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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Being smart may not help

Posted by Muthu on July 23, 2017

Mensa is an organisation founded in 1946. You can become a member if your IQ is within top 2% of the population. Higher IQ would be of advantage in many aspects of life. When it comes to investing, higher IQ is often counterproductive.

Eleanor Laise evaluated the performance of Mensa investment club for a 15 year period, from 1986 to 2001. When top notch intelligent people manage money, you would expect extraordinary results. During the above period, S&P 500 index provided an annualised return of 15.3% whereas Mensa investment club was able to generate a paltry return of 2.5%. Mensa underperformed index by a whopping 84%.

What contributed to Mensa’s failure? They did not have a coherent investment strategy. They kept changing their strategy almost every quarter. They repeatedly tried to time the market, chased performance, focused more on the fads and fashions, was over confident, lacked discipline and long term orientation.

That’s why Warren Buffett said, “If you are in the investment business and have an IQ of 150, sell 30 points to someone else. You do have to have an emotional stability and an inner peace about your decisions. It is a game where you are bombarded by minute-by-minute opinions. It’s not a complicated game. It’s simple, but it’s not easy. You have to have an emotional stability.”

I don’t know what my IQ is. It should either be average or below average. But I’m able to reasonably do well at investing (after a decade of painful learning) because I’ve evolved an investment strategy and stick to the same through ups and downs. Long term orientation, patience and discipline are the only edge I possess. We do our best in nurturing and sustaining the same traits in you.

Once you have a proper investment strategy, what is required is emotional intelligence. Ignore noise, ride the ups and downs, stay the course, have long term orientation, stick to the investment discipline with extreme patience. If you are able to do this, you’re most likely to end up rich.

The idea is not to criticise people with higher IQ but to highlight it is emotional stability and not higher IQ which would make you a successful investor.

4 Responses to “Being smart may not help”

  1. Mahesh said

    Investing is more about EQ than IQ

  2. KK Venkatachalam said

    Dear Muthu,

    You continue to write simple yet realistic articles. If only one just follows your advice and stays quiet, I am sure that person would be satisfied with his / her own investments.

    Yes, it is painful (a decade of learning). That has actually given you an opportunity to adopt a strategy and stick to it.

    Keep writing such good articles. It is always nice to read.

    Best wishes,
    Venkat

  3. Abu said

    Fully agree with you Muthu. One of the greatest geniuses the world has ever produced and a man of high intelligence with an astonishing IQ of 190, the one who invented calculus and conceptualized the three laws of motion, Sir Isaac Newton was a lousy investor who lost all of his life savings in stock market. For more information pls google Newton and South Sea Company.

  4. Fully agreed. More intelligent people suffer from visible signs of “prove me right/wrong” hysteria. And that’s the root cause of all the problems. They cannot take a wrong in their stride and face it with humility. I have seen many highly qualified and intelligent people from Harvard, Wharton and IIMs taking wrong calls in their life but would never agree to it and would keep on compounding their wrong decisions.

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