Investors’ levels of knowledge reside along an enormous continuum based on all sorts of variables including practice and exposure to different economic circumstances. But after 10 years, I have learned that from the questions I am asked within the first 15 minutes of a meeting, I can pretty much gauge how successful an investor will be in the long run.
The other day a client, who is a young dentist by day and a beginning investor by night, asked one of the more intelligent questions that I have been asked in 10 years about investing. After about 15 minutes of chatting she asked, “How did you develop a perspective of how the world functions so that you can be at peace investing money?” or the short hand was, “How do you know all this stuff and why are you so calm?”
Let’s contrast this with the single most naïve question I hear far more often. The naïve question, “Is the market going up?” or its close cousin “Is the market going down?” It could be the stock market, the property market, currencies, gold, the bond market, it doesn’t matter which market..that’s the most frequent and naïve question out there.
The reason the first question is smart is because it is asking about how one gains a perspective based on a body of knowledge that doesn’t just appear, packaged and ready to eat like a frozen dinner. She correctly surmised that investing is not something I learned how to do sitting in a bath leafing through Cosmo one morning. Having a perspective on anything takes time, involves reading a variety of material and often entails seeking information that answers the question, “what if I am wrong?”
The beauty of developing a general perspective on how the world functions, who pulls the levers of power and credit formation, is that you can develop an investment strategy around it that allows you to sleep at night. You also welcome debate because you are aware that you may need a back up plan in case you are wrong.
The second question, the “up” or “down” question is a naïve question because no one knows the answer for sure month in and month out. You can only get a feel for long term market trends. But this investor tends to be more interested in appearing smart than gaining knowledge. Maybe they’ve read a book. Maybe they’ve gone to a seminar. This investor will end up being sold at their peril into their confirmation bias, considering themselves long-term investors only up until the moment their investments do not pan out.
Moral of this story - we are what we eat AND what we read and what we believe and who we love and how we invest. So, if you want to start investing more like the young doctor asking thoughtful questions and less like financial industry prey, here are some good starter questions to ponder:
- When does credit (lending) expand and contract and why?
- Why is inflation so persistent and how does it effect how I’ve invested my money?
- Has my country’s currency strengthened or devalued against other major currencies, and how/when/why does this happen?
- What countries are growing and which countries are shrinking and why?
- What happens if everything that I have ever thought about money and investing is wrong?
Here’s a blog by my friend and well-regarded economist Enzio Von Pfeifl out of Hong Kong that is worth a regular read.