🧠 The Worst Thing That Can Happen To New Investors

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Our friend and New York Times best-selling author Morgan Housel recently commented on the beginning of his investment career:

I think the worst thing that can happen to you as a young investor, is to do well early-on because of luck. It increases your confidence more than your ability.
The best thing that happened to me [as a beginning investor] is that I lost a lot of money.

There’s a name for this phenomenon: The Dunning-Kruger Effect. Humans naturally overestimate their abilities in any new field. After time passes, that confidence level comes crashing back to reality.

Morgan was able to avoid ‘Mount Stupid’ because he failed immediately.

Lots of other new investors aren’t so lucky.

Take Stoffel as an example: one of his first major purchases as an investor came on March 9, 2009 — the best single day to make an investment in the last few decades. His investment immediately took off, which filled him with investing confidence and made him think he was a genius!

It took a few years (and thousands of dollars in losses) before his mindset came crashing back to earth. But it’s a good thing he did because that’s when his real investing education began.

How do you recover from the ‘Valley of Despair’ and gradually reach the ‘Mastery’ level? It’s a mixture of three components:

  1. Knowledge: There’s simply no substitute for learning the ins and outs of investing. For stock-pickers like us, that means understanding financial statements, valuation, and industry-specific metrics.
  2. Mindset: The only real advantage we individual investors have over ‘professional’ investors is time arbitrage. Professionals have to satisfy the needs of their investors every 90 days. We don’t. That allows us to keep our eyes trained on the decades-long time horizon. But it takes the right mindset to maintain that discipline.
  3. Experience: Even with enough knowledge and the right mindset, there’s no substitute for real-world experience. Whether you’re learning from your own mistakes — or those of others — there’s lots of wisdom in unfavorable outcomes.

Riding the entire wave of the Dunnin-Kruger effect isn’t a fun experience. Plenty of investors give up after their first brush with the ‘Valley of Despair.’ Pushing through that initial plunge to slowly build back up to the ‘Mastery’ level is a lifelong pursuit that isn’t easy.

But, then again, nothing worth doing ever is.

Investing is hard, as it should be.

Wishing you investing success.

– Brian Feroldi, Brian Stoffel, & Brian Withers

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