WIH-3covers2 copyChapter 4 of The Winning Investment Habits of Warren Buffett & George Soros:

George Soros Doesn’t Take Risks?

Unconscious incompetence is also the reason why the worst thing that can happen to a novice investor is to make a pile of money on his very first investment. His success leads him to believe that he’s found the secret of trading or investing and that he really knows what he’s doing. So he repeats whatever he did the first time — only, much to his own surprise, to lose money hand over fist.

As futures trader Larry Hite explained to Jack Schwager in his book Market Wizards:

I once worked for a firm where the company president, a very nice guy, hired an option trader who was brilliant, but not very stable. One day the option trader disappeared, leaving the firm stuck with a losing position. The president was not a trader, and he sought my advice.

“Larry, what do you think I should do?”

I told him, “just get out of the position.”

Instead, he decided to hold on to the trade. The loss got a little worse, but then the market came back, and he liquidated the position at a small profit.

After this incident, I told a friend who worked at the same firm, “Bob, we are going to have to find another job.”

“Why?” he asked.

I answered, “We work for a man who has just found himself in the middle of a mine field, and what he did was close his eyes and walk through it. He now thinks that whenever you are in the middle of a mine field, the proper technique is to close your eyes and go forward.”

Less than one year later…this same man had gone through all of the firm’s capital.

Being in a state of unconscious incompetence can be highly hazardous to your wealth.table5

Conscious incompetence is the first step to mastering any subject. It’s the conscious admission to yourself that you really don’t know what to do, and the full acceptance of your own ignorance.

This may result in feelings of despair or futility or hopelessness — which stops some people from investing entirely. But it’s the only way to realize that to master the subject requires a process of intensive learning.

Conscious competence is when you’re beginning to have mastery of a subject, but your actions have yet to become automatic. In this stage of mastery, you have to take every action at the conscious level. While learning to drive, for example, you must be consciously aware about where your hands and feet are; think through each decision about whether to hit the brakes, turn the wheel, change gears…and as you do so, think consciously about how to do it.

In this stage, your reactions are far slower than the expert’s.

This doesn’t mean you can’t do it: far from it. Youcould make the same investment decision as Warren Buffett. But what took Buffett 10 minutes to decide might take you 10 days…or even 10 months: you have to think through every single aspect of the investment, and consciously apply the tools of analysis (and acquire most of the knowledge) that Buffett has stored in his subconscious mind.

An amazing number of investors believe they can skip this stage of learning entirely. One way they attempt to do it is by adopting someone else’s unconscious competence: following a guru or a set of procedures developed by a successful investor.

But people who’ve read a book on Gann triangles or Dow Theory, or whatever, and follow the steps outlined, or who adopt someone else’s commodity trading system, sooner or later find that it doesn’t work for them.

There’s no short-cut to unconscious competence.

As your knowledge expands, as your skills develop, as you gain experience by applying them over and over again, they become more and more automated and move from your conscious mind into your subconscious.

You eventually reach the stage of… continued…

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