Obviously, what we mean is knowledge about your asset and the markets. But more important is knowledge about yourself. I wouldn’t expect a hyper, super-involved person to invest for the long-term. On the other hand, I wouldn’t advise a low-key person to appreciate the daily thrills of day-trading. Are you more of an active person or passive?

Are you looking to make a steady 7% return on your investment or are you willing to take the chance on making 30% yearly… or losing it.

And finally, are you a passive person or an aggressive one. Here we come back to Buffet who defined the 2:10, 5:20 rule. It’s a kind of risk-assessment rule-of-thumb:

If you’re a passive investor, never have more than 2% of your total assets invested in a single position and never have more than 10% invested in all of your open positions all together. For a $1000 account, that means $20 per position and $100 in all of them in total.

If you’re an aggressive, go by the 5:20 rule – 5% peer position and $200 in all of them together. Again, for that same $1000 account, that’s $50 per position – it’ll go up and down much more – and $200 in all your positions together.

In our next level we’ll talk about market ANALYSIS, which is complex but easy to understand and – more importantly – fascinating.