Back in high school, I was a singer. I was a really good singer. How do I know? Because I was judged, professionally, by professional singing judges who measured my singing ability against a known working pitch pipe. I also had developed the skill of assessing my own singing ability and had demonstrated my ability to sing well. I was actually better than the average singer in my school.
I sung many songs, sight-read pieces (meaning, I could read a music sheet and sing the notes off the sheet… usually with perfect pitch). I composed my own musical scores and… I performed publicly on more than one occasion. I had won singing competitions, and attended conferences reserved for the best singers in my county (which were invite-only). I had also scored very highly on state-level competitions.
I KNEW I was good and I was also competent enough to judge other peoples’ singing abilities.
It took YEARS of hard work to get that good.
So… when a fellow classmate tried out for a singing club in school, I got to listen in on the audition. He had some problems singing BUT… he didn’t know he was a bad singer. In his head, he was singing well. Basically, he was unable to identify whether or not he was actually singing well.
Mayhaps you have experienced this yourself. Have you ever recorded your own voice and played it back later? It never sounds the same as it does in your own head, does it? Try singing and recording it. Sounds different. In your head, everything sounds right. But listening to it sounds like “ohmygodthat’snotme”. Or… maybe it sounds fine to you but… other people (who are actually good singers) tell you that it sounds awful. Do you believe them? Yes? No?
Your answer to that question might tells you something useful.
Here’s what I mean:
Recently, I was listening to an interview with David Dunning… one of the psychologists that studied what is now known as the “Dunning-Kruger effect”.
Basically, it is the idea that incompetent people tend not to understand their own incompetence.
“Incompetence” here doesn’t mean “stupid” (or even STOOOOOPID).
It just means a person who really doesn’t know what they’re doing and… who doesn’t know that they don’t know what they’re doing.
Another name for this is “unconscious incompetence”.
Another (although not as accurate) way to think of this is that some people tend to be overconfident in their abilities when they don’t have real knowledge about something.
I bring this up because it’s very common for investors to fall victim to this. Some people (tho obviously not all) believe they are better investors than they really are.
They don’t even really understand how bad they are, and it’s particularly bad when these investors get lucky and mistake that luck for skill.
Essentially what you need is the knowledge (and perhaps skill) to understand how to assess your own investment performance and abilities.
For example, do you think you’re better than the average investor? How well does the average investor do? How well do you stack up? And… what is the probability of you outperforming that average in the future? Can you prove your own investing skills? And, do you understand the level of skill needed to be, say, a Warren Buffett?
I cover some of this stuff in my investing section of my new life insurance buyer’s guide, which you can read, here: