Three of the hardest words in the world to say …

I don’t know.

three of the hardest words to sayThe human refusal to say “I don’t know” has huge consequences, for example, not getting good returns from your investments in the stock market, because there is a strong correlation between knowledge and humility.  As such, the best investors are those who realize how little they know.

Don’t be one of those people who spend 10 minutes on Google studying, for example, monetary policy and then think they have it all figured out, while people with Ph.D.s and decades of experience throw up their hands in frustration.  Because the more you study economics, the more you realize how little you know about it.

Billionaire investor Ray Dalio once said, The more you think you know, the more closed-minded you’ll be.”  So repeat this to yourself the next time you’re certain of something.

The truth is that there is not a single person in the world who knows how the market will perform in the short run.  So what makes you believe that you might be that person?  In reality, you are exponentially dumber than you think you are.

Ok, that was a bit harsh.  But don’t be disheartened.  Do continue to learn vicariously about the stock market, particularly from the financial problems of others.  Still, be aware that by the time you get the hang of making smart money decisions, your life expectancy might round to zero.Path to knowledge

Focusing on what you don’t know is the only way to get better at money decisions.

No matter what you might be doing in the investment field, you should always ask yourself the question: “What am I doing wrong?”.  It’s probably the most important question that you can ask yourself and the only way that you’ll be able to answer this is by seeking the opinions of people (who probably think you’re crazy).

Generally, the stronger you believe in an investment idea, the more important it is that you are able toaccurately state the opposition’s position.  That’s the easiest way to get more intelligent at investing.

I believe the old proverb: “It ain’t what we don’t know that gets us into trouble, it’s what we know that ain’t so,” isn’t exactly true.   What really gets us into trouble is not even knowing that we don’t knowwhat you know

Right, that is all good to know, but how can you test whether you know enough to have an informed decisions?

Pretend to be four years old and re-embark on the habit of asking “Why?” over and over, until you have tested the limits of your knowledge.

In the event that you struggle with an answer after the second “Why?”, then that’s an indication that you don’t have enough knowledge to make an informed decision yet.

In the event that you are not good at asking yourself tough “Why questions”, then ask a friend or your spouse to be your four year old kid for a while.  That could be quite fun.

Nonetheless, when it comes to your retirement finances, not deciding at all would be the worst outcome of your “knowledge check”; therefore make one solid decision and stick with it.  Don’t procrastinate, but take comfort in this good news:

You don’t have to outsmart Wall Streetat its guessing gameto succeed as an investor.  You don’t need to know which is the next “hot” sector; what Tesla’s earnings (to the nearest cent) would be; what next month’s GDP data would reveal; whether energy and gold stocks would move parallely; whether Janet Yellen would raise interest rates or not.

Remember my previous posts on ETFs?  These broad based stock market index funds (ETFs) are baskets that hold a piece of virtually every stock worth owning at rock-bottom costs.

If you buy and hold three ETFsone for your home country; one for international stocks; one for bondsyou would no longer need to know which stocks/industries/sectors/countries will do well or poorly.  You can win the prediction game by simply refusing to play it since it enables you to say, “I don’t know, and I don’t care”.

Will the next great growth sector turn out to be 3D-printing or Alternative Energies? “I don’t know, and I don’t care: My ETF owns both”.

Will small stocks do better than big ones?  “I don’t know, and I don’t care: My ETF owns both”.

What will be the world’s best stock market in 2016?  “I don’t know, and I don’t care: My ETF owns all of them”.

Life can be so simple.  Well, at least in this aspect of putting your money to work for a comfortable retirement.  But it is not easy.  Can you do it?

 

“What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.  An investor needs to do very few things right as long as he or she avoids big mistakes.” — Warren Buffett

“‘The most important product of science is knowledge,’ the physicist David Gross likes to say.  ‘However, the most important product of knowledge is ignorance.  The more we learn, the more we reveal what we do not know.'” — Daniel Gross, Future Babble

“Acknowledging what you don’t know is the dawning of wisdom.” — Charlie Munger

“The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.” — Stephen Hawking I dont know1

6 Comments

  1. Hi Andy,
    If someone really does buy all the said ETFs will he still subjects to the “sequence of return risk”?
    How real is it?
    Can anyone really do something about it?

    • I don’t know.

      Anybody can answer Temperament’s question?

      Maybe time in the market could remedy the “sequence of return risk” a bit. Spreading the investments over many years and doing the same with the withdrawals – slowly.

  2. HI Andy

    The more I learnt, the more I don’t know what to write and what to comments in blog nowadays. I thought those things I want to say should be common sense. If the receivers can’t buy in, no matter how elaborated I shared, they will still closed it.

    Is there a need to share, unless people asked? I don’t know. I only know I need to spend all my time preciously.

    “Never explain―your friends do not need it and your enemies will not believe you anyway.”
    ― Elbert Hubbard

    • I do feel with you, FD.

      Sometimes “… knowledge is subtractive, not additive – what we subtract (reduction by what does not work, what not to do), not what we add (what to do).” — Nassim Taleb

  3. Andy,

    I also observe that adults (myself included)do not readily admit that we don’t know or we sucks at certain things. We instead find explanations for why we don’t know or pre tent to know by the 10 min internet exercise

    Kids are at the other end of pendulum. Ask do they understand,they nod their head and said yes. Tell me what u have learnt then., they said i don’t know.

    • Only kids? Aren’t we adults doing the same thing? Nodding when someone tells us something new without really understanding it. Just to save us the embarrassment of outing ourselves as “not knowing – yet”. Instead it should be simply considered active open-mindedness (“eager to learn”), and what could be embarrassing about that?

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