A Good Education
Over the years I have chalked up a few academic accolades and whilst of course I value them I also value the depth of achievement of colleagues. At MASECO we have individuals who have passed advanced qualifications such as CFAs, CFPs, ACAs, those who have completed and are completing MBAs and Mark who is concluding his Ph.D. in Finance.
Reading a blog post of a US financial advisory firm (that I hold in high regard) they do a sound job of connecting advanced academic achievements to overconfidence.
The downside of overconfidence
If I look back at my career there have been times where I have found myself wearing rose tinted spectacles and only focusing on the positives rather than the negatives. For me it was concerning a leveraged loan fund that was held going into 2008. For others it was holding stock in the bank they worked at through the financial crisis and seeing their net worth being wiped out. Everyone has their own story.
What as investors can we learn from this? Generally when we look at potential investments we tend to focus on two things:
- Past performance
- The cost of the investment
Whilst both are important they shouldn’t by any means be the only factors in assessing a suitable investment. According to Standard and Poor’s latest scorecard only 7% of the 700 mutual funds that were in the top quartile in September 2011 were still there two years later.
The belief that we or those we trust with our money know more than they actually do is probably one of the biggest mistakes investors make.
Asking good questions
I have worked with many clients over the years and I think there is a positive correlation between asking good questions and having a positive investment experience. Having the ability to ask good questions comes from having a good understanding/experience but more importantly having humility and the ability to critique the status quo.
Being overconfident is like being at the casino, you are inclined to make larger, more concentrated more emotional decisions.