A special talent for converting life’s setbacks into future successes

The investor

The right stuff

I have given a lot of thought to the kinds of personal traits or personal qualities that lead to successful investing.

For the most part, these traits or qualities may be thought of as the hand you are dealt at birth. But, there’s a world of difference in how you play that hand. What I want to explore in this post is the mindset that sorts the winners from the losers.

Challenge of the brainiacs

We can start with the observation that geniuses don’t necessarily do well in the stock market. This would include mathematical geniuses. Isaac Newton is a good case in point. After losing his shirt in the South Sea Bubble he reportedly said “I can calculate the movement of stars, but not the madness of men.” (Wikipedia). Lord Radnor is said to be the source of this quote. We learn from Newton’s niece that he lost some twenty thousand pounds, the equivalent today of millions of pounds. Newton was no fool when it came to money. For many years he ran the British mint.

Nobel Prize winners and other highly regarded academics in economics and finance frequently show no special aptitude. As well, and of more than passing interest to us mere mortals, you don’t have to have a soaring I.Q. to do well.

The cards you are dealt with

At the end of his career in 1974 in the midst of what may still be the greatest bear market since the 1930s, Benjamin Graham gave a speech to securities analysts. It was styled “Renaissance of Value”, and was reprinted in Barron’s September 23, 1974, and is quoted by Roger Lowenstein. (Lowenstein, Buffett, The Making of an American Capitalist. 1995,2008) p.160. Graham remarked that investing did not require genius: “What it needs is, first, reasonably good intelligence; second, sound principles of operation; third, and most important, firmness of character.” (Emphasis added)

Graham’s prescription is not far different from that given by Warren Buffett.

“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, 1995,2008) p.333. (Emphasis added)

Lowenstein reports: “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’

John Neff, one of the investing greats, puts it this way: “investment success does not require glamour stocks or bull markets. Judgment and fortitude were our prerequisites. Judgment singles out opportunities, fortitude enables you to live with them while the rest of the world scrambles in another direction.” (Neff, John Neff on Investing 1999) p.4. (Emphasis added)

Words used here include: good intelligence; character; energy; discipline; integrity; instinct; Kiplingesque cool; judgement; and, fortitude.

The interesting question

Can we think of these personal qualities as the cards we are dealt at birth? To some degree we can. It’s the old nature vs nurture debate. I’m not a psychologist. My own life observation is that when kids are young their personal traits or personal qualities are revealed and, in many ways, don’t change over a lifetime.

But these personal qualities can be cultivated or nurtured. As well, given the same personal qualities, there is a mindset that sorts the winners from the losers. This mindset is something we can learn.

Sailing experience

For many years I’ve been a competitive sailor. It’s a great sport. Success involves having the best equipment, boat preparation, how to make the boat go fast, the best tack and angles to take, strategies, tactics and team and personal psychology. There are many decisions to make in a race and in a regatta. Many mistakes are made. Many things go wrong.

The most successful sailors are those who have a particular mindset in how they deal with the setbacks. It is a mindset that does not fear failure. It does not fear mistakes. It includes a willingness to take reasonable risks. It is the mindset that avoids flyers. It is the mindset to work through setbacks and challenges and views these as learning experiences and catalysts for continuous improvement.

I can’t say much about the mindset of losers. Psychologist tell us that it often comes down to viewing their skills or talents as fixed. That is, when confronted by setbacks and challenges their reaction is to feel that they just weren’t good enough.

Carol Dweck

Through my sailing and reading about what leads to racing success, I came upon Carol Dweck.

The distinction between those who face challenges and learn from their experiences and those who fear failure and never reach their potential, is explored in a book Mindset: The New Psychology of Success by Carol Dweck. She summarizes her ideas in a short note on Farnham Street here in which she writes:

“There are two main mindsets we can navigate life with: growth and fixed. Having a growth mindset is essential for success.”

In a nutshell Carol Dweck tells us that “what exceptional people seem to have is a special talent for converting life’s setbacks into future successes.”

I have seen that in my competitive sailing over the years. I also think it is particularly true in investing.

A simple message

Over years of investing we will all make lots of mistakes and face setbacks. How we react to those mistakes and setbacks will determine whether we will have success as investors or poor results. If we learn from them, we will enjoy the challenge and have investing success.

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Other posts on investment psychology

This post is part of a series. Readers are invited to read Investment psychology explainer for Mr. Market – introduction  This will give you a better understanding of some of the terms and ideas and give you links to other posts in the series.

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

I’m also on Twitter @rodneylksmith

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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.

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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.

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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.

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