Play within your level of competence (The Financial Athlete, #5)

Icarus could fly. With feathers and wax he fashioned wings. “Do not fly close to the sun,” he was warned on the day he escaped Crete. Flying gave him immense  excitement. He paid no heed to the warning and flew as high as he could soar, closer and closer to the sun. Drip by drip the wax melted, and to the sea Icarus plummeted.

Icarus, a mythological figure of ancient Greece, is a metaphor for plummeting performance as a result of playing far beyond your level of competence.

The natural tendency for energetic people new to the game of tennis is to whack the ball hard. It’s a thrill to see your opponent unable to return a fast flying ball. You feel like a pro. The only problem is you lose the game because of too many unforced errors (unless you have an opponent who plays the same way). For every one of those spectacular shots delivered by your racket, nine other bullet shots either hit the net or go past the baseline or sideline.

When my tennis instructor sees a student wildly hit the ball, he advises, “Play within your level of competence. Reduce the pace of the ball to keep the ball in play. Work on consistency before pace. Play with control!”

Many new investors invest their money like they’re whacking tennis balls. Experienced traders call this ‘dumb money’. Like sharks biting on bait, they don’t hesitate to devour it.

My mantra is not “Diversify. Diversify. Diversify.” But if you don’t know what you’re doing, diversify. If you don’t have time to do proper due diligence, diversify. If you’re not a disciplined investor who’ll work within the framework of an effective system, diversify. Otherwise, the stock market or other investment vehicle is just another casino.

After you’ve honed investment skills, which normally takes up to 7 years of study and practice, then you’re ready to take on a more concentrated portfolio. Unless, of course, you’re prepared to pay a high tuition at the school of hard knocks.

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