Superior investment performance – what it takes – part 1

The individual investor

Children and Oreo cookies

I want to talk about the personal qualities you need to cultivate to achieve superior investing performance.

Ben Graham and Warren Buffett use words like character, energy, discipline, patience, instinct, coolness under fire, judgement and fortitude. It’s an interesting subject. I want to dig a little deeper. They do agree that you don’t have to be a genius. In fact some super smart people make bad investors.

In this post and following posts in the series I will look at the needed qualities. Let’s start with the ability to think, plan and act for the long term.

Children and Oreo cookies

Saving and investing for perhaps 30 or 40 years to provide for retirement takes a lot of forward thinking.

You need to not only think about something that is way down the road; as in, how will I fund my retirement? You need to commit to saving year in and year out for the long haul. And you also need to conceive of investing in this way, i.e. with a long term view.  On top of that, and of equal importance, you have to have the determination to carry it through rigorously.

The saver/investor knows that much current consumption will be deferred to the distant future. The ability to defer gratification of course brings to mind Walter Mischel’s original Oreo cookie study on young children. The personality trait specifically identified in that study seems to have been self-control or impulse-control. These seem to be at the heart of deferring current consumption.

I can’t describe the experiment any better than Daniel Kahneman. He writes:

“In one of the most famous experiments in the history of psychology, Walter Mischel and his students exposed four-year-old children to a cruel dilemma. They were given a choice between a small reward (one Oreo), which they could have at any time, or a larger reward (two cookies) for which they had to wait 15 minutes under difficult conditions. They were to remain alone in a room, facing a desk with two objects: a single cookie and a bell that the child could ring at any time to call in the experimenter and receive the one cookie. As the experiment was described, ‘There were no toys, books, pictures or other potentially distracting items in the room. The experimenter left the room and did not return until 15 min had passed or the child had rung the bell, eaten the rewards, stood up , or shown any sign of distress.’ The children were watched through a one-way mirror, and the film that shows their behavior during the waiting time always has the audience roaring in laughter. About half the children managed the feat of waiting for 15 minutes, mainly by keeping their attention away from the tempting reward. Ten or fifteen years later, a large gap had opened between those who had resisted temptation and those who had not. The resisters had higher measures of executive control in cognitive tasks, and especially the ability to reallocate their attention effectively.” (Kahneman, Thinking, Fast and Slow, 2011) p47. (Emphasis added)

Certainty of two cookies

What is noteworthy about the Mischel experiment is that the children had to choose between a certainty of one cookie and a certainty of two cookies. At another time marshmallows were used. The outcome for each child seems to have depended on a combination of self-control, the ability to defer gratification and trust in the experimenter. Kahneman says that the resisters later exhibited ‘higher measures of executive control in cognitive tasks, and especially the ability to reallocate their attention effectively’.

Nature or nurture

It is interesting to reflect on whether it was nature or nurture that gave rise to these qualities in the resisters. It has been suggested that early childhood nurturing and education can have a significant impact on a child’s view of the world. No doubt some qualities are ‘bred in the bone’. But, it also seems some children learn how to be more confident, to have higher executive control and to be more willing to trust experimenters who offer double treats.

It does seems self-control can be improved.  Walter Mischel, who carried out the original Oreo cookie study on young children, believes that self-control and other techniques to overcome behavioral biases are not simply innate traits you are born with. He has written a book titled The Marshmallow Test: Mastering Self-Control (Little, Brown & Company) which was reviewed in The Economist October 11, 2014. He relies on research which has shown upward trends in IQ in developed countries from one generation to another and, apparently, a significant role for nurture in improving self-control.

An approach to life

Put as simply as possible, what investors need is the ability to make decisions that have no near term or even intermediate term benefit. This is not just about deferring gratification. It is an approach to life that is constantly taking the long view.

In other life contexts this may be a person who always saves the best for last or who does the most unpleasant jobs first in a list of tasks so that the tasks become progressively easier or more pleasant.

Fear of becoming destitute

No doubt motivation plays a part here. Most people are well motivated to plan and make provision for their retirement. I must confess that part of my motivation to succeed in investing has been fear, yes, simply a fear of a retirement with inadequate financial resources.

Flip side procrastination

It is extraordinary that some people are so bound up in their day to day lives that retirement seems such a distant prospect that they feel they can worry about it later. Their fault seems to be a kind of procrastination. Perhaps procrastination is the flip side of the quality I am describing as the ability to make decisions based on a long view.


The idea of long term thinking permeates investing. The ability to buy a beaten down superb stock needs long term thinking. The ability to resist taking short term profits is a classic Oreo cookie situation. And so on. Understanding the magic of compounding is a long term thinking thing. The secret to long term thinking is framing. Framing is a subject in itself. I have written several posts on in. See here.

Over and over again the question to ask yourself is; what is the right thing to do for the long term?


I have developed a set of what Kahneman calls risk policies to address short term thinking. See this post:

Overcoming mistaken short term thinking with Kahneman style risk policies


To dig deeper take a look at the Motherlode Chapter 20. The Right Stuff

The chapter begins with an introduction and then continues with these Sections which flesh out the ideas:

20.01 Personal qualities

20.02 Self-reliance

20.03 Ability to make decisions based on the long view

20.04 Patience

20.05 Stick-to-itiveness

20.06 Sound judgement

20.07 Insight and good instincts

20.08 Creative thinking

20.09 Counterintuitive thinking

20.10 That something is wrong

20.11 Strategic thinking

20.12 Adaptability and flexibility

20.13 A skeptical mind

20.14 Impulse control

20.15 Kiplingesque cool

20.16 My experience

20.17 Resilience

20.18 Moderate risk tolerance

20.19 Natural curiosity

20.20 Reasonably good intelligence


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