If you’ve always lost money investing in the past, it may not be because you weren’t hardworking or weren’t lucky. 80% of the reason is that you did two things you shouldn’t have.

First, you clearly knew a company wasn’t great, but as soon as the stock price rose, you couldn’t resist buying.

Second, some businesses were too hard to understand. You thought you understood them, but you didn’t, and you bought them anyway.

What to do? Read Poor Charlie’s Almanack! In that book, Munger divides investments into three categories: can invest, cannot invest, and too hard to understand. He only chooses the “can invest” category, while you chose the latter two. So it’s no surprise you don’t make money—or even lose it.

Why can doing this multiple-choice question well make you money? Because we will limit ourselves to our circle of competence. Good businesses we can understand—act decisively. Bad businesses we can understand—stay as far away as possible. Businesses we can’t understand—whether good or bad—throw them all in the trash.

A person’s time and energy are very limited. It’s impossible to understand everything or be expert in everything, so it’s impossible to make money from everything. Munger is enormously learned, but he doesn’t understand tech companies either. It’s not that tech is bad—it’s just outside his circle of competence. It’s not his dish. So he puts such companies into the “too hard to understand” category and simply doesn’t invest.

So what should we specifically do when investing? Just three steps:

Step one: list all the target companies you’ve invested in or want to invest in.

Step two: for each target, ask yourself three questions: Can I understand this company’s business model? Can this company keep making profits? If this company’s stock price fell 50% within a month, could I still hold on? If any answer is no, put it directly into the “too hard to understand” category and never look at it again.

Step three: spend all your time and energy on the companies in the “can invest” category. Focus on their competitive advantages, read their financial reports more, use their products more, and you’ll know whether these companies are truly good. Pick out one or two of the best, then hold them long term.

The biggest risk in investing is not market volatility, but you running around blindly in areas you don’t understand! Investing requires subtraction—invest only in what can be invested.