There’s a strong case to be made that the two sentences I’m about to share with you are the most influential in the entire history of Western philosophy.
They were uttered during the trial of Socrates for “corrupting the youth” in Athens, 399 BC–according to the version recounted by his disciple Plato.
According to Plato, Socrates said–while commenting on a negative run-in with a supposedly wise man of Athens:
“Although I do not suppose that either of us knows anything really beautiful and good, I am better off than he is–for he knows nothing, and thinks that he knows. I neither know nor think that I know.”
A basic reformulation of this, is that a fool can become wise, simply by knowing that he’s a fool. For he is then wiser than the most other people, who are also fools, but don’t realize that they are.
What does all of this have to do with investing?
If you think about it, investing in market assets is basically a form of educated betting on who knows more about the future value of the asset, the buyer or the seller.
In most forms of investing, you are encouraged to bet on some market asset external to yourself: stocks, bonds, real estate, crypto, etc…
Here’s a simple question keep in mind when placing bets on market assets.
If you ask yourself this question every single time you considering investing in them, you’ll automatically become a better investor:
Whenever you buy an investment asset, someone else is selling it to you. Why do you know more about the future value of this asset than the seller?
When we get excited about some financial asset that’s going up–a stock index, an individual stock, a cryptocurrency, a piece of real estate–we often have the idea, “Anyone who sells this in this market is a fool.”
That may be true. History is littered with people who sold at the wrong time.
But it’s also littered with people who bought at the wrong time.
My point is that not that, when you’re buying an investment asset, you never more than the seller. My point is, you should ask yourself, “Why do I know more about the future value of this than the seller?”
One of you is on the wrong side of the bet.
What reason do you have to believe that you’re on the right side?
Unless you have some strong reason (other than high self-opinion of your “intuitions”) to believe you know much more about the value of the asset than the people selling it to you–i.e., that you have access to better information about this asset’s future value–then you’re in dangerous territory.
Socrates taught me that we should think hard about what we know, what we think we know, and what we know don’t know– especially as it compares to what other people know.
And that it often pays to realize that you don’t know.
Which brings me to the next letter in this series:
“The Secret to Fool-Proof Investing”
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