Knowledge
“When you do not know a thing, to allow that you do not know it — this is knowledge” –Confucious
One of the biggest enemies investors face, is overconfidence. It doesn’t seem to matter whether the investor is professional or novice, one of the hardest things to admit is that you don’t know something.
Nearly all investors are confident in the direction of the economy, interest rates, stock markets, and even individual securities. Surprisingly, the returns of these overly confident investors often lag the comparable indexes.
So, what went wrong? After all, given their level of confidence, wouldn’t you expect them at least to earn a return equal to their benchmark?
The problem most investors face is not their knowledge or lack thereof, but their overconfidence. Investors that “know” exactly what is going to happen trade too much, trying to take advantage of their superior “knowledge.”
If investors would just admit to their lack of knowledge, they would be better off by sticking to their core competencies.
For example, my core competency is being able to perform a reasonable valuation of individual companies. I can not predict where the economy is heading, where the price of securities are going in the short term, where interest rates are heading, or what the next big thing is. So I don’t pretend to know what is happening in these domains.
As an investor, it helps to figure out what your core competency is and exploit that. Effort spent satisfying your ego by researching areas in which you don’t add value, is pointless. Knowing what you are able to do is something every investor should spend time figuring out.
