Become A Smarter Investor by Asking Better Questions

Photo by Rohit Farmer on Unsplash

The process of becoming a smarter investor isn’t solely about intelligence; it’s about curiosity. I don’t think intelligence and curiosity are mutually exclusive. But I do think that while intelligence inspires one to acquire more facts, curiosity inspires one to ask more questions. When I think about this comparison and how it applies to the world of investing, asking more questions can be immediately beneficial.

I wrote last week that it’s very hard for an active manager to consistently outperform the market. I’m not saying that it’s impossible; it’s just very hard to do over a long timeframe. According to David Stein, author of Money for The Rest of Us, even skilled investment managers go through periods of underperformance and unskilled investment managers can get lucky with extended periods of outperformance. Part of the challenge in deciphering which investment managers are skilled from those that are not is finding a suitable way to compare them directly to each other or to a larger group (or universe) of similar managers over some set time period. The most common method is to compare the performance of a single manager to the average performance of a group of managers. But one of the problems with using the average or collective performance of a group or universe of managers is survivorship bias. Survivorship bias is the tendency to take at face…