The difference between knowing and knowing what to do is huge, and no more so when it comes to investing. To a large degree, I think we are victims of our own success here. With the proliferation of products, instruments and strategies, it is more difficult than ever to know what to do. We all understand that you first have to learn the basics. Like in tennis, you cannot have a match, unless you know how to serve.
In finance, there are endless things to learn. For instance, how a bond pays a coupon versus a stock paying a dividend, and what are the tax consequences thereof, and in what jurisdiction? Or what it means to be “short gamma” and my all-time favourite: what is the optimal cross-correlation coefficient of a risk neutral portfolio? These are all questions only very few people will be able to answer (and they have spent many years at university and in the various departments of large institutions to learn their trade).
But the problem with finance isn’t that it takes a long time to learn everything. No, the point is that we have seemingly forgotten that we are supposed to do something with that knowledge. The thing that keeps amazing me is that people seem quite satisfied (even arrogant), having worked so hard to master the jargon and knowing a bit more than others. But just because you know how to hit a good backhand, doesn’t mean you are going to win Wimbledon.
The efficiency of the markets and the power of technology have revolutionised the way we manage our investments. Gone are the days when we could print money because our current accounts were paying us three per cent above inflation. A distant memory are the days when the stock markets only ever went up or we could just hold London property as it never went down. Today, you also have to be smart and that means understanding the risks one is taking, and not overpaying for the investments we are making.