process
Circle of competence - and the case for indexing
The rule
Risk comes from not knowing what you are doing. So the honest answer for most people is simple: just own a low-cost index fund.
Where it flips
For the rare person who truly builds the skill (that is the whole point of R5), picking stocks can make sense. But only after honestly clearing the readiness gate, not before.
Buffett has two linked ideas. Stay inside the circle of what you truly know, and be honest about how small that circle is. In his 2013 letter he told most investors, even the people who will manage his own estate, to put the money in a low-cost index fund and get on with life. Trying to pick stocks or time the market is a game most will lose to costs and to their own nerves. R0's readiness gate is built on this. Choosing not to pick stocks is not a failure. It is the expert's own advice.
A worked example
Buffett's will says to put his family's cash 90% in a low-cost S&P 500 index fund and 10% in short-term government bonds. That is the 'know-nothing' default, from the most famous stock-picker alive. [illustrative]
How to spot it
- ·an honest list of what you do not know
- ·indexing treated as a fine default, not a booby prize
- ·no shame in saying 'not yet' to picking stocks
Warren Buffett · Berkshire letters; the 2013 letter