Mastering investing skills is similar to learning how to drive a car, ride a bicycle, or even walk.
Do you remember when you first learned to drive a car? You braked cautiously, steered awkwardly, watched the speedometer closely, and got an adrenaline rush from merging onto the freeway.
Now you do all these tasks unconsciously with the radio blaring while talking on the cell phone and putting on make-up or shaving.
Driving changed from a conscious process requiring great effort to something you can do competently without conscious thought.
The four stages to profitable investing are no different.
Inexperienced investors make lots of mistakes because they lack sufficient skills. Each action requires conscious thought and extra effort to implement.
Stage 1 Investing: You begin with “unconscious incompetence” because you don’t even know enough to know what you don’t know.
Everything is new to the beginner causing anxiety and risk of failure because so much is unknown.
Stage 2 Investing: You’ve progressed to “conscious incompetence” when you’ve learned just enough to know how little you know.
You’ve taken your first steps forward by saving and investing passively, but realize there’s so much more to becoming consistently profitable.
You have the desire to build wealth and play the financial freedom game, but active investing skill and knowledge are still missing. Risk management isn’t even part of your game plan.
Stage 3 Investing: “Conscious competence” occurs when you know enough about the investing game to get comfortable, but you still have to work at it because you aren’t a master.
This stage is marked by a solid investment plan and execution based on proven principles that lead to success. However, you haven’t mastered the intricacies of your particular investment approach and/or the approach isn’t grounded in risk management.
This causes occasional blunders and losses that could be avoided with greater experience and skill. Your portfolio has reasonable return characteristics, but occasionally experiences undesirably large losses.
Stage 4 Investing: “Unconscious competence” is the final stage of knowledge where you know the subject so well it’s become your new comfort zone.
Investing has become primarily an administrative task, and you only seek investment advice from others for factual information. You don’t base your investment decision on their advice.
You’re truly “financially independent,” regardless of your current net worth, because your financial situation is no longer dependent on anyone else.