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Tacit Knowledge - An Important Concept for Investors

Tacit knowledge is an important concept that investors should understand. It refers to the knowledge, insights, and intuitions that people have which are difficult to articulate or write down. This type of knowledge is often acquired through personal experience and practice. Being able to identify and leverage tacit knowledge can give investors an edge.

Characteristics of Tacit Knowledge

There are several key characteristics of tacit knowledge:

  • It's hard to verbalize or codify - Things like insights, intuitions, and gut feelings are difficult to put into words or data.

  • It's learned through experience - Years working in a particular field or repeatedly doing an activity leads to the accumulation of tacit knowledge that is hard for others to gain just by reading.

  • It resides in people's heads and bodies - The knowledge itself becomes embedded in the human mind and physical being, encoded in the way people think and move.

Examples of Tacit Knowledge

There are many examples of how tacit knowledge manifests itself:

  • A venture capitalist who can quickly size up startup founders and predict potential success or failure based on pattern recognition gained from years of experience.

  • A commodities trader who has a "feel" for when a big price move is coming soon, based on a myriad of small signals they've learned to pick up on.

  • An investor who meets a CEO and subconsciously picks up on subtle cues about their competency, drive, and leadership abilities.

  • A financial analyst who has worked in a niche industry for many years and has deep insight into the dynamics that are hard for outsiders to grasp.

Importance for Investors

Leveraging tacit knowledge can lead to investing success in several ways:

  • Identifying disruptive trends and innovations before the data clearly points that way

  • Recognizing key factors about people and teams that quantitative analysis may miss

  • Trusting one's "gut feel" when the timing seems right to buy or sell

  • Developing a "market sense" that comes from subjective pattern recognition

Investors should focus on developing their own tacit knowledge by continually gaining hands-on experience. They should also seek to access the tacit knowledge of other experts by networking and collaborating with specialized professionals they trust.

Challenges with Tacit Knowledge

While tacit knowledge can provide a competitive advantage, there are some challenges that investors should be aware of:

  • Biases - Years of experience can lead to biased thinking that misses new opportunities contrary to past patterns. Need to actively guard against confirmation bias.

  • Overreliance - It's unwise to depend solely on gut feel; data and analysis still crucial to balance decisions. Tacit knowledge should complement, not replace quantitative rigor.

  • Lack of documentation - Since tacit knowledge isn't written down, investors run the risk of losing insights and intuition when veteran employees leave.

Ways to Cultivate Tacit Knowledge

For investors looking to strengthen their tacit knowledge, here are some suggestions:

  • Mentorship - Working closely under the tutelage of seasoned professionals accelerates the development of tacit skills.

  • Information immersion - Constantly reading industry publications, researching companies, analyzing financials all help build subconscious pattern recognition.

  • Network building - Having an extensive network of experts to consult with exposes you to their hard-earned tacit insights.

  • Skin in the game - Having your own money invested ensures you quickly learn the unwritten nuances of the market.

Investors can't afford to ignore the importance of experiential knowledge even as big data and AI shape much of the investment world. Leveraging tacit insights along with quantitative analysis is crucial to success. By deliberately cultivating tacit skills, investors equip themselves with a versatile tool for pursuing returns.

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