Came across this superb article by Larry Swedroe, titled Overconfident enemy in the mirror.
It highlights the folly of getting overconfident in a field that is full of uncertainties – investments.
Nothing can be achieved if one were not confident about one’s abilities, since lack of confidence would lead to a person not even trying new things. At the same time, it is also important to understand that success also eludes those who do not know about their own limitations.
It is for nothing that Warren Buffett says, “Invest within your circle of competence. It is not how big the circle is but how you define the parameters.” Do we even know the parameters? This is an important question to consider.
In the absence of the knowledge of the right parameters – what can lead to success, we wrongly assume the short term result to be the parameter of success. We mistakenly focus not on the process but the results – and that too short term results.
And that often leads to overconfidence if the short term results are positive, or in line with expectations. This leads to behaviour that is harmful to our own future. And that exactly is what Swede highlights in the article. Remember the words of the guru of investing, Benjamin Graham, “The investor’s chief problem and his biggest enemy is likely to be himself.”
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