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Are there Smart Investors in the Market?

Global management consultant firm McKinsey & Company has come up with an interesting four-level format to identify such dimensions.

April 25, 2011 10:06 IST | India Infoline News Service

Who are smart investors? 

There is always some degree of uncertainty that investors face continuously while dabbling in stocks and shares. But the key factor that sets apart smart investors from the rest is their ability to consistently make superior decisions amid those uncertain conditions. One needs to first define, recognize and understand the various dimensions of uncertainty to be able to cope with it. Global management consultant firm McKinsey & Company has come up with an interesting four-level format to identify such dimensions.

 

Identifying uncertainty: 

Initially, the uncertainty variable in relation to investments bearing yields is relatively low. The future is relatively clear and it is enough if one can effectively deal with a single uncertain variable. The next stage requires the ability to cope with different views of the future but the choices are limited, separate and quite easily defined. 


The third stage is where the uncertainty levels are more as a significant number of key interrelated variables are involved. The final stage is a perfectly confusing environment wherein one has to constantly learn and show great alertness, because of the fact that it is almost impossible for the human mind to anticipate enough of the future in advance.


A McKinsey & Co. report maintains that while dealing with the first stage-like situations, an investor must assess accurately how much he can actually foresee. Once he comes to terms with the limits of what he knows, the best move would be to assess a range for the unknown outcome and ascertain his level of confidence with the given range. In the second stage, one should have multiple views of the future by acknowledging the uncertainties involved instead of searching for a single ‘most certain’ outcome. 


The last two stages are tough to tackle because of the high level of complexity involved. Careful planning and a disciplined approach that would assist in foreseeing the various possible outcomes is an analytical technique that is widely used.


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