Month: February 2023

No, you don’t need a high IQ to be a successful investor

“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.”

Charlie Munger

Do you know your intelligence quotient (IQ)?
If you are curious and you want to measure it, just go to the Mensa website and take the test. I did it, it is a challenging experience.

Did you take it?
Are you in the best 2% percentile? Or in the best 5%?
Now please listen: it doesn’t matter!
YOUR IQ IS NOT IMPORTANT TO ACHIEVE SUCCESSFUL RESULTS IN INVESTING. At least, it is not important to be at the top of the IQ ranking.

It is a common mistake to assume that high-IQ people take the best investment decisions. The point is that good investments depend on the right “temperament”, not on a high IQ – which in some cases may even become detrimental, due to behavioral biases.

According to Wikipedia, temperament broadly refers to consistent individual differences in behavior that are biologically based and are relatively independent of learning, system of values and attitudes. But this definition is not useful for the specific topic of investments.
I found the book of William Green “Richer Wiser Happier” a wonderful source of examples of successful temperament, as he describes the distinctive traits of some of the world’s greatest investors – all of them being learning machines and nontribal freethinkers.
Just to give you a short idea of some of these traits as described in the book:

  • Mohnish Pabrai: cloning others’ best ideas
  • Sir John Templeton: a self-disciplined, nontribal investor
  • Nick Sleep and Qais Zakaria: focus on “destination analysis”, not on short term
  • Tom Gayner: adopting “directionally correct” habits
  • Charlie Munger: avoiding standard stupidities

As you can understand, these are all temperament competitive advantages, not IQ advantages.

Do you need to match 100% the temperament profiles of these investment masters?
No, you do not need to. But you should learn from them and selectively adopt specific habits or methods: you do not need to become like them, but you can improve yourself during your life and become the best version of yourself.

Are you going to follow my advice? Then, have a nice life journey!

Buy it for the long run

“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

Warren Buffett

Have you ever bought a hot stock, planning to sell it in a short time with a significant gain?

Do not lie. You did it.

When we listen to financial news or when we get a suggestion from a friend who is an expert, it is quite normal to get excited about a stock. Very often, our mind pushes us to action and we buy.
And in many cases the price of that stock begins to drop.

No, you are not unlucky. That’s normal.

A hot stock is often bought in the very wrong moment: after a nice good price run. That’s the moment in which our brain fools us, because it projects in the future the same recent positive trend.

What can we do to avoid that?
Just take a seat, grab a cup of coffee and try to be rational.
First of all, you have to be aware that there is a very high probability that the stock price will fall after you buy it – I am not aware of any worldclass investor who was able to buy stocks exactly at a price minimum point, so how can you be better?
Your best approach is to really avoid any “hot suggestion” and do your homework, which is to analyse any interesting stock by understanding the underlying business and its potential value, to see if it is cheap enough to buy or not. Value vs price, remember?
If you then decide to buy, then do it for the long run. Are you willing to keep that stock in your portfolio for the next 10 years?
To reinforce the quality of your decision you should also think of a no-sale rule and stick to it; my proposal is that when you buy a stock you should oblige yourself to avoid selling it at least for the next 2 years (unless the investment thesis changes, of course).

It sounds difficult, but it really helps.