An Investor’s Personal Evolution: A 4-Stage Process

Last week I promised you an article about a recent conversation I had with an executive from a Fertilizer company operating in China, however as I was finishing the article last night and adjusting minor grammar I managed to “disappear” the entire post from our website. I only found out this morning about my achievement and after a brief round of cursing I proceeded out the door to abuse myself in the gym. Much to the gratitude of my family I think. I’m glad to say I felt much better afterwards. No matter, I thought I’ll just re-write it. I sat down to do so but inspiration failed me. A bit more cursing and out the door I went with my i-pod and running shoes. 25km in the midday sunshine in Phuket certainly makes you sweat out your agro. This combined with my nonchalantly stepping close to a “stick” on a jungle path (the stick slithered away) led me to thinking all sorts of thoughts of a philosophical nature and as such that is what I am writing about today.

The Unconscious Behavior

I have a theory that I use for everything in my life from say playing tennis to investing. In fact it probably applied to hitting on girls when I was single, younger and bulletproof. It was first taught to me by a much older more experienced athlete when I was about 15 years old and it still holds true today. It may not even be new to you and its certainly not revolutionary but I think that often the simplest understanding of things is actually the best. I’d like to share it with you today.

Think of the tennis player Rafael Nadal, presently ranked world no 1. When the tennis ball comes hurtling across the court towards him he instinctively moves his body into position and hits the ball back over the net. What is vitally important is that while he does this, it is no longer done with conscious thought.

When you or I first learn to hit a tennis ball properly we have to be taught how to do it. To open our shoulders, bend our knees; keep our head still and so on. There are a whole range of things that we need to do and while we are still learning we have to think consciously of all of them. This is difficult and often results in neglecting one element which was important and screwing up the shot. A guy like Rafael Nadal has learnt all of these things and then repeatedly applied that process with such frequency that it is akin to you and I breathing. We don’t think about it anymore than Rafael Nadal thinks about hitting the ball. It’s all unconscious. Like driving a car and braking when we see a traffic light turn red. We’ve done it so many times that it is automatic. Ergo, an unconscious behavior.

This brings me to the theory.

A Breakdown Of The Theories

We go through 4 stages in anything we do. We don’t necessarily get to all 4 stages, sometimes getting stuck at one of them or giving up along the way and bouncing back and forth amongst various stages. I have found that realizing and being honest with myself about where I am in the 4-stage process can be very helpful since it’s impossible to move from one level to the next without realizing where I am in the first place.

Stage 1: Unconscious incompetence

Here we do the particular act, but poorly and may not even know how badly we are actually performing. We hit the tennis ball, but do so poorly, we run, but like a lumbering elephant, we swim but with the elegance of a floundering fish on dry land, we buy and sell shares of companies not really knowing what we are really buying or why. We buy an investment property but cannot actually make a clear case to anyone for doing so. We hold currency not because it makes any logical sense to do so but simply because it is what everyone around us is doing. In the beginning it feels fun, even exciting just to participate, but we cannot compete like this without getting blown out of the water at some point. This stage could otherwise be known as blissful ignorance.

Stage 2: Conscious incompetence

We realize that we are missing something. We lose money when investing or trading or our business falters. In the sports analogy we get creamed in the tennis game, come last in the running race or nearly drown in the pool.

This is a good stage since it is at this stage that we realize we are crap. We are conscious that we are incompetent so now we can move on. The worst thing we can do is deny our incompetence and ignore the signs.

Stage 3: Conscious competence

At this stage we attempt to learn what needs to be learnt. We read books on running, swimming, we get a coach who shows us how to hit the tennis ball, we talk to people who have proven they know what they are doing in business, we analyse companies, politics, currencies and history BEFORE making any judgement. In short we educate ourselves to be better.

