As featured in the Herald Sun – Friday 9th September 2016.
By David McCulloch – Market educator and consultant to Share Wealth Systems
“A man’s got to know his limitations”……Dirty Harry.
People tend to hold overly favourable views of their abilities in many social and intellectual domains.
This overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the self-awareness to realize it. These are conclusions made by Justin Kruger and David Dunning in their research on confidence and competence in a study at Cornell University. Interestingly their experiments asked individuals to evaluate their performance relative to their peers in several areas, and then provide a self assessment of their own performance.
The findings were that below average individuals tended to over-estimate their abilities in relation to their peers. It was also noted that those with minimal knowledge in any one of those fields seemed equally troubled, as whist their performance was poor their incompetence robbed them of the ability to actually recognize it. So here we have individuals lacking in competence but seemingly confident at the same time. There are many real life examples of this type of behaviour and Australia’s got talent is a classic case in point. Blinded by confidence and an unknowing lack of competence there is always at least one contestant that wakes up to the harsh reality that perhaps they are not really all that good after all.
So how might this relate to investor performance in the markets?
Competence develops through experience, and investing is very much an experiential endeavour. Being prepared to learn is therefore the starting point, as is having an awareness of your own limitations. Being successful in the markets over the long term is as much about understanding yourself as it is your own investing plan. Learning about the markets can be a challenge because of pre-existing cognitive biases, but with some patience and strong desire to grow progress can certainly be made. In my experience a level of understanding once established often provides an important benchmark in terms of individual competency and self awareness. At this point investors may have a “light bulb” moment, but more than likely the globe is not yet lit. The lighting of the globe starts to happen when that growing competence is accompanied by a change in behaviours.
Actions speak louder than words, and being acutely aware of one’s own actions or lack thereof is an important step in the development of any investor. Investing is a largely a decision making process and it requires a steady unwavering approach. Whilst a benchmark of knowledge is the starting point, your ability to transpose that knowledge and build a blueprint for your actions will determine your longer term success. Are you good at making decisions? Are you consistent? Are you disciplined? Are you patient? These are attributes of successful investors. Most investors need to work at these as they develop into routines of behaviour, which eventually become habits. Breaking bad habits takes time. Recognising a bad habit in the first instance is a good place to start.
David McCulloch is a market educator and consultant to Share Wealth Systems