Personal Finance FAQ

Making Money in Your Investments Doesn’t Make You a Great Investor

Crash at St.Marys Corner - Andrew Beaumont - LDS Alfa Romeo - Glover Trophy practice - Goodwood Revival 2013 - Driver ok
You’re a better driver than #37, right?

“The one thing that unites all human beings, regardless of age, gender, religion, economic status, or ethnic background, is that, deep down inside, we all believe that we are above-average drivers.”
–Dave Barry

Do you think that you’re a good driver?

You probably do.

Why do you think that?

You’ve probably only been in a wreck or two. You may have only had a couple of tickets. When you drive on the Interstate, people don’t go careening out of the way to avoid your approach.

Plus, you’re still alive.

In general, you’ve proven that, in almost any set of circumstances, you can get in a car, drive, and arrive at your destination completely intact.

So, you’re a good, competent driver in that you can get to work every day and come home and not have significant worries about completing the task.

But, are you a great driver?

How would you know? What’s the standard by which you measure a good driver?

Are you this guy?

The Stig - Knebworth Classic Car Show 2013

Because we have no measure of what an average driver looks like, 93% of us think that we’re above average drivers.

The bar is relatively low – don’t crash or cause others to crash while driving, and because we exceed that bar, we jump to what are probably unwarranted conclusions about our skills.

Driving is not the only area where setting a low bar leads to unrealistic expectations.

How Low Bars Make You Think You’re a Great Investor

As an investor, subconsciously, your first and foremost goal is to avoid losing money. Note that I included the word subconsciously in that statement. While your limbic system, what I call Monkey Brain – given that we share the same brain part with our simian counterparts – would love for you to make mad scads of cash and be able to roll in the dough and drive a fancy car, realistically, the bar is actually pretty low.

In “Why Past Performance Affects Your Future Investing Actions,” we saw that we are driven primarily by loss and regret aversion. We hate the thought that we could lose something, particularly money, and losing money hurts us more psychologically than making the same amount money provides us with pleasure.

Since we hate taking losses, we let our losers ride and sell our winners so that, in our mental accounts of our investing prowess, we can tell ourselves that we’re good investors.

Our bar for “good investor” is set at the standard of “not losing money.”

But, given the historical performance of the stock market, are we setting the bar too low?

As we’re susceptible to our investing biases, we’re afraid to lose, but the average annual return of the S&P 500 since 1871 is 10.75%.

You can look at different timeframes to see just how low the mental bar of “don’t lose money” actually is.

Probability of Positive Returns Over Time by Fort Worth Investment Advisor Hull Financial Planning

This chart shows that even a trained (or untrained) monkey could probably beat the low bar that Monkey Brain sets for our perception of investing prowess.

Furthermore, a full 22.4% of the time (32 out of 143 years), given an unhinged mental assertion of how good we are – not losing money – we tell ourselves that we’re good (we didn’t lose money!), when we underperformed the market average.

Therefore, according to Monkey Brain, you could be a good investor while significantly underperforming the market.

Add this to the series of missteps you could make by falling prey to the behavioral biases that can affect your money.


Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

2 replies on “Making Money in Your Investments Doesn’t Make You a Great Investor”

Such a cool post, Jason. I remember having a conversation with friend on this subject a while back. Discussing his single stock purchases, I told him he needed to compare his performance to a benchmark (like the S&P500). His response: “Well, I’m making money dude…it works. I don’t know what else to tell you.”

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