“Raise your hand if you’re an above-average driver.”
Ask that question in any group and see how many hands go up. Usually it’s way more than half. That’s because we’re pretty overconfident. We think we know more than we do, and we think that we’re better than we are.
It’s not just because people are arrogant. It’s also because the folks who lack a true expert’s abilities can’t discern what makes someone really good. For example, if you’re not very good at learning languages, you might not be able to tell that you’re not all that good, because the skills you’d need to tell a good language-learner from a bad one—an ear for sounds, a broad vocabulary—are the ones you lack.
This has broad implications for investing. We’ve discussed before how it’s fairly easy to measure investment return, but it’s difficult to evaluate risk. Most occasional investors never consider the risks that they’re taking when they measure their investment returns. So they may have a great run, but usually it’s because they’re taking significant risks that they’re not even aware of.
All the more reason to be humble about our investment prowess. There are some real tools investors can use to improve their returns, but they’re mostly humdrum matters of policy, discipline, and humility. Investing is a game of inches, and little things add up to make big differences in investment performance.
Investment skill is real, and above-average performance is possible. But this isn’t Lake Wobegon: not everyone can be above average.
Douglas R. Tengdin, CFA
Chief Investment Officer
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