Two weeks ago, in a critique of random walk theory, I briefly touched on the importance of investing in one's own "circle-of-competence," as well as the importance of finding — and listening to — others who are competent in their own respective domains.

I presented the argument that your only chance of reliably making money in the market is to exploit its inefficiencies by collecting more information (knowledge) than investors around you. I'm sure to many of you this probably seems obvious...

What many investors often find difficult to understand, though, is just how small (or what) their circle of competence actually is. Cocky commodity experts who branch out into real estate, for instance, will almost always get burned. Arrogant real-estate moguls who take a stab at industrials are playing a losing game.

In more accessible terms, Michael Jordan was an incredible athlete and basketball legend, but his MLB batting average was still .202.

As much as we like to pat ourselves on the back for our past investing successes, the truth is, no one can be a king of all trades. In the world of investing, it's better to be king of one than a jack of many. Anyone who disagrees is welcome to buy a benchmark fund and call it a day...

For those of you not settling for mediocrity, though, we're going to expand on this idea of "circle of competence" today. In doing so, were going to briefly explore two anecdotes: The first comes from my personal investing experiences. The second is regarding widespread criticisms currently surrounding Tesla's (NASDAQ: TSLA) recent acquisition bid for SolarCity (NASDAQ: SCTY).

Your Greatest Strength is Knowing Your Weakness

I'm not afraid to admit that when I first began investing, I had (almost) no idea what I was doing. From a young age, I had discussed and learned about investment strategies with my father but had virtually zero experience trading myself.

The closest I had come to real investing was a mock trading game in my high school business class. I closed out the year with the second highest return in my school, but as much as that boosted my confidence, it turns out I wasn't as clever as I thought.

The first $2,000 in real money I invested quickly turned into $1,600. Trading fees were eating me alive because of my small positions, but mostly it was my presumptuous nature that was to blame. I had the audacity to think I knew something about developmental stem cell applications, when in fact I knew nothing.

After enough time, I eventually came to accept that I was not a biologist. My educational background was/is in technology, psychology, and behavior — not hard biological science.

Rather than completely quitting, though, I decided to focus on my own strengths while staying fully aware of my weaknesses. Not only did I lower my allocation of biotech stocks in my portfolio, but for the biotech stocks I did continue to watch, I sought the advice of people who actually knew something about the science.

I began to reach out to academics behind research studies related to specific drug candidates and indications. I began to look at historical data on FDA approval rates. I avoided attempts to understand complicated mechanisms of action and listened to investors with records of success in the field.

Most importantly, I applied my own skills to a personalized trading strategy. I stopped betting so much on approval and began to focus more on investor behavior. I bought and sold between data releases and FDA decision dates. This way I didn't always have to be right about the science — just the market's sentiment on it.

For me, investor (human) behavior just happens to be something of intuition — it is my primary circle of competence. When a mass shooting gets picked up by the media, I know to buy calls on Smith and Wesson (NASDAQ: SWHC). When the first American contracts Ebola, I know to buy hazmat suit maker Lakeland Industries (NASDAQ: LAKE).

Over the years I've learned that I'm particularly skilled at picking up on and exploiting aspects of behavioral finance. It's true I know more than the average Joe on valuing stocks, but I am by no means a mathematical guru. I have little business running financial models, but I have every bit of business identifying burgeoning markets and companies early, before the crowd rushes in.

Once I realized this, I decided my best chance at success was to narrow my focus almost entirely to emerging technology where trends and behavior rule the game. In doing so, I was able to quickly reverse my losses, and eventually, returns like this started showing up on my brokerage account:

If there's one surefire way to lose money in the market, I've found it to be overconfidence more than anything else. A lot of folks out there are quick to assume their omnipotence, but the truth is most players in the game are novice at best. Ultimately, coming to terms with one's ineptitude is the only way to work around it.

You're NOT Smarter Than Elon Musk

Part of what's sparked this discussion today is the recent buzz surrounding Tesla's acquisition bid for SolarCity announced earlier this week. The market came down on Elon Musk hard following the announcement, crushing Tesla stock and berating the prominent CEO across the web.

Here are a few articles trashing the merger:

Now, I haven't been an advocate of Tesla stock since 2013, but what's funny about all this is just how quickly the critics came out of the woodwork in response to the merger. Without at all understanding Musk's plans for synergizing the two firms, this was somehow declared one of the worst deals in the history of the market — all in a matter of a few hours.

Some of these pundits were so bold as to say there would be “no synergy” between the two firms whatsoever, prompting Tesla to issue a press release and state the obvious: it aims to build an off-grid infrastructure for consumers with an integrated product-line of solar panels, electric transport, and home power storage. This is not a car company looking to put solar panels on cars; it's a one-stop shop for building a personal microgrid.

Critics also seemed to greatly lament the near 30% premium being paid for SolarCity, seemingly oblivious to the fact that even at $27.00 a share, SolarCity is being purchased for half of what the market had priced it at 12 months ago and one-third of 2014's highs. 

Most egregiously, though, these critics are, for all intents and purposes, asserting that they're somehow more knowledgeable about the merger plans and future of Tesla than its notoriously competent CEO.

Now, just to be clear, I am not an Elon Musk cheerleader by any means, but it helps to remember that this is the man they said would never get an electric car into mass production, yet who is sitting on record-breaking preorders. This is the guy who successfully launched a rocket into space, delivered a payload to the International Space Station, landed the rocket on a floating barge, and then did it again. 

The reality of the situation is that sustainability and engineering are Elon Musk's circles of competence (not yours or mine). There is simply no one with more clout or vision in the realm of solar energy, so why trick yourself into thinking you know better? To say a merger with SolarCity is a "bad idea" for Tesla is akin to telling Clayton Kershaw he needs to work on his form.

Just to clarify, none of this is to suggest that Tesla is suddenly a stock worth buying or somehow impervious to overvaluation. It is, however, to point out how unwarranted the widespread criticisms over this merger actually are.

While I've long held that Tesla has been priced too generously for a mere car company, a successful acquisition of SolarCity would make the firm more attractive than ever before. I'm not buying the stock just yet, but it's finally back on my watch list.

Until next time,

Jason Stutman

 @JasonStutman on Twitter

In addition to his work at Wealth Daily, Jason Stutman serves as the Managing Editor for multiple investment advisory newsletters including Technology and Opportunity and The Cutting Edge. Jason has also served as an editor and contributor for popular investment services Energy and Capital and Tech Investing Daily. Jason holds a B.A. in Behavioral Science alongside an M.Ed.,with postgrad coursework in mathematics, technology, and science.