Today, more than ever, it is VERY easy to put our money in the wrong place.
In a few minutes you can open an account to invest in the stock market, buy shares, buy cryptos or something more strange, such as scams and betting pages.
How can we avoid losing our savings when there are so many false opportunities?
Meet David Dunning, the University of Michigan psychology professor who became famous for developing the so-called Dunning-Kruger effect. This establishes that:
“While the most competent people are full of doubts, the incompetent tend to be completely convinced of their excellence.”
In other words, Dumb people are usually too dumb to understand how dumb they are.
“Everyone is an idiot, except me.” Go ahead, fool.
Let’s do a simple exercise. Imagine that you lose half of all your capital.
HALF, of everything. Kapuff!
Did you know that, to recover what you had, you now have to DU PLI CAR what you had left?
You would need 100% performance.
To give you a comparison, Warren Buffet, the Messi of investments, has achieved the incredible return of 20% average per year throughout his career.
(In dollars people, we are not talking in pesos).
While the average investor, who spends his time trying to beat the market, is around 2%…
Think about the time it took you to raise that money; Now add what it will take you to recover it. Bad business.
So so that you can invest, but with more care, today I am going to share with you 5 principles that I adapted from the Dunnign-Kruger effect for managing your personal finances:
1. Get good at saying “I don’t know.”
Nowadays searching for data is very simple. But before you go looking for information, you first have to accept that you don’t know.
This requires intellectual humility, something that is not abundant in Argentina. A country full of everythingologists, where it seems that people are uncomfortable saying “I don’t know.”
Since there is no magic pill to make us more humble, it is advisable to recognize and remember our own limitations.
Without lying to ourselves or others.
By acting like this, you will be smarter and save yourself a lot of trouble.
2. Learn from others.
Not knowing the extent of our own ignorance is part of our human condition.
There are things we know we know.
There are things we know that we don’t know.
And there are things… that we don’t know that we don’t know.
I suggest you read these last 3 lines once again.
Many of the batons that we send each other, we send them to each other for wanting to do everything alone.
We all have blind spots. What can we do with that?
If we consult and brainstorm with others, open to listening, we could discover some risks that we had no idea about.
Arrogance can cost us too dearly.
3. Think about probabilities and not certainties.
You don’t have the crystal ball. Me neither.
Let’s cut it with the basic binary thinking of “never and always”, “everyone and no one”, “such and such things will happen” or “such and such things will not happen”.
It’s simplistic, biased… and tends to be wrong.
Instead of stating “Properties / stocks / cryptos WILL go up!”
I suggest you think in terms of probabilities and in the form of a question.
“What are the chances of this or that scenario happening?”
Sometimes the eyemeter is enough. Other times, it requires more brainpower and downloading it to paper or Excel.
The absolute conviction can lead you to lose a lot of money. Eye.
4. Imagine the worst possible scenario.
Optimism has its place and it’s great.
However, for important decisions, pessimism and neurosis will be your best allies.
Ask yourself:
What can go wrong?
Where could I be going wrong?
How would it affect me and who else?
For each risk we identify, we can take action in 3 ways:
PREVENTION: Take actions to prevent the occurrence or minimize the consequences. (Lock your house or wear a helmet when riding a motorcycle).
FORECAST: Prepare with financial reserves to face the consequences of the damage. (Savings and Insurance).
INDIFFERENCE: Do nothing about it and suffer the consequences. (I wish you good luck, you’re going to need it).
Consider risk first, then profitability.
5. Differentiate facts from opinions.
“Pizza with pineapple is delicious” is an opinion.
“Messi is Argentine” is a fact.
This important distinction seems to be being forgotten.
Let us remember that the facts are not open to personal interpretation. It’s not all relative.
Seek the truth and don’t waste time.
You can’t win an argument against reality.
End.
How can a financial friend help you?
It can teach you easy ways to take care of your money both in your personal finances and in your investments.
Illuminating hidden risks and giving you perspective to challenge your convictions.
Showing you how to cover yourself from the worst possible scenario.
Getting together with a financial friend is dedicating special time to yourself.
It is a space to visualize how you want to be and what you want to achieve.
Investing without clear purposes is a very serious mistake. Learn how to use your money to get closer to those goals using the odds in your favor.
Remembering these principles will probably make you earn a lot of money, but, above all, a calmer life.
Guido Canti,
Your financial friend.
Contact: +54 9 11-6980-2309
www.linkedin.com/in/cantiguido/
by CEDOC