At each step though we think very hard about what we need to do. When running we have to think about our lean, posture, and cadence. When swimming we need to relax our hips keep our head in the water and so forth. When trading and investing we need to analyze balance sheets, check debt levels, incomes or cash flows, management etc. It is not automatic and we actually need a list to follow to get the steps all done. We are doing the right stuff but are not particularly fluent with any of it.

Stage 4: Unconscious competence

This is Rafael Nadal. At this stage we have hit the tennis ball back thousands of times from the ball machine. So many times in fact that we go to bed dreaming of our body performing the motion. The process is now totally reactive. The ball comes and we automatically react without thinking about each particular step. When driving a car, we see a red light and brake. We don’t think…ooh red light, oh crap, oh yeah right foot where again? When trading and investing we react with what people call gut instinct. I don’t believe it is gut instinct at all, but rather an automatic unconscious reaction to something we see in the market. An example would be a businessman buying back stock in his company when the stock falls due to market perceptions that are inconsistent with his business, which he knows like the back of his hand.

Understanding these various stages and where you fit into them I believe is crucial to one’s ability to progress, prosper and evolve regardless of what it is you are involved in.

I’d be interested to hear from readers what they have found useful in learning the skills they’ve acquired no matter what line of work or play you’re involved in.


PS. If you liked this letter, please consider inviting your friends, associates, neighbors and enemies alike to subscribe to our missives.

“What’s the use of happiness? It can’t buy you money.” — Henny Youngman


This Post Has 8 Comments

  1. Djamel Hassaine

    I enjoyed the philosophical tread of thought in this post. Allow me to add my thoughts in a similar manner:

    I believe there may be a fifth stage beyond mastering a subject/skill; I’m not sure anyone actually reaches it though. As we practice and accumulate knowledge in whatever area, whether its investing, sports, etc, we develop a certain style. Our actions today are influenced by our past decisions and lessons learnt.

    Occasionally century old mathematical problems which have been scrutinised by countless masters are solved by children — granted they are geniuses, but their lack of experience means they aren’t shackled by preconceptions and taught wisdom. Is the fifth stage the ability to re-learn the basics under a new light?

    I place myself somewhere near the beginning of stage 3 in both investing and my working career, so take whatever I say with a healthy dose of scepticism.

  2. Chris MacIntosh

    Good point.

    On a very basic level we have all experienced something of this. We work on a problem for hours or days only to find someone take one look at it and pinpoint something so critical that it leaves us feeling stupefied.

    It makes me think of the ability to see what is possible DESPITE prevailing wisdom.

    In the 1700’s if you were to explain to someone the concept of a light bulb, you may well have been institutionalized. It would simply not have been thought possible. Fairy tale stuff right?

    Would an expert in technology in the 1700’s have been able to consider the possibility? I don’t know. What I do know is that a child’s mind can and does consider the possibility. Play with a child and you’ll see what I mean. Pigs can fly, cars can become trees and talk etc.

  3. BK

    The fifth level of competency is when your own personal charisma/genius becomes evident in your work.

    The best observation of this is comparing Rafa Nadal or Roger Federer and now Novak Djokovic to Andy Roddick or John Isner.
    Andy is a Master at Tennis and a phenomenal athlete. But, why is it that its impossible for him to Win a Big Tournament and why is that people thirst more to see Rafa or Federer or Djokovic. Why is watching John Isner play less fun than watching Rafa. I think Federer/Rafa/now Djokovic have reach a level where you go beyond being a Master of the strokes/strategy. These stand out tennis players bring a personal charisma or a genius to their game that is only possible at the fifth stage.

    The same fifth level must be possible for intellectual pursuits like investing, but there are fewer people who can recognize the Rafa Nadal and Roger Federer of investing.

  4. CW

    I think this is relatable to rumsfeld’s “known unknown” statements.

    Stage 1 are “Unknown unknowns” – Things we don’t even realize
    Stage 2 are “Known unknowns” – Things we need to work on
    Stage 3 are “Known knowns” – Things we have learned
    Stage 4 is actual knowledge. – Things we have mastered

Leave a Reply