Knowledge + Context = Understanding

I learned this equation in a training course. I’m afraid I don’t remember who said it but it has stuck with me ever since.

I believe it is extremely important in all walks of life and especially the markets.

Consider this example. Your friend tells you they bought shares of ABC Company and you should too.

That is the knowledge - they bought shares of ABC Company.

But what is the context? Did they put 100% of their Portfolio into it? 5% of their Portfolio? How much do they save each year? Do they have a pension so this is just their “fun money”? How much is their Portfolio worth?

You can’t truly understand what they are suggesting you do without getting more context.

Another example is the concept of investing for the “long run”. In my view we all should do it. History shows that given time “this too shall pass” and Markets move higher. That is great knowledge – “given time, markets go higher”, but it is missing the context.

How much time do you actually have? People get nervous as they near retirement, however if you retire at 65, you need the money to last another 25 – 30 years (or more). You certainly have a long-term horizon for at least a portion of your portfolio.

Other important context: How much risk can you afford to take? How much do you have saved? How much cash-flow do you need from your investment?

The moral of the story is to dig deeper. There is no "one-size-fits-all solution". When given information seek out the context. That way you’ll have a much better understanding.