The Five Levels of Investing Competence
I came across a paper, written in 1980, that laid out the five stages of mental activities involved in the acquisition of competence as it relates to learning a complex skill – such as investing, for example. The paper, written by Stuart and Hubert Dreyfus, an engineer and a philosopher from Berkeley, respectively, was titled:
A FIVE-STAGE MODEL OF THE MENTAL ACTIVITIES
INVOLVED IN DIRECTED SKILL ACQUISITION
I found it interesting and very applicable to learning how to invest for maximum effect.
In this article I will borrow heavily from their work and show how their ideas can be applied to investing skill and competence. Since I am an investing coach and consultant, this material fits neatly into my teaching wheelhouse. From the paper’s abstract:
“In acquiring a skill by means of instruction and experience,
the student normally passes through five developmental stages
which we designate novice, competence, proficiency, expertise and mastery.”
Competence begins when the individual develops organizing principles to quickly access the particular rules that are relevant to making informed decisions. Competence is characterized by active decision-making in choosing a course of action. Proficiency is shown by individuals who develop intuition to guide their decisions and devise their own rules to formulate plans. The progression is thus from rigid adherence to rules to an intuitive mode of reasoning based on tacit knowledge.
I have adapted the five developmental stages to better represent how a novice investor can become a master at investing. The following is a brief description of the mental progression an investor goes through during this journey.
1. Novice
- doesn’t yet know what they don’t know
- highly susceptible to “fad” stocks and enticing stories
- over-reliance on headline news and tired narratives
- rigid adherence to taught rules
- little or no exercise of “discretionary judgment”
- inability to evaluate quality of information sources
- most aspects of learning treated with equal importance
2. Competence
- early signs of “situational awareness”
- some perception of actions in relation to goals
- deliberate but rudimentary planning
- formulates basic routines and procedures
- begins to change tactics based on past decision errors
3. Proficiency
- begins to develop a holistic view of situations
- develops a detailed plan with strategic and tactical elements
- prioritizes importance of decision hierarchy aspects
- readily changes tactics based on new information
- seeks guidance that is specific to the situation at hand
4. Expertise
- takes a full accounting of mental and emotional biases
- values humility above hubris
- focuses on core competency to the exclusion of all else
- conducts a “pre-mortem” and “post-mortem” analysis of every trade
- seeks out opposing points of view – “what if I’m wrong?”
5. Mastery
- transcends reliance on rules, guidelines, and maxims
- “intuitive grasp of situations based on deep, tacit understanding”
- has “vision of what is possible”
- uses “analytical approaches” in new situations
ZenInvestor offers education, training, and coaching with the express purpose of moving everyday investors up through these 5 levels of competence. Many of our programs are free. We offer three ways to do this:
- Premium subscribers get access to our workshops and webinars, so that they can move through these stages at their own pace, and in the privacy of their own homes.
- Coaching clients receive personal, one-to-one instructions and training with email support.
- Consulting clients receive unlimited coaching, mentoring, and support with 24/7 access to the full resources of ZenInvestor.
To decide which of these methods is right for you, schedule a free initial consultation today by sending an email to info@zeninvestor.org with the subject line “schedule consultation”.