, tangible “being” comes from the invisible, intangible “non-being.”

“Non-being” is the great Way by which Heaven and Earth operate; it is the fundamental law of the market’s rise and fall; it is the cycle of the bull-and-bear rotation; it is the core trend behind how individual stocks move; it is foreknowledge that appears before the行情; it is unchanging human nature; and it is the fundamental driving force that moves the market behind all appearances.

In investing, this is the essence of the difference between top traders and ordinary retail investors. Retail investors only see the visible “being,” while experts can see through the hidden “non-being.” Retail investors watch the daily rise and fall in their screens and the trading gains and losses, while experts lock onto the cycles of bull and bear markets and the trends of individual stocks. Retail investors chase after the market’s hotspot appearances, while experts always keep hold of the market’s fundamental laws.

These unseen, intangible “non-beings” are the real core force that truly determines the market’s rise and fall and decides the account’s gains and losses. “Non-being” is the mother of行情, the source of profit, and the foundation for long-term standing. If you can understand the birth of “being” from “non-being,” and understand the inevitability of rise and fall from the fundamental laws, then that is top-tier cognition in trading—and that is the confidence that lets us survive in the market for a long time.

Chapter Forty, only four short lines, is both the essence of the Dao and the essence of trading. When trading reaches the end, what you are competing on is never only technical skills, and never whether your capital is strong or your nerve is big. It is whether we have reverence for the market’s laws, whether we can restrain our own human nature, and whether we firmly uphold the great principles of trading.

Not being extreme, not showing off strength, not getting lost in appearances—if you hold to these three points, then you are truly the strong one in the market.

In the next chapter, Laozi teaches us: the superior person who hears the Way works diligently to put it into practice. It explains exactly where the differences between people in investing really lie.