What makes paper assets somewhat dangerous is that, unlike real estate and business, almost anyone can buy stock at any time. And many people do. There is very little barrier to entry when it comes to the stock market.
Think for a moment about your country’s retirement system. In my home country, the United States, the dominant program is a contribution retirement program called a 401(k). In this 401(k) program, workers take a portion of every paycheck and let the “experts” in the financial industry spend it on mutual funds. The majority of these workers know next to nothing about the stock market: the risks, the fees, the laws, or even the basic details of a given plan. Like a herd of sheep, they are funneled into the stock market by the Wall Street sheep herders.
It takes only a little common sense to break from the herd and say, “I probably shouldn’t invest my money in something I don’t understand.” But evidently there aren’t enough “common” people in the herd because the herd is getting fleeced on a daily basis.
When we lose money in an investment, it’s most often because of something we don’t understand. I know that when I look back at my gains and losses, my biggest losses have come when I was delving into something I did not yet understand. More money is lost due to ignorance than anything else.
Luckily, we can escape ignorance.
Awareness
Moving from ignorance to awareness is a good feeling. It is illumination, it is discovery, and it’s awesome. But it’s impossible to set good solid education goals unless we discover a little bit about the things we need to learn.
I remember years and years ago when I took my first investing course. The instructor put several stock charts up on the screen and began to teach us about “technical indicators.” I remember thinking to myself, “This is one of the most impressive things I’ve ever seen.” I became very excited about what I was discovering. I could see that this was something I was going to want to study and learn more about.
When we have moments of discovery we simply learn about what’s possible. It was much the same as the first time I ever attended a concert as a child. The concert featured an extremely accomplished pianist, and I discovered what the possibilities were with that particular instrument. With playing the piano it’s pretty easy to feel the distance that exists between being aware of what the instrument’s potential is and becoming an accomplished musician.
As you read each chapter in the book you will become more aware of what professional investors actually do when they make investment choices. Chances are you will then want to delve even deeper. It’s natural to want to move from mere awareness to a more complete level of understanding. That understanding is called competency.
Competency
Think of an airline pilot who has passed a written test on flight regulations, but has not yet had a chance to practice what he has learned in the air. Think of a musician who has spent many months in a classroom learning to read music, but has yet to pick up an instrument and practice. Competency is that level of understanding that does not yet translate into ability.
Competency denotes a minimum amount of knowledge and skill to perform an act. In a court of law, a witness would be expected to be competent to testify. But competency is often associated with minimums. In most countries there are minimum competency tests for various professional licenses to practice medicine or law.
Competence denotes the ability to get an A on a written test. But understanding how something is done is not the same as being able to do it. The real world demands proficiency. Classrooms are havens of competency. Classrooms reward competency. You can move through your whole academic life with nothing more than competency.
There is little room for mere competency in the real world. The real world rewards proficiency. It’s much easier to describe than to go out and do.
In basketball, it’s easy to draw a play on a chalkboard. It’s the easiest thing in the world: just a bunch of Xs and Os, a few arrows here and there. Go out in front of 13,000 people and a couple of blind referees and pull it off—that’s a whole different ball game. That’s proficiency. Step onto even a college-level court and try to compete with just competency, and watch yourself learn the real meaning of getting schooled.
Proficiency
Closely related to the word competency is proficiency. Proficiency is a higher degree of competency, and that difference in degree can mean the difference between making money and being wealthy. If competency is knowing the play book, proficiency is execution of the play. Competency is the intellectual ascent to the truth. Proficiency is execution.
In my experience, proficiency is a pursuit and not a destination. We can always become more proficient. I hope that you will be more proficient in the stock market next year than you are today, and even more so the year after that. But, as I said earlier, the stock market is a moving target, and as it changes, so will you. As the markets change, as economies change, so will your need for changes in your knowledge base. You can never be satisfied with competence.
People wonder at what moment they will know that they are able to successfully trade stocks and options. I don’t know the answer to that question because proficiency is a process, not an event. I compare it to the drum lessons I took when I was a kid. I could always hit drums, but it sure didn’t sound very good at first—at least not to my parents. Today I can play in my rock band—and we’re not half bad. But it was a long process over many years of practice. There is never a singular moment where you say “yesterday I could not play but today I can.” There are milestones, however. If you have never owned shares of stock, there will be a day when you begin trading on paper or in a virtual account. There will come a day when you invest a small amount of real money. Then the day will come when you short a stock…and so on.
Over time, you travel along the Education Continuum to proficiency. But you can’t always put your finger on when those transitions happen. There are thousands and thousands of drummers more proficient than I’ll ever be (and that is true for investors as well), but there are probably many more thousands who are less proficient. I can play in my rock band and enjoy making music without effort. Because of my learning and practice, it’s now automatic, and it sounds like actual drumming to most people.
Confusing Awareness with Proficiency Will Cost You Money
Part of the value of the Education Continuum is the humility that comes with knowing that if you are an investor, you are also a student. One of the dangers of the stock market is its accessibility. Unlike playing the drums, you can play the market and not realize you don’t know what you are doing. I see some people make the leap to awareness and confuse that with proficiency. Sometimes this happens because of arrogance, and sometimes it’s merely from the excitement of discovery. If you keep yourself in check with the Education Continuum, you can avoid the costly tuition of the school of hard knocks.
Powerful Suggestions for Becoming a Great Student
Are you ready to take control of your education and become a serious student? Of course you are. You’re the one who knows what you want and what captures your interest. You know what is vital to your education and what is trivial. So let’s get down to some studying.
As Robert often teaches, there is a drastic difference between “reading” and “studying.” I’m going to help you supplement your reading with activities that will make this a study of investing that will actually apply to all the asset classes—not just the stock markets of the world. If you like the idea of becoming a serious student, the suggestions that make up the remainder of this chapter will ensure you a more rapid and powerful transformation than reading alone.
1. Discuss what you read and share it with others who share your interest.
2. Set education goals, not just lifestyle goals or money goals.
3. Begin working with mentors.
4. Do it now!
When