Property Investment Is Easy! Or is it?
We live in the age of information, where data is readily available to us. But the problem isn’t obtaining the information, but rather, knowing what to do with it.
Property investment is an endless journey of learning. After 10 years in this business, there are still property segments, property markets, areas and neighbourhood that I am not aware of. And yet, many investors overestimate their abilities and fail in the process. Why is that?
THE DUNNING-KRUGER EFFECT
The ‘Dunning-Kruger Effect’ is a cognitive bias which causes people of low abilities to have the disillusion of skill, thus wrongly assessing their own ability as greater than it is. This cognitive error may result in people being unable to recognise their own incompetence in a particular field.
The first rule of the Dunning-Kruger club is that you don’t know you’re a member of the Dunning-Kruger club. Dr David Dunning believes that people tend to think that this effect only applies to others, when, in fact, it is something that impacts each and every one of us.
“We are all confident idiots” – Dr David Dunning
Beginners don’t start out displaying confidence from the get-go, but rather manifest it after a little bit of learning. You have probably witnessed the Dunning-Kruger effect in reality TV shows such as American Idol or The Voice, where contestants think they can sing, but really can’t.
People tend to be at their most confident with a little bit of knowledge, but will gradually realise that they are not as competent as they thought they were. So how does this concept apply to investments?
DUNNING KRUGER & INVESTING
A few years ago, everyone was jumping on the cryptocurrency hype. I’ve joined in as well after learning a bit here and there. Many people buying into bitcoin in late 2017 appeared to know very little about investing and were only buying because of Fear Of Missing Out (FOMO), including yours truly.
Incidentally, at that time, there were many self-proclaimed cryptocurrency investment experts or “gurus” predicting never-ending profits with an increasing level of conviction.
I believe that many of these experts have mistakened domain expertise (knowing how cryptocurrency works) for investment experience (knowing how markets work). Many underestimated how much they didn’t know.
In Jason Zweig’s “Your Money and Your Brain”, roughly 75% of people believe they’re above average regardless of the skill that is being assessed.
- Driving? —75% believe that they are above average
- Telling jokes? —75% above average
This is despite the fact that, statistically speaking, only 49% of people can realistically be above average.
HOW TO SPOT OVERCONFIDENCE IN INVESTING TIME IS YOUR BEST FRIEND
- How long have I researched on the topic? If you were exposed to a new topic relatively recently, the data suggests you are more likely to be overconfident. It is best to do more research first.
GET OPINIONS FROM OPPOSING SIDES
- If your decision is reasonable, it should be able measure up to intense scrutiny.
- If you keep asking yourself “why”, you may realise that there might be holes in your logic.
IF IN DOUBT, CONSIDER DIVERSIFYING
- No one ever went bankrupt by playing it safe and allocating less capital to an investment.
PARADOX OF EXPERTISE
Finance is one of those fields where the term “expert” is a loose concept. There are plenty of finance commentators who claim themselves to be experts by speaking with confidence and conviction. However, that doesn’t mean that they’re more often right than wrong.
They should be better described as investment salespeople instead. While many might have the gift of the gab, the fact that they can talk about a lot of different investment topics with conviction makes everything they say rather unhelpful. This is because there is no way to verify if they have real expertise or they are suffering from the Dunning-Kruger effect.
What I find more valuable instead, is identifying experts who are prepared to say ‘I don’t know’ when faced with an unfamiliar topic. That way, the moment they do have an opinion on a subject, you can be more confident it is within their circle of expertise. As Warren Buffett once said, “It’s a terrible mistake to think you have to have an opinion on everything.”
KNOW HOW MUCH YOU KNOW
So how does this apply to you, the property investor?
The most valuable skill you can have, is not the ability to accurately predict the markets going up or down, or knowing which property to buy. It’s about self-awareness and knowing how much you actually know.
It is okay to know a lot, and it is ok to know only a little, so long as you realise the difference. As long as you can accurately assess where your knowledge ends and where your unfamiliarity begins, you will not fool yourself into thinking that you know more than you do, and make rash investment decisions because of it.
Because as long as you do not shower yourself with overconfidence, you will have a significant advantage over the “experts” in one regard which is vital in the art of investing – humility.
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