Colonel Olcott was co-founder of the Theosophical Society in 1875 with William Q. Judge and an associate of Helena Blavatsky. After recovering from dysentery, he served for four years as Special Commissioner of the War Department, investigating fraud, corruption, and graft at the New York Mustering and Disbursement Office. It was at this time that he was made a Colonel. When Lincoln was assassinated, Olcott was appointed to the three-man special commission to investigate the murder.
His first experience with psychical phenomena came in 1874 when the New York Daily Graphic sent him to investigate the phenomena of the Eddy Brothers in Vermont. Olcott spent ten days at the Chittenden farm and came away convinced of the authenticity of the phenomena. He summarized what he had experienced in fifteen articles, which launched his career as a psychical investigator.
His next big opportunity came along, which was the Holmes scandal. Nelson and Jennie Holmes, husband and wife, were spiritualistic mediums who had been accused of fraud. Helena Blavatsky then arranged for further seances and for Olcott to witness them to prove their authenticity. She and Olcott had met at the Chittenden in Vermont. It was rumored that the Holmes, particularly Jennie, had impersonated Katie King, the daughter of the spirit John King, in a previous sťance. In the seance which Olcott witnessed, John King was said to have spoke again, clearing his daughter of all wrongdoing and "rapping out" an account of what actually occurred before. His statement cleared the Holmes, and Katie King appeared in white again. Olcott knew it was not Jennie Holmes whom he had securely tied up. This strengthened Olcott's belief in psychical phenomena.
After the Eddy and Holmes investigations Olcott was thought to be a creditable psychical researcher. When the professors of the Imperial University of St. Petersburg, at the wish of the Grand Duke Constantine of Russia, decided to make a scientific investigation of Spiritualism, they asked Olcott and Helena Blavatsky to select the most qualified American medium. Henry Slade was their choice.
From their first meeting at the Vermont farm Olcott seemed fascinated by Helena Blavatsky's psychic power. In those early days Helena Blavatsky professed to have been controlled by the spirit of John King during which she specialized in automatic writing and supernormal duplication of letters and other items. In the presence of Olcott and the Honorable John L. Sullivan she produced a $1,000 banknote which dissolved into a drawer. These feats occurred after the founding of the Theosophical Society in 1875. Olcott, himself, witnessed more of the Magnificent acts" performed by Blavatsky than anyone else. This was another reason why he eagerly assumed the presidency of the Society.
Eventually, there was a public espousal of Buddhism by Colonel Olcott that served to popularize the religion in Western countries. He converted to Buddhism in Ceylon in 1880. His Buddhist Catechism (1881) had been widely studied by Western Buddhists, and versions of it are still in print.
Colonel Olcott also performed "magnetic healing":
At 5 o'clock in the morning the whole courtyard and veranda of the houses we stopped in were crowded with the lame and the cripple. At every station, the railway platforms were crowded with the sick lying in wait for him . . .. I saw him begin curing the sick at 6 in the morning, and never sit down till 4 p.m.; and when stopping to eat a plate of vegetable soup have to leave it to cure a possessed woman and his plate of soup remaining unfinished at 7 p.m. and then he would sit down and dictate to his Secretary till 2 in the morning; having only three or four hours sleep. -- The Letters of H. P. Blavatsky to A. P. Sinnett, p. 61
After Blavatsky's death, Olcott (President-Founder), William Q. Judge (Vice-President of the Theosophical Society and co-head of the Esoteric Section), and Annie Besant (President of the Blavatsky Lodge, London, and co-head of the ES) were the leading officials. Long-standing personal and policy tensions between Olcott and Judge (similar but far greater than those between Olcott and Blavatsky) magnified the conflicts that eventually split the Society in 1895. After the division, Olcott continued his theosophical work with Annie Besant, traveling widely, lecturing and establishing new Branches.