- Work a job
- Set some money aside each month
- Hire a financial advisor to invest for them
- Sit back for 40 years and expect a huge nest egg for retirement
While this method does end up working for some, it has proven to be a fatal formula for many. Ever hear of Bernie Madoff? Just like Bernie, there are other advisors that are just flat out swindlers, looking for ways to take your hard-earned money without you realizing it. There are still others that believe they are doing good work for you, but after the fees and advisor expenses, you’re typically left earning less than the general market. Sitting on the sideline and expecting your financial advisor to make you millions often leaves you earning less than if you would have simply placed your money in the S&P 500. If you want to build wealth, I don’t suggest that you try to find the best financial advisor. Instead, I prefer that people do what they can to enlarge their circle of competence.
In the stock market, there are buyers of stock and sellers of stock, and the market is really as simple as that. Let’s say that I own Derek’s Greenhouse and I issued 100 shares of stock a while back. Currently, 100 different people each own one share of Derek’s Greenhouse. One of my stock owners, Marge, visited my greenhouse today to buy some flowers and she noticed that my business had been overrun by rabbits who are incidentally eating up all of my profits! Marge knows this won’t be good for Derek’s Greenhouse, so she quickly put her share up for sale in the market.
Joe, a part-time investor, read about my company this morning and was impressed with its historical performance metrics. Just recently, he has decided to purchase a share of Derek’s Greenhouse. To make his purchase, he simply went online, signed into his brokerage account, searched for the ticker symbol, and clicked, “Buy”. Essentially, Joe just purchased Marge’s share of Derek’s Greenhouse.
So who will likely benefit from these two transactions? Marge, who knows that my business is currently in trouble, or Joe, the investor that really had very little knowledge of the business and its current operations? Of course, Marge will likely be the winner of this trade. The devastation to my crops will reduce my revenue severely and will probably put me into the red for a little while. With negative profits, the stock price will tumble and Joe will be in a cold sweat, while Marge will happily be counting the cash that’s safely in her pocket.
Marge knew all about Derek’s Greenhouse and how the operations would affect the stock price. She lived near the business and watched it carefully, always looking for that next sign of growth or reduction. Marge had great competence when it came to Derek’s Greenhouse and their stock price. She understood it all and therefore did well with her investment. Joe, on the other hand, really didn’t understand what he was buying. Due to his low level of competence, he put himself in a position to fail miserably.
How Do You Increase Your Circle of Competence?
When I was in college and was nearing my graduation date, I started wondering how much I would need to learn throughout my career (I was getting pretty sick of book learning at this point and honestly never wanted to open another book for as long as I lived). Pretty much every professor I asked explained that there would be some level of learning that I would have to do in order to keep up with the inevitably changing work environment.
Ideally, I wanted to hear a response like, “Derek, you’ve learned all you need to know for the rest of your life. Go out, find a job, and you’ll never have to read another textbook again.” How incredibly lazy was I? In my teenage wisdom, I wanted to earn a butt-load of money and put as little effort into my work as possible. In other words, I wanted my circle of competence to stay the same for all my life. If I would have kept this mentality, I would have experienced a moderate amount of wealth at best. More than likely, I would have been the typical 8-5 employee, kicking back and watching TV after work, thinking of doing nothing more with my life until retirement. That would be a pretty sad existence. If you want to build wealth, I would suggest increasing your circle of confidence.
Above illustrates how much we know, how much we think we know, and what we could know at this point in our lives. As you can see, the speck of what we know is pretty ridiculous when compared to the circle of competence of what would cold know.
So the million dollar question is, “How do we increase our circle of competence? The answer is actually pretty simple. Just never stop learning! And more importantly, be sure to learn bits of information that are actually important in your life. Only then will the learning really matter.
In my life, I choose to learn about personal finance. This allows me to live frugally today and invest wisely for my retirement years. In the near future, I intend to learn more about real estate and become a landlord, thereby increasing my passive income. The more I learn about these areas, the more efficient I’ll become, and the wealthier I’ll get!
The Main Benefits of a Larger Circle
Yes, we have all heard that it’s important to learn and keep our brain active, but what is the real benefit? How will our increased knowledge actually help us in life? As I see it, there are actually two areas of benefit:
- Learning to become wealthy yourself
- Learn to teach people how to do what you’ve done
Dave Ramsey, Suze Orman, Roberty Kiyosaki – they all have a similar story. They wanted to become wealthy, so they learned all they could about a particular area of interest to them. Through their learning and their action, they became masters of their given field and therefore accumulated a decent amount of wealth. But, their ultimate wealth did not come from step number one. They became ultra-wealthy when they decided to teach others how to do what they did. With books, seminars, podcasts, and video series’, they built a large following and created a large passive income.
Want to build wealth? First discover what you’re passionate about, learn as much as you can about that subject, create a modest amount of wealth, and then create a passive income with a series of how others can do exactly what you did. The larger your circle of competence, the greater your wealth will become.
Do you want to build wealth? How are you building your circle of confidence?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.