The Four Stages of Investment Knowledge

Alas, but we are poor creatures, muddling along in a confusing market that denies many the ability to earn money.  WHAT HAPPENED TO THE NINETIES, WHEN MAKING MONEY WAS AS EASY AS HITTING THE BROAD SIDE OF A BARN?!  Uh, that was then, this is now.  We’re in a dead spot, a lost decade; old certainties are being tested, and many clever investors (alas for Bill Miller) are being weighed in the scales and found wanting.

This is actually a good time to become an investor, because it is a bad environment.  You develop your skills when expectations are low, and the battle is tough.  But you have to confront the four stages of investment knowledge.

Stage one is being puzzled, and knowing that you don’t know much.  There is extreme caution and risk avoidance, and so much of the market appears to be random.  But with some drive, there is a desire to learn, and that leads to stage two.

A little knowledge is a dangerous thing.  It can come in the form of articles like “Ten Best Stocks to Buy Now!” or “The Simple Formula That Beats the Market, in One Tiny Book.” Whatever.  The initial knowledge is typically a stripped-down version of what has worked in the past, and past results indicate future performance.

Stage Three is the rare point, because it comes after some failure in stage two, because the world wasn’t as simple as the few experts initially read would indicate.  Stage three admits that the prior knowledge was very limited, and that investing is more complex than previously thought.  This is a time of study, and modest experimenting in investing, learning risk control, and understanding oneself.  What am I good at?  Where do I grasp value better than others?

Stage Four is where the survivors prosper in a limited way.  They know that the market is fickle, and have learned that their methods may be good in the long haul, but may underperform in the short run.  They don’t panic, they keep learning, and they persevere in times of fear and greed.  They invest as if it were a business, and are prepared for bad times, and don’t go crazy during good times.

My own methods are geared to Stage Four.  I’ve been through all manner of markets (minus the Great Depression), and know how badly I can be hurt.  I am ready for losses in the short run, if I know gains are likely in the longer term.  I’ve gotten to the point where losses on individual stocks don’t bother me; I just maximize value from where I am now, without letting past losses or gains prejudice me.

Investing is a business.  Spend time studying.   Some of the book reviews on my site could be valuable in that respect.  Don’t let a few early losses get you down.  Investing is rewarding over the long haul; you can never tell when the game will get easier.  On a personal note, my worst time in investing was June-September 2002.  I lost big, but I did not lose confidence in my management methods, and made it all back and a lot more by the end of 2003.

Another way to say it is, “Be ready for losses.  Don’t let them knock you out of the game, but budget for them.  It is your market tuition.”  Ah, my market tuition.  Would that I could avoid the occasional “refresher course.”