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More Knowledge = Better Investments?

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bookshelf Often the more you learn, the better you become. So if you learn a lot about how to program a software, you should become better at writing great programs. But does it really work like that?

When you learn the theoretical aspects of how to do something, this has to be buttressed by the experience of actually doing it. You can study all the theories of learning, but unless you spend time actually teaching it to someone, you don’t really know what types of learning or teaching methods really works.

The same applies to investment. It doesn’t mean that the more books you read, the more maths and mathematical modeling you know, the better you become in investment.

Otherwise, the maths and investment professors in universities will be the richest investors in the world.

A comment from a reader and fellow blogger, La Papillion, on my post about the mathematical probabilities of winning a lottery made me think about this issue. He saw his future father-in-law winning a few lotteries in a row and debunk the probabilities that was calculated in the post. It illustrates the fallacy of depending too much on just maths.

Which was one of the reasons why the recent financial crisis happened. The over dependence on the mathematical risk models as the be all and end all. It took just one black swan event to bring the whole edifice crumbling down.

Depending on just one method in investment is asking for trouble.

Does this mean that you throw all the investment books away plus the maths and the Excel sheets? Nope. I would use them as a guide, as tools of an increasing armoury which you can use together. And improve your odds of making a good investment.

So more knowledge doesn’t necessarily translate to better investments.

What do you think?

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5 comments:
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Anonymous said...
December 10, 2009 at 3:30 PM  

One over-used example:

BUY LOW, SELL HIGH

How many times have we come across this phrase, yet how many can lay claim to its successful execution?

W

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financialfreedom said...
December 13, 2009 at 6:40 PM  

Yep. Knowledge has only a slight correlation to how you perform in your investments.

The other things that play a part is your attitude and skills.

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Musicwhiz said...
December 14, 2009 at 2:48 PM  

Knowledge can only do good up to a certain point, just like marginal utility for food. Try eating more and more food and you realize the marginal enjoyment you get once your "full" threshold is reached begins to decrease, until you feel like throwing up if you eat more.

I've realized this with my own reading as well. The learning curve was very steep for me initially when I learnt about value investing; but now I just fine-tune here and there. Too much reading will result in information overload and the classic "analysis paralysis" syndrome.

Hence, I agree with you. If the smartest people made the best investors, then all professors would be blinking rich by now! Haha.

Cheers,
Musicwhiz

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la papillion said...
December 14, 2009 at 6:55 PM  

Hi,

Corrections :) I didn't just 'saw' my future father in law winning a few lotteries, I'm still 'seeing' him winning now :) haha

But I do agree with you. Whenever I see pple saying that the value of this company is x.xxx (3 dp somemore!), I'll wonder if this guy really thinks that whatever he is calculating is so precise and certain.

Mathematics is not just numbers, it's a thinking process :) Unfortunately, most will just see the numbers but not the thought process.

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Lemizeraq said...
December 20, 2009 at 10:43 PM  

Hi financialfreedom,

Thank you for visiting.

Apologise for the late reply but my house modem is down.

Yes, attitude, skills and knowledge are all important. Too much dependence on one will make one a poorer investor who don't use all their weapons.

Lemizeraq

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