From Barry Ritholz at The Big Picture comes a great article about what he calls “competency transference.“ His article was triggered by a Bloomberg story about a technology mogul who turned his $1.8 billion payoff into a bankruptcy just a few years later. Mr. Ritholz points out that the problem is generalizable:
Be aware of what I call The Fallacy of Competency Transference. This occurs when someone successful in one field jumps in to another and fails miserably. The most widely known example is Michael Jordan, the greatest basketball player the game has ever known, deciding he was also a baseball player. He was a .200 minor league hitter.
I have had repeated conversations with Medical Doctors about this: They are extremely intelligent accomplished people who often assume they can do well in markets. (After all, they conquered what I consider a much more challenging field of medicine).
The problem they run into is that competency transference. After 4 years of college (mostly focused on pre-med courses), they spend 4 years in Medical school; another year as an Interns, then as many as 8 years in Residency. Specialized fields may require training beyond residency, tacking on another 1-3 years. This process is at least 12, and as many as 20 years (if we include Board certification).
What I try to explain to these highly educated, highly intelligent people is that they absolutely can achieve the same success in markets that they have as medical professionals — they just have to put the requisite time in, immersing themselves in finance (like they did in medicine) for a decade or so. It is usually around this moment that the light bulb goes off, and the cause of prior mediocre performance becomes understood.
To me, the funny thing is that competency transference mostly applies to the special case of financial markets. For example, no successful stock market professional would ever, ever assume themselves to be a competent thoracic surgeon without the requisite training. Nor would a medical doctor ever assume that he or she could play a professional sport or run a nuclear submarine without the necessary skills. (I think the Michael Jordan analogy is a poor one, since there have been numerous multi-sport athletes. Many athletes letter in multiple sports in high school and some even play more than one in college. Michael Jordan may have been wrong about his particular case, but it wasn’t necessarily a crazy idea.)
Nope, competency transference is mostly restricted to the idea that anyone watching CNBC can become a market maven. (Apparently even talking heads on CNBC believe this.) This creates no end of grief in advisor-client relationships if 1) the advisor isn’t very far up the learning curve, and 2) if the client thinks they know better. You would have the same problem if you had a green medical doctor and you thought you knew more than the doctor did. That is a situation that is ripe for problems!
Advisors need to work continuously to expand their skills and knowledge if they are to be of use to investors. And investors, in general, would do well to spend their efforts vetting advisors carefully rather than assuming financial markets are a piece of cake.