Experience and becoming a really successful investor

Developing expertise

It doesn’t take a genius

I’m going to discuss what it takes to be a really successful investor. This will not be about what it takes to invest in index funds and achieve a perfectly satisfactory return. No, I want to look at how to get truly superior returns.

Personal qualities

A good place to start is with Warren Buffett. Roger Lowenstein writes: “Buffett said it did not require a formal education, nor even a high IQ. What mattered was temperament. He would illustrate this with a little game in business school classes he spoke to. Suppose, he would tell a class, each student could be guaranteed 10 percent of one of their classmates’ future earnings. Whom would they choose? The students would start to scrutinize one another intently. They weren’t looking for the smartest, necessarily, Buffett would observe, but for someone with the intangibles: energy, discipline, integrity, instinct. What mattered most was confidence in one’s own judgment, from which would flow the Kiplingesque cool to keep one’s head ‘when all about you are losing theirs.’ ” (Lowenstein, Buffett, The Making of an American Capitalist, 1995,2008) p.333. (Emphasis added)

Lowenstein continues: “Most of what Buffett did, such as reading reports and trade journals, the small investor could also do. He felt very deeply that the common wisdom was dead wrong, the little guy could invest in the market, so long as he stuck to his Graham-and-Dodd knitting. But people, he found, either took to this approach immediately or they never did. Many had a “perverse” need to make it complicated.” (Lowenstein, 1995,2008)p.331’(Emphasis added)

What is interesting is that geniuses don’t necessarily make the best investors. Isaac Newton lost his shirt in the South Seas Bubble. The brilliant mathematicians at Long Term Capital Management (LTCM) were too smart by half. They suffered from hubris and over-confidence. The whole thing blew up in 1997 with billions of dollars in losses. Hubris can strike any investor no matter what their IQ.

I’d even go so far as to say that in investing, brainiacs may be at a disadvantage. They are susceptible to over confidence and hubris.

Two sides to investing

To invest successfully in common stocks you need to learn about two things. The first is the world of finance and the investment process. The second is about yourself.

The world of finance includes companies, the economy, reading and understanding financial statements, bonds, stocks, interest rates, inflation, the stock market and so on. These are the nuts and bolts. You don’t have to become as knowledgeable about the economy as an economist. You don’t need to be a finance grad or a qualified securities analyst. You just have to have read widely enough to be an intelligent user of reports they put out. Your investment process is defined by the kind of companies you invest in and how you go about buying and selling stocks.

I said the second side is about yourself. Here I’m referring to energy, discipline, integrity, instinct, one’s own judgment, Kiplingesque cool to keep one’s head ‘when all about you are losing theirs, hubris and over-confidence. This is all about behavioral psychology.

Experience and practice

So, can we learn to be really good investors? Will experience get us there?

Most of us have heard of Malcolm Gladwell’s popularization of the ‘Ten-Thousand-Hour Rule’ for complex activities. His conclusion is that in cognitively demanding fields ‘there are no naturals’. What this means is that a rooky chess player, no matter what his innate talent, will not play at the grand master level until he has accumulated years of practice and experience.

The general rule seems to be that the more demanding the activity, the more practice and experience play a role. Apparently there has been a prodigious amount of research carried out since the original study published by Herbert Simon and William Chase some forty years ago which concluded that there were no ‘instant experts’ in chess.

There is a more recent study that carries the issue further. In his book Rationality, Steven Pinker a psychology prof at Harvard references a study of lifelong chess players who differed in their cognitive ability; i.e. some were smarter than others. It confirms that practice improved the skills of players of both average cognitive skills and those with above average cognitive skills.

What is noteworthy is that without practice brains barely matter. As practice increased, the smarter players improved faster than the average smartness players. (Pinker, Rationality, 2021) p.278

Chess isn’t investing

Every challenging activity is different. I’ve played chess. It is highly dependent on skill. You can learn by reading books on tactics and strategies and on famous games or moves. To develop skill you have to play real games. There’s not a lot of luck in play. Nor is there much psychology.

I’ve also played squash, golf and competed in sailboat racing. Of these three, luck (both good and bad) and psychology are much more in play in golf and sailboat racing. It’s noteworthy that at the top level, in many sports, psychologists are part of the training team.

