Mental Model: What the Fall of Dividend Mantra can Teach You About Your Circle of Competence

Mental Model What the Fall of Dividend Mantra can Teach You About your Circle of CompetenceThis is old hat for many of you, but it is an extremely important model to conform to: know thy circle of competence and stay within it at all times. It’s seductively easy to stray out of our circle of competence. People spout on about things they have little to zero knowledge of all day, every day. Go check out the bowels of Reddit if you need confirmation. The harm is minimal when you’re bullshitting with your friends, although you may be labelled a douche if your ignorance is ever caught. But the harm can be tremendous when it comes to your hard earned money. Look at all the people who got burned recently with Kinder Morgan. How many were piling in because they understood the intricacies of the risk/reward payout of pipelines, master limited partnerships, and the energy sector? Or were many getting lured by the promises of management and a history of rising dividend payouts? Hindsight is hindsight, but if one really understood Kinder Morgan and the business environment it operated in, there potentially could have been red flags that were raised as you studied the company in depth. But I’m not here to talk about Kinder Morgan today. Let’s speculate on the fall of Dividend Mantra.

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Differentiating Between Confidence and What You Actually Know

Screen Shot 2015-05-20 at 9.43.11 PM“Investor Know Thyself” is an ironclad maxim that is so simple but elusively deceptive. While integrally important in investing, it is even more so in life. Wisdom springs from knowing yourself. I was recently perusing the musings of Inner Scorecard (I’d highly recommend you go check out his stuff) and he wrote about confidence. What was really intriguing was the test he linked to. It was a simple true and false test but with a twist: every question you would ascribe a confidence level to your answers. The results were fascinating. And it has real implications in your life. It will give you a glimpse about how your brain is wired and if your confidence matches up with your actual knowledge.

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