There is this unique set of investors, who will believe much of everything that they come across relating to investments. Its not that these are not intelligent people, its just that they never thought it necessary to make efforts to learn the ropes.

As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy (a person who is easily taken advantage of) is, you’re the patsy.” – Warren Buffett in his 1988 Letter to Berkshire Hathaway shareholders

Ask this question every time you invest: Are you an informed or a naive investor? This is not a one-off question but rather should be asked every time an investment decision is made. As soon as we step outside our Sphere of expertise and knowledge, we become vulnerable. While experience can expand our sphere of expertise, there is a point at which we step into an area where we have little knowledge. At this point it is the process we apply which will determine whether we invest naively or not.

Caution against being the patsy: No matter how wide your sphere of expertise, it is the actions you take when faced with a situation outside of that sphere which will determine whether you invest on an informed basis. The most crucial aspects are:

• Acknowledging that this situation is outside of your sphere of expertise
•  Defining a benchmark level of knowledge that will make you suitably informed and developing a programme to achieve that knowledge benchmark

Expanding the sphere of expertise:  Knowledge is obtained in many different ways:

• Reading about the journey of the most successful investors.
•  Seeking seasoned professionals to coach you to expand your sphere of expertise.

It’s never much fun being the patsy at the table.