Early Retirement Extreme Forums

I started reading "The Little Book of Value Investing" by Christopher Browne and came across a few assertions that I found somewhat funny. Because this is on the Kindle, I can't pull accurate page numbers.

First: "...sensible investing, which can be found in the art and science of the tenets of value investing, is not rocket science. It merely requires understanding a few sound principles that anyone with an average IQ can master."

Second: "As Warren Buffet has said, no more than 125 IQ points are needed to be a successful investor. Any more and they are wasted."

This corresponds to a theory of mine that many highly-intelligent people are out-of-touch with reality with regards to human ability. A 125 IQ puts one above 95% of other people. That is, it is not average at all! I think many people simply aren't as capable, no matter what degree of education is provided, as some highly-intelligent people assume (who are easily capable of making good decisions with the right amount of education and input).

That said, I haven't taken an IQ test. How am I to judge my own ability and decide if I'm capable of successfully investing my own money versus paying a money manager? And if not, then how am I capable of judging the money managers ability?

We also have the problem of the Dunning-Kruger effect, which if I'm understanding correctly would imply that if I'm not capable, I'm more likely to overestimate my ability to be capable, and if I am very capable then I'm more likely to underestimate my ability. Should I at least take an IQ test and require it of my money managers, or beg a physicist quant to make decisions for me?

None of the above. IQ is really only useful as a conversation subject and Jacob won't do it (don't blame him). The other physicist quants/math wizards (hedge fund managers) are mostly taking a beating the last couple years, so you can't go there.

I'd prefer not to turn this discussion into a political debate on the relevance of IQ, but instead assume it is correlated to intelligence, and acknowledge that a degree of intelligence is required in investing, and go from there.

@workathome -

The principles are simple (middle school math).

However, there are a lot of them and it takes many years of experience/wisdom to understand how to put them into context and when to apply which ones (good judgment and experience).

It requires a steady hand to avoid trading in panic and stay disciplined (high emotional intelligence).

Finally, good investors are very well/widely read (about a book a day or so). They're omnivorous reading everything from FOMC statements and ecology journals to fashion magazines (to understand what consumers are going to buy) and trade journals. Anything from classics to garbage, essentially.