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Circle of competence
"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent"
Charlie Munger
I found it particularly difficult to choose a name for this final, but all-encompassing principle. In the end, it simply became the ‘circle of competence’. It is the cornerstone of successful investing and therefore also forms the foundation for the successful implementation of the other four principles. I am trying to put into words what is actually a combination of several characteristics. At the centre is the ability to be aware of one's own competence - and more importantly - one's own incompetence. Specifically applied to investments, this means: only buy what you understand 100%. Sounds simple, but it's not. If you want to dedicate yourself to this topic, you will quickly end up in a rabbit hole of psychology and behavioural finance (book tips follow). Our emotions can quickly lead us to make irrational decisions or make us susceptible to biases, i.e. errors. In principle, this is not a bad thing as long as we are aware of it. For a private investor, for example, the power of compound interest can quickly be forgotten when a new car beckons. Or: when things are going well on the stock market, we tend to attribute this to our expertise. And if it doesn't work out, then it was just bad luck.
What this is meant to express: Successful investing is hard work and over time there are many temptations and mistakes that are reinforced by your own ego or other interests. That's why it's not what you do that counts, but what you don't do. A negative share price performance alone is no reason to sell a share. A sense of achievement is no reason to become greedy and increase the risk. A tempting consumer spending spree is no reason to throw your long-term investment plan overboard. It takes good self-awareness, emotional stability and a certain down-to-earthness to avoid being tempted to make unwise decisions over the decades. So: be aware of your (in)competence, stay level-headed and stick to the plan!
What this is meant to express: Successful investing is hard work and over time there are many temptations and mistakes that are reinforced by your own ego or other interests. That's why it's not what you do that counts, but what you don't do. A negative share price performance alone is no reason to sell a share. A sense of achievement is no reason to become greedy and increase the risk. A tempting consumer spending spree is no reason to throw your long-term investment plan overboard. It takes good self-awareness, emotional stability and a certain down-to-earthness to avoid being tempted to make unwise decisions over the decades. So: be aware of your (in)competence, stay level-headed and stick to the plan!
