Inspired by the new season of Game of Thrones, I write about the common misconception of investors those new and more experienced. The misconception I'm talking about is the illusion of knowledge. Now, this is a somewhat controversial topic, many experienced investors might even disagree with me, but I want to discuss how people tend to think that learning more about investing will make them better at predicting what will happen. To some extent, maybe, but there is no way of actually knowing what will happen. If someone knew, they would be billionaires in no time.
What do investors think?
Investors think that they can predict what happens in the market. They believe that experience will make them better at predicting and that those who are experienced are better at predicting the markets. I won't completely bash this. To some extent, people who have some experience with investing can see some things happening over and over again, therefore, their prediction might be slightly better than those who are just starting out.
To further make things more complex, there are a set of investors who rely on what is called technical analysis. I'm sorry to tell this to you, but if it worked, we wouldn't think of Warren Buffett as the best investor in the world. We would think of someone who did technical analysis, however, I can't name a single one. That is maybe due to the fact that I haven't been learning about it, but if it made people rich, I would've heard one name at least.
Why investors know nothing!
Investors know nothing, because the markets act randomly. This statement shouldn't be taken extremely literally. I believe there are certain things that affect the random movement of the market, but there are thousands of things happening. Each investor acts based on something, there are thousands of investors, together these decisions form a random entity. No one can predict how these decisions will make the market behave in a short term.
An interesting book that discuses this random movement of markets is: The (mis)behavior of markets, by Benoit Mandelbrot. Mandelbrot is a scientist who isn't an economist. He is known as the father of fractal geometry. He has devoted his life to studying fractals, which are of random nature. His book talks about how fractals work with markets. He explains how his theory can explain how the markets work, which is really interesting to read. However, the main message of the book is that the market acts randomly. Randomness can be predictable to some extent, but cannot be predicted accurately. There are certain things that randomness does on general basis, which we don't associate with randomness. If you're interested in reading about arguments towards the general way we think about the market, this book is a must read.
How do we decide how to invest if we know nothing?
The fact that we know nothing about how the market acts doesn't mean that we know nothing about how a company will do, or what the potential of cryptocurrencies is. This means that one should stop looking at the charts. They tell you nothing. One should start looking at the investment. You're much better of predicting if a company or currency or whatever you invest in will go up or down in the long run, due to qualities involved with it, than you are predicting how the market of that company or currency or whatever will react tomorrow, a week, or a month.
Start looking at the market like: "I know nothing of what will happen. How will I invest if I don't know?". This will lead you to make decisions, not based on the current state of the market, but on the things that truly matter. A company's potential, a currencies development team, the community surrounding and opting for the currency, etc. You'll notice that your decisions start to be based on things that can be expected to result in results in the long term.