The Motley Fool

You Can Beat The Experts

Many would-be investors shy away from taking the plunge because they figure they don’t know as much as the experts.

Others pay huge fees to investment managers for what are all too often sub-par results.

What other choice do you have?

Before we answer that question – a quick interlude.

You may have heard of Malcolm Gladwell. He’s the New Yorker writer, and author of best-sellers including The Tipping Point, Blink and Outliers. Gladwell has the incredible ability to see events around us and distill them into interesting, thought-provoking and entertaining stories which make a serious point.

It’s his 2008 work, Outliers, that has some interesting lessons for investors who are considering their options.

Practice really does make perfect

One key theme of Outliers is to dispel the myth that somehow people succeed because of innate ability. Gladwell shows that so-called talent or intellect is not enough. Nor is being in the right place at the right time. In round numbers, Gladwell suggests that 10,000 hours is the amount of practice time required to reach the pinnacle of your chosen field.

Applied to the field of music, Gladwell describes 2,000 hours of practice as being enough to become a ‘strong amateur’ and 4,000 hours to be a future music teacher. He cites the need to practice for 8,000 hours to become a really good student, and the magic 10,000 hours to become an ‘elite performer’.

On one hand, the sheer scale of the numbers involved can be daunting. After all, who has the spare time to devote the equivalent of 415 days of non-stop practice (24 hours a day, 7 days a week!) to anything?

Raw talent isn’t enough

On the other hand, Gladwell directly contradicts the commonly held belief that sheer talent or raw ability somehow sets the superstars apart from the rest of us.

In fact, he gives the example of a quiz-show winner named Christopher Langan who won US$250,000 and had an IQ that was said to be ‘too high to be accurately measured’.

Langan didn’t have an incredibly high paying job or fame and fortune. Instead, his career was characterised by largely menial jobs requiring little applied intelligence. A stratospheric IQ isn’t enough to guarantee success.

Using the example of musicians again, Gladwell goes further, citing a study of Berlin violin students. The study underpinned Gladwell’s theme – students who worked harder than the others invariably rose to the top of their cohort. Going further, none of those who reached the pinnacle did so without the requisite practice time.

No effort went unrewarded and no mastery was achieved by those who didn’t apply themselves to the appropriate degree.

What should investors make of Outliers?

Gladwell doesn’t offer any direct advice, but I think we can take some key lessons.

There is no substitute for hard work

The first is that there is no substitute for practice and hard work.

Warren Buffett is known to spend his work day reading annual report after annual report, punctuated by phone calls and newspapers. He spends countless hours – and has done so for decades – simply reading and thinking. By the time he’s ready to pull the trigger, you can be sure he has understood all of the risks and all of the opportunities.

The second lesson is for us mere mortals – namely that the so-called experts have no natural advantage.

Intellect alone won’t make them more successful, and we’ve seen the professionals in another industry – the so-called ‘smartest guys in the room’ – come spectacularly unstuck before. Yes, experience – ‘practice’ – counts. But that applies to the ‘experts’ and DIY investors equally.

You can be successful…

You can be successful doing it yourself. You can beat the index – without needing to pay a disproportionate fee for an uncertain result.

In fact, The Motley Fool was founded on that very proposition. We believe that with interest, a bit of effort and some help, individual investors can take control of their own money and make better financial decisions. The 13 Steps to Financial Freedom tell you more.

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