We all go through four stages of competence as we learn something new:
- Unconscious Incompetence – we don’t know enough to even know we are incompetent (Dunning Kruger Effect)
- Conscious Incompetence – we know enough to recognize our incompetence (Socrates: “The only thing I know is that I know nothing.”)
- Conscious Competence – we know we are competent, but we realize how difficult it is to be so
- Unconscious Competence – we are competent, and can’t imagine how someone could remain incompetent when it is so simple
So how does this apply to investing? I think people go through the same four stages (if they progress):
- “Investing is easy – just buy the investments that are obviously going to go up.” (And, as Will Rogers said after the 1929 crash, “if they don’t go up, don’t buy them.”)
- “Investing is hard – I have no idea what is going to go up.”
- “Investing is hard – I’ll just buy everything (index).”
- “Investing is easy – why doesn’t everyone see the obvious, that due to the arithmetic of active management they would be better off if they just indexed?”
(There are higher levels of investment expertise than this for professionals, but I’m thinking of the investment approach of an individual investor without professional help.)