The only true wisdom is knowing that you know nothing

By Vedran Vuk

I recently attended a lecture at Johns Hopkins University by the director of research at Legg Mason Capital Management, which manages about $16 billion in assets. It’s always good to compare the research methods of other companies to study room for improvement. Beyond the many organizational details, I found the presenter’s take on credentials particularly interesting.

First of all, the speaker only possessed a Bachelor’s degree in philosophy and religious studies. However, he was a chartered financial analyst (CFA). Although lacking a formal business education, he passed the extremely difficult exams through his own self-guided effort. In August, I wrote about the CFA being more valuable than a college degree, and this guy proves that idea.

He also made a second interesting observation. In his research department, he often preferred analysts without a business background. His reasoning was that those who know nothing about the market have more respect for it. The analyst who’s under the illusion that he’s got everything figured out is the worst researcher out there.

On my own learning curve, I’ve followed much the same path. At first, I didn’t know anything about the market and was naturally cautious due to my lack of knowledge. After finishing undergrad, I thought that I had things figured out. And as a result, I faced my first losses in the stock market. Only after attending graduate school did I fully appreciate the majesty of the market with all of its risks and challenges. Again, I’ve become as risk averse as my younger self who knew nothing, but this time from a much more informed perspective. You can’t just open up the Wall Street Journal and find a profit opportunity. Truly undervalued companies are few and far in between.

To bring philosophy into this conversation, Socrates once said, “The only true wisdom is knowing that you know nothing.” And this absolutely applies to investing. Thousands and thousands of analysts around the world are constantly analyzing companies. And they’re no hacks, but instead some of the best and brightest from Goldman Sachs, JPMorgan, etc. On top of that, they’re not just business majors; there are doctorates of math, statistics and physics to compete with. So when one makes the assumption that a particular stock is overvalued or undervalued, that opinion contends with the consensus of extremely intelligent people.

Hence, if they believe a stock is worth $10 and you believe it’s worth $15, the dilemma becomes philosophical rather than mathematical. For every “undervalued” stock, you must ask yourself, “What do I know that everyone else doesn’t?” and “Why don’t they notice the same thing?” If you can’t answer those two questions in a reasonable way, your stock valuation isn’t particularly worthwhile.

Therefore, the director of research had an excellent point. The person who doesn’t know anything about the market is sometimes more attuned to questioning his own conclusions than the business student who has “it all figured out.”

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