The difference between being an investor and a buyer

There are few more dangerous sentences in investing than: “I understand this.”

Sometimes it is true. Often it means something weaker: I have heard a convincing story, recognise the company, like the product, or someone clever-sounding has explained it in a way that made temporary sense.

Ignorance can be surprisingly protective. If you know you know nothing about Korean biotech, private credit, oil futures or the latest fashionable corner of the market, you are unlikely to bet much of your wealth on it.

The danger lies in the middle: knowing enough to feel informed, but not enough to be competent.

Smart in spots

There is a line often credited to Thomas Watson Sr, the founder of IBM: “I’m no genius. I’m smart in spots, and I stay around those spots.”

That is the “circle of competence” in one sentence: not brilliance everywhere, but disciplined self-knowledge somewhere.

Investing tempts us in the opposite direction, encouraging us to have views on everything: interest rates, inflation, elections, currencies, China, AI, oil prices, central banks, private markets, and whether a company we admire is worth buying at today’s price.

Most of us are not smart in all those spots. More importantly, we are not always good at noticing where our spots fade.

The ‘onion of competence’

For investors, though, the more useful image may be an onion. A circle is about the boundary between inside and outside. An onion is about depth.

At the centre are the things you genuinely understand: areas where you have experience, context, judgment and enough knowledge to see what could go wrong. Around that sits the more dangerous layer of partial competence: enough vocabulary to follow the argument and perhaps have a decent view, yet still too dependent on others’ framing. Further out is the skin of stories, familiarity, fashion and excitement.

For most investors, the problem is not the size of the onion, but the thinness of the middle layers. There is a small core of genuine competence, a large outer layer of appealing stories, and too little disciplined self-awareness in between.

This is Dunning-Kruger in investing: you know enough to form an opinion, but not enough to judge how much remains hidden from view.

Real competence includes the ability to say: “I understand this part, but not that part.” Or: “I believe the trend, but I do not know whether this investment captures it at the right price.” Or: “I can explain the product, but I cannot assess the valuation.”

That is not a weakness. It is the beginning of judgment.

Stories are not competence

The easiest way to wander beyond your competence is through a story.

Stories make investments feel familiar. They take something complex and make it edible. They turn uncertainty into narrative, and narrative into comfort.

That is why the SpaceX IPO is so behaviourally interesting. It is almost engineered to be the perfect investment story: rockets, Mars, Elon Musk, national security, AI, private markets opening up, and the sense that the future is finally becoming investable.

It may be a wonderful company, and may even become a wonderful investment. But for most investors, there is a very large gap between understanding the story and understanding the security: the valuation, governance, capital structure, competitive dynamics and range of outcomes already embedded in the price.

A true story is not automatically a good investment. A good company is not automatically a good stock. A powerful trend is not automatically a profitable entry point. And a familiar narrative is not the same thing as understanding valuation, incentives, liquidity and what could go wrong.

Many investors are not investing in what they know. They are investing in what they can explain.

Elbow grease and edges

None of this means active investing is foolish. It simply means that activity requires a much higher standard of self-knowledge than most investors bring to it.

Broad diversification manages risk by admitting how much you do not know. Active investing tries to manage risk in a very different way: through time, effort, skill, knowledge, judgment and elbow grease.

Done well, this can work. Done badly, it does not reduce risk; it increases it.

The problem is that active decisions often feel like extra control, even when they are just extra exposure. Control has to be earned. An edge is not the same as interest, confidence, or a well-told story.

But investing does not reward interesting. It rewards being right, at the right price, in the right size, often enough to overcome costs, errors and overconfidence.

That is a much higher bar.

Map your onion

A useful exercise is to map the investment areas you are tempted by onto your own “onion of competence”. Start with topics rather than products: index funds, bonds, individual technology stocks, private markets, currency, gold, venture capital, the sector you work in, and the thing your clever friend keeps talking about.

The centre should be small. If it is not small, you are probably flattering yourself. The middle layers are not forbidden zones, but they require smaller decisions, stricter rules, more humility and more challenge. The outer layers should usually be accessed only through diversification, delegation or a deliberately small play pot.

Then ask someone who knows you well and has enough judgment to spot narrative fluency masquerading as expertise to do the same exercise for you. The point is to find where your confidence outpaces your competence.

Where have you placed yourself near the centre, while they have pushed you towards the edge? Where do they see enthusiasm where you see expertise? Where are they better able to see the amount you do not know?

Those differences are worth exploring. The most useful challenge is often not about the investment itself, but about your estimation of your own ability to judge it.

The uncomfortable solution

Investing rewards humility more often than brilliance.

Know where your knowledge gives you an edge. Know where it merely gives you confidence. Then build your portfolio accordingly.

Inside your onion, you may earn the right to be more active. On the edge, size carefully and build in challenges. Outside it, diversify, delegate or leave it alone.

You can expand your onion, but expansion should be slow and earned. Progress is not longer explanations; it is better-justified convictions and better-sized decisions.

The aim is not fewer opinions. It is earned opinions, and fewer expensive mistakes.

This article is part of an ongoing Currency series on how behavioural finance can help investors make better decisions. 

If you’d like the full framework behind these ideas, including tools to align investing strategies with your financial personality, Greg B Davies’ CPD-accredited course, The Art of Behavioural Investing, created with 42Courses and Oxford Risk, walks you through the approach step by step.

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_{Top image collage: Rawpixel; Firefly; Currency.}