Why Beginners Have All the Luck

Back during the dot-com gold rush, I knew several people who were really into trading stocks. One sat near me at work, and he was proud of his stock-picking expertise.

He knew all the ins and outs of Infospace (Nasdaq: INSP), Cisco (Nasdaq: CSCO), Vignette (Nasdaq: VIGN), Amazon.com (Nasdaq: AMZN), and other darlings of the era. He diligently followed the pronouncements of luminaries like Henry Blodget and Goldman Sachs ' (NYSE: GS) Abby Joseph Cohen very closely. And sure enough, his profits were really impressive.

I was impressed, but still a little skeptical. In those days, it seemed like everybody was making great money on tech stocks -- I was, and I wasn't trying that hard. It seemed that you'd have to try hard not to do well.

Of course, it didn't last, and by mid-2000, my co-worker wasn't looking so happy. I got a new job around that time, and I didn't see him again for a while. When I ran into him a few years later and asked him how his investing was going, I was a little surprised by the answer.

He didn't pay attention to the markets anymore, he said. He didn't even bother contributing to his 401(k). He didn't really want to talk about it, either, and he certainly wasn't up for jokes about the mad growth mind-set of the era.

The bursting bubble took him from tech-stock whiz to someone who wasn't even saving for retirement, someone who was putting his future at serious risk. What happened?

Simple. His mindset did him in.

The importance of "mindset"
Stanford psychology professor Carol Dweck has done extensive research on people's self-conceptions and how they drive behavior. One of her insights involves "mindset," the way in which people choose to see where their abilities come from.

According to Dweck, there are two basic mindsets: "fixed" and "growth." People in a fixed mindset tend to believe that talents and intelligence are fixed traits, and that their success is due to something inherent about them. They tend to seek validation of their qualities, and they shy away from challenges that might expose them.

Those with a growth mindset, on the other hand, see challenges as growth opportunities. They believe that talents -- inherent or not -- can be developed and improved with work, education, and practice, and they tend to love learning and be more resilient after setbacks.

There's a continuum between the two, and many find themselves in a fixed mindset under some conditions, or in some life arenas, and in a growth mindset at other times. But some tend strongly toward one or the other, and as Dweck notes, that's a very good predictor of whether and how a person will grow and deal with challenges over time.

To see this in action, consider the story of my old co-worker, a fixed mindset classic. He got invested (so to speak) in the idea that he was a great investor. As long as the market was validating his sense of himself, he was feeling pretty good.

But as soon as things turned, that validation ended. His true skill level was exposed, and that hurt. So instead of taking a deep breath and learning about "boring" stocks like Altria (NYSE: MO) and Caterpillar (NYSE: CAT), he walked away entirely, putting his future in doubt.

The value of not knowing how
I think a growth mindset is a huge key to long-term investment success. Retirement investing isn't all that hard, but it does require a willingness to set preconceptions aside and learn. That's a growth mindset in action, and even experts benefit from taking a fresh look from a beginner's point of view every now and then.

Robert Brokamp, the Fool's resident retirement expert, took a fresh look at retirement investing ideas recently -- and came up with a revised soup-to-nuts approach, complete with model asset allocations and suggested investments.

If I've got you thinking about what you don't know and contemplating a fresh look at your own retirement portfolio, Robert's results -- reported in the July issue of the Fool's Rule Your Retirement newsletter -- are a very good place to start learning. (It's a paid service, but a 30-day free trial gives full access, so click with confidence.

Copyright © 2008 Universal Press Syndicate.