Thinking you know something versus you understanding it are two very different thoughts, and can be dangerous when it comes to investing. Here’s why.
- The definition of knowing is: “be aware of through observation, inquiry, or information.”
- Whereas the definition of understanding is: “perceive the intended meaning of.”
When you think you know something it promotes a greater sense of confidence, and a greater sense of confidence can lead to someone taking on higher risk, because they are “aware” of the potential hazards. It’s an overconfident way to approach investing. There is no investor on this earth that has a crystal ball and can tell the future, so knowing that something will work out isn’t a sensible approach.
The difference with understanding is that it is “perceived” as stated in the definition. Perception doesn’t promote confidence, but rather curiosity and thinking. We can understand something, but still have questions about the validity of our understanding.
Take a chocolate business for example, knowing the business comes from an experience approach, or all encompassing as how it makes their products and makes money. These are a lot of elements that could be simple or there could be elements that they aren’t aware of that affect the bottom line. Where understanding a chocolate company is a perceived view that they make chocolate and make money from doing so. There’s a lot less confidence in this attitude.
When you self talk to yourself about an investment don’t get caught in the trap of thinking you know a business, because unless you are the CEO you probably don’t. If you understand what they do, and how they make money great, but leave yourself open to constant exploration, because you may find or discover something else out that you weren’t aware of or know.