The Difference Between Amateur and Professional Investors

Updated: Aug 25, 2021

"Amateurs believe that the world should work the way they want it to. Professionals realize that they have to work with the world as they find it. Amateurs are scared — scared to be vulnerable and honest with themselves." - Shane Parrish, The Knowledge Project

We get bombarded with a fire hose of information on a daily basis. It's tough to filter out what's worthwhile and what's garbage (developing an information filter is an underrated skill).

Every now and again, you read a piece that gets seared into your brain.

Shane Parrish created The Knowledge Project to help foster better thinking, problem solving, and decision-making through mental models. Shane wrote an article about "The Difference Between Amateurs and Professionals." At first, I didn't directly map over the principles to investing, but there are many parallels.

Below is my opinion of the differences between amateur and professional investors.

Amateurs anchor to narratives. Professionals can change their minds.

Amateurs focus on the results. Professionals obsess about process.

Amateurs blame their good outcomes on skill, and bad outcomes on luck. Professionals know most outcomes often lie somewhere in between luck and skill.

Amateurs do not take accountability when they make bad investment decisions. Professionals can self-reflect and will rarely make the same mistake twice.

Amateurs think in absolutes. Professional think in probabilities (this is on Shane's list and one of my favorites).

Amateurs have extreme convictions. Professionals keep an open mind.

Amateurs work off gut instinct. Professionals have a framework for making decisions.

Amateurs seek opinions that confirm their beliefs. Professionals seek opinions that challenge their beliefs.

Amateurs are emotional. Professionals are measured.

Amateurs have massive blind spots. Professionals have massive blind spots, but they have a high level of self-awareness.

Amateurs focus on things they can’t control. Professionals obsess about optimizing things they can control.

Amateurs get seduced by narratives and stories. Professionals prefer empirical evidence.

Amateurs use their own personal experiences to explain the world. Professionals acknowledge their biases and seek other opinions.

Amateurs make emotional decisions. Professionals understand emotion and investing do not mix.

Amateurs tend to act. Professional tend to do nothing.

Amateurs have a fixed mindset. Professionals have a growth mindset. They often ask themselves, how can I be wrong?

Amateurs mix politics and investing. Professionals understand politics are emotional and have little value in the investment process.

Amateurs extrapolate recent events into the future. Professionals look for perspective and context.

Amateurs try and explain everything that happens in financial markets. Professionals understand complex systems can be random and unexplainable.

Amateurs get worked up during bad market environments. Professionals understand negative returns are part of investing.

Amateurs chase yesterday’s performance. Professionals evaluate the future opportunity set of potential investments.

Amateurs obsess about returns. Professionals obsess about returns in the context of risk.

Don't believe that financial advisors, brokers, money managers, etc. always act like professional investors. Nor that retail investors automatically are amateurs. I've met advisors who are clueless about investing, and seemingly novice investors who are very advanced. It's not the title or profession, it's the mindset that matters.

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