Bridging the Knowing-Doing Gap is Everything in Investing

In the world of investing, knowledge is necessary but far from sufficient for success. You will never know everything before you make an investment decision; no one does. That is because investing success depends on what happens in the future and no one can predict that with any degree of certainty. So, at best we must aim to have adequate knowledge of how to invest. That’s quite reassuring come to think about it. 

But what does adequate investing knowledge mean? Let’s say it is knowing what to do, when, and what to not do.  For example, to drive a car and successfully reach your destination, you don’t need to know exactly how the car works, but you need to know enough about it to drive it – what to do to make it move in the right direction, how to go faster or slower, how to park, etc. And finally what route to take to get to your destination, and make changes in the route if required.

But just knowing this is not going to get you to your destination. You must get into the car and drive it and do everything that you know, and have learnt about driving in the real world, amidst the traffic and all the chaos that you will face for sure.

But there is something at work that makes it possible for almost everyone of us, even the uneducated, to drive and reach our destination almost always (some accidents do happen). It is a fact that while cars have become a more complex piece of equipment, driving them has become simpler. The rules of driving are the same for any car and haven’t changed. Once you have learnt and practiced the basics you automatically do what you have learnt. Essentially, there is no knowing-doing gap in driving, most of the time. 

Now, investing is very similar to this in principle but there are two major differences. First, the rules of investing unlike driving cars are not universally accepted, so there is no one way of investing. And second, the knowing-doing gap in investing is epidemic compared to it being almost absent in driving.

Most financial educators and there are many today (go to YouTube and you will be hit by one) are focused on teaching how to invest. My concern is with the huge number of courses they offer and the price they charge which is bound to make it appear as if there is some sophisticated knowledge that is being given. Suppose this is indeed so, my bigger concern is that it aggravates the knowing-doing gap. So, how does it help you? It doesn’t. And that is true about most educators and education.

The situation is made worse in investing thanks to:

1. Information Overload, Analysis-Paralysis and Mis-placed Confidence:

In the age of the internet, information overload is the norm. Investors often find themselves overwhelmed by the sheer volume of financial data, expert opinions, news, and investment advice available online. This abundance of information can lead to analysis paralysis, where individuals become so inundated with data that they struggle to make decisions. Consequently, despite knowing what they should do, they end up doing nothing, resulting in missed investment opportunities. The other extreme is having consumed so much information you are bound to feel confident about your decision, but that is likely to be an error.

2. Emotional Biases in Decision Making:

Human emotions play a significant role in investment decisions. Fear, greed, overconfidence, and loss aversion are just a few of the emotional biases that can cloud judgment. Even when investors possess the knowledge to make rational choices, these biases can lead them to deviate from sound investment strategies. Recognizing and managing these biases is crucial in aligning knowledge with action.

3. Lack of Discipline and Consistency:

Investing requires discipline and consistency. It's not just about knowing when to buy or sell; it's also about having the patience to stay invested during market fluctuations and adhering to a well-defined investment plan. The lack of discipline often hampers investors from translating their knowledge into consistent, long-term actions. Impulsive decisions driven by market volatility or short-term trends can erode the benefits of a well-thought-out investment strategy.

4. Failure to Plan and Set Clear Goals:

Many investors fail to translate their knowledge into action because they lack a concrete plan and specific financial goals. Understanding the importance of diversification, asset allocation, and risk management is futile if investors do not have a clear roadmap. Setting achievable financial goals, whether it's saving for retirement, buying a home, or funding a child's education, provides a tangible framework for making investment decisions and taking action.