Investing is highly dependent on skill. Like chess experts you develop investing skill by studying and playing. But, in investing luck is very much in play, more so than in chess. Investors are constantly making decisions in face of uncertainty. Even if the decisions are made with great skill, they can turn out well or badly depending on luck. One expects that over the long haul, skill and process will win the day.

Investing is also highly dependent on how we, as investors, cope with our own human foibles. This is the behavioral psychology Buffett alludes to: discipline, integrity, instinct, one’s own judgment, Kiplingesque cool to keep one’s head ‘when all about you are losing theirs, hubris and over-confidence. These factors come into chess to a limited degree. They also come into squash, golf and sailboat racing. But, investing is almost in a class of its own when it comes to psychology. I have written some twenty posts on investment psychology. See here.

Let me quietly repeat what I wrote above: brainiacs may be at a disadvantage to ordinary mortals when it comes to investing; remember Isaac Newton and the folks from Long Term Capital Management.

There may be a profession of sports psychologists but I’ve never heard of ‘investment psychologists’. I suppose investment advisors can play that role. I prefer to develop the skill myself.

Where does that leave us?

The first step to develop investing skills is reading. You need to read about the investment process. You need to read about luck. And, you need to read about your own human foibles i.e. investment psychology.

But, reading will only get you so far. You have to actually invest real money to advance. It’s best to walk before you run. What I did to get started was to put all our savings in a mutual fund for ten years and invested with smaller amounts on the side until I felt I had enough skill to manage all our savings.

After you have read about investment psychology, the only way to develop skill is in the school of hard knocks. You have to be able to learn from your mistakes. And, there will be many.

One lesson from the chess skill chart above is that skill increases over time with experience. Learning is a lifelong thing. Reading about finance, economics, the stock market and investment psychology is lifelong. The school of hard knocks goes on forever.

What we can do

Most of what I have learned about investment psychology comes from reading Daniel Kahneman’s Thinking Fast and Slow (2011). From this I developed my own set of rules or policies to counteract biases. I call them my gap-to-edge rules. Avoid the behavioral gap and gain a behavioral edge. See here.

Pinker’s recent book Rationality refers to a study of behavioral biases and cognitive errors in decision making carried out by de Bruin, Parker and Fischoff. The foibles included overconfidence, sunk costs, inconsistency in estimating risks and framing issues. Pinker relates the outcome: “…people’s skill in avoiding fallacies was correlated to their intelligence, though only partly. It was also correlated with their decision-making style – the degree to which they said they ‘approached problems reflectively and constructively rather than impulsively and fatalistically.” (Pinker, 2021) p.323


My topic has been experience and becoming a really successful investor. Many people are not interested in learning to invest. They will do just fine with index funds and/or an investment advisor. Some want to take it on. The rewards of successful investing are substantial. I’m convinced that those who want to can learn and, with practice, develop exceptional skills. And that they can continue to learn and improve their investing skills year after year. The study of chess players certainly shows that players at all levels can continue to learn and improve their skills. No doubt the same is true for investors.


Readers wishing to read further about what it takes to become a successful investor can take a look at the Motherlode Part 3: Thoughts for the Individual Investor

After an introduction that part continues with these Chapters:

20. The Right Stuff
21. Developing Expertise
22. Luck and Investing
23. Decision making under uncertainty

Chapter 21. Developing Expertise contains these Sections:

21.01 The illusion of skill

21.02 The bitterest way to learn

21.03 Lifelong learning


You can reach me by email at rodney@investingmotherlode.com


Check out the Tags Index on the right side of the Home page that goes from ‘accounting goodwill’ to ‘wisdom of crowds’. This will give readers access to a host of useful topics.


You can also use the word search feature on the right hand side of this page to find references in both blog posts and also in the Motherlode.


There is also a Table of Contents for the whole Motherlode when you click on the Motherlode tab.

Want to dig deeper into the principles behind successful investing?

Click here for the Motherlode – introduction.

If you like this blog, tell your friends about it

And don’t hesitate to provide comments or share on Twitter and Facebook


Leave a Reply