Overview – What Exactly Do Investors Need to Know?
When choosing to pursue any sort of endeavour, whether you’re just starting out or are already highly experienced, chances are one of the key aspects of your journey is to make sure you have adequate knowledge needed to work effectively and to make informed decisions, as well as expanding your knowledge when necessary.
A new chess player may take the time to study common openings and basic endgame strategies, a student choosing to pursue a Ph.D. in mathematics may want to familiarize themselves with the theory of their research topic, and a mechanic working with EVs for the first time will probably want to study how exactly they differ from the ICE (internal combustion engine) cars they’ve worked on for so long.
New investors face all sorts of challenges, and one of them is building up an adequate knowledge base in order to make effective investment decisions. As they progress, it’s expected that they keep expanding and refining their knowledge in order to keep up with the constantly changing investing landscape.
Dedicating adequate time and putting serious effort into your investment education is important, yes, but what sort of approach should an investor take in order to make sure they have all the relevant knowledge they could possibly need? The key is to approach your investment education holistically.
Investment Education Is All About Understanding the Small Parts of a Larger Whole
When looking at professionals such as teachers, doctors, lawyers, and engineers, what makes those individuals at the top of their fields so skilled at what they do? What separates mediocre teachers, doctors, lawyers, and engineers from the exceptional ones?
One possible reason is that exceptional professionals have competencies in several areas, and they know how to unify those strengths into a coherent whole.
A good teacher may be able to explain a topic clearly, but an exceptional teacher can also do that, on top of being able to answer their student’s questions effectively, motivate their students to become better, get the students to genuinely enjoy the subject they’re learning, and interact with them in a way that earns their trust and respect.
Many investors understand the importance of developing their knowledge base, but the problem is that some of them don’t realize just how broad investing truly is, and because of this they unknowingly leave out key bits of knowledge that they should be aware of.
It’s easy to think that the only knowledge you need in order to start investing is how to read the financial statements and how to work with some ratios, and while that may be true when you’re just starting out, as you progress in investing it becomes increasingly clear that there are so many more things you need to know.
When going through a company’s annual report, it’s important to understand how to go over their financial statements and how to perform ratio analysis, but in addition to those things you should also know how exactly the industry this company is part of works, how certain government policies/political developments affect this company’s operations, the types of regulations this company is subject to, and how specific accounting changes affect them.
Investors draw on all sorts of knowledge before reaching an informed decision, and they continue to draw on all sorts of knowledge when maintaining their portfolios. Skilled investors know how to combine these different fields of knowledge into a single, unified whole.
If that’s the case, how can investors ensure they have the adequate depth and breadth needed when it comes to the knowledge they have? One solution is to take a holistic approach to their investment education.
Why Does a Holistic Approach to Investment Education Matter?
Effective investment education is more than just absorbing lots of information: approaching it with the right mindset is just as, if not more, important.
Some investors make the mistake of viewing investing as something that’s performed in isolation and has little to no connection with any other field. After figuring out how to read financial statements, learning a few ratios/metrics, and familiarizing themselves with some common investment instruments, some investors feel that they have almost all the knowledge they’ll ever need.
However, as an investor progresses through their career, they eventually find out just how interconnected investing is to all sorts of fields, and in doing so begin to realize that they might not know as much as they originally thought they did. As the saying goes: “the more you know, the more you realize you don’t know”.
To understand just how many fields of knowledge investing draws upon, let’s break down a simple example.
Let’s say you want to invest primarily in equities (i.e., you want to purchase shares of publicly traded or privately owned companies). The first thing you’d probably want to do is to understand how exactly the business you’re interested in investing in works, and how businesses similar to it operate as well. This requires an understanding of a specific industry/sector.
Of course, business success is also influenced by all sorts of external factors, such as economic conditions, government policy, tax laws, and certain regulations, which means you’ll also need to understand how these will affect your prospective investments.
Knowing how to read financial statements is an important skill, yes, but it’s also important to know how the numbers in those statements were calculated in the first place, and to detect if any of those numbers appear to be suspicious. In order to gain this ability, investors will also need some knowledge of accounting.
If this much knowledge goes into making investment decisions regarding equities, then imagine how much more knowledge you’ll need if you decide to pursue other types of investing, and if you plan to expand your investment horizons to different countries.
Holistic investment education is crucial to an investor’s success because it grants them the ability to look at certain problems and scenarios through more than one lens, and in doing so gain a more comprehensive understanding of what exactly they’re dealing with.
It’s easy to analyze a prospective investment in terms of financial performance, but signs of weakness may be brought to light when looking at it in terms of overall industry performance and the effects of the regulations that they’re subject to.
Gaining mastery over several fields of knowledge is a key element of holistic learning, but there’s more to it than just that. Another equally important aspect of a holistic investment education is knowing how these different fields of knowledge all relate to one another in the context of investing, and how this knowledge will ultimately lead to an informed investment decision.
Anybody can take the time to learn economics, industry details, accounting practices, tax law, and policymaking, but an investor’s responsibility is to understand how knowledge in these different fields relates to one another, and how it will ultimately affect their investing activities.
Knowing a Lot vs. Knowing Everything
After reading the preceding sections, you may be under the impression that investors must know absolutely everything related to investing, finance and myriad other topics before reaching a decision. After all, a holistic approach to your learning means that you should cover as much ground as you possibly can, right?
Let’s make something very clear right now: there’s a difference between knowing a lot and knowing absolutely everything. Not only that but there’s a difference between someone who knows a lot and someone who knows a lot while also effectively applying what they know.
Instead, what’s being encouraged here is for investors to become as knowledgeable as they can about a wide variety of topics that pertain to investing – within reason. By doing this, they reduce the number of question marks they may have surrounding their decisions and analytical work.
Make no mistake, your analyses and decisions will still have some blind spots, unjustified assumptions, and unanswered questions – investing will always involve some element of uncertainty. A holistic approach to investment education tries to reduce that uncertainty, but no matter what it will always be present, similar to how no investment is 100% risk-free.
Striving to create a holistic knowledge base isn’t the same as obsessing over trying to learn everything possible. No investor can know it all, and new knowledge is being produced almost every day, so trying to acquire all knowledge that could potentially be useful in investing will only end in frustration, without a single dollar being put to work in the process.
Additionally, an investor can have knowledge in a wide variety of subjects and still end up performing lacklustre analysis or making poor decisions. How is this possible if they know so much? There’s a difference between knowing a lot and applying what you know.
There’s nothing wrong with learning something to satiate your curiosity, but if you plan to advance your goals or self-interests, then you better know how to use the knowledge you’ve acquired. For example, learning advanced accounting methods is great, but if you don’t know how to apply this knowledge to the financial statements that you analyze then you’ve ultimately just wasted your time.
Re-Affirming the Case for Continuous Learning
As we talked about earlier, it’s impossible for an investor to know absolutely everything they could possibly need. Sure, they could dedicate the rest of their lives to this endeavour, but given how incredibly detailed every field of study is and the fact that new knowledge is being discovered all the time, this is most likely an exercise in futility. Besides, if an investor decides to do this, how can they have enough time to perform actual investment-related tasks?
There’s no such thing as a “perfect” investor, that is, someone who doesn’t need to learn anything new or refine their skills any further. Even the most skilled and experienced investors still take the time to improve themselves (Warren Buffett spends as much as six hours a day dedicated solely to reading).
Given how rapidly the investing world changes, there will always be something new to learn. The knowledge an investor has today may prove to be insufficient, or worse, obsolete in the near future. Assuming you decide to take a holistic approach to your investment education, this challenge is further magnified because there are so many different fields of knowledge that you need to keep up with.
If you’re serious about being an investor for the long haul, then you must also be willing to commit yourself to a journey of continuous learning. The point of continuous learning isn’t to know everything, rather, it’s to ensure that the knowledge you have is constantly up-to-date, and to discover new fields that may be of help to you along your investing journey.
Continuous learning may not make you all-knowing, but it certainly has the potential to result in near-encyclopedic knowledge, which for most investors is more than enough knowledge to perform their work and make their decisions effectively.
Wrapping Up
Knowledge is by far one of an investor’s greatest assets. What an investor knows can sometimes make the difference between a great investment decision and a disastrous one.
While many investors understand the importance of being well-read, many of them fail to realize that they must draw on all sorts of knowledge across different fields in order to ensure their work and decisions are as complete and well-informed as possible.
How can investors make sure the knowledge they have has enough depth and breadth? By taking a holistic approach to their learning. In doing so, not only do they expose themselves to the different fields of knowledge they may one day draw upon, but they understand how different fields relate to one another in the context of investing.
While a holistic approach to investment education can greatly expand an investor’s knowledge base, this shouldn’t be confused with trying to learn everything possible. With new knowledge being produced almost every day, it’s impossible to truly know everything. Instead, choosing to adopt a continuous learning approach will ensure investors are up-to-date with what they need to know without having to burn themselves out in the process.
