Four things investors (even Warren Buffett) just have to accept they know nothing about — and one new thing
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Oh, how we should have listened to her. According to John Hopkins University which keeps updates on the numbers, the worldwide tally of COVID-19 virus events as of June 19 was 8.5 million cases and 455,000 deaths worldwide.
As Charlie Munger has said, you simply throw it into the “too hard” pile and move on
Circle of competence is an essential concept in investing, and in life in general. Separating the knowable from the unknowable is vital. Many people buy companies with only limited information, certainly not nearly enough to say they see all the advantages of the business and, more importantly, not enough to see the critical pitfalls.
Knowing you don’t know something important and, therefore, avoiding the investment should be viewed as a huge positive. As Charlie Munger, vice-chairman of Berkshire Hathaway, has said, you simply throw it into the “too hard” pile and move on. The stock may perform fabulously, but it can also turn out to be a disaster.
Staying well within your circle of competence, in the areas that you know best, helps safeguard you from situations that can do a great deal of damage. Think of it as wearing both a safety belt and a helmet when driving because the roads are filled with dangerous drivers you never want to meet up close.
The list of questions I don’t have answers to is infinitely long. However, when it comes to the world of making investments, there is a standard list of four I have followed for years.
Short- to mid-term economic trends
Buffett has said that if you have an economist on staff, then you have one too many employees. Forecasting future trends is a hazardous occupation. True, some are better at it than others, but, overall, the track record of the average economist is probably no better than 50/50. If one has a very positive view of the future, and another a negative outlook, good luck in choosing the one to base your investments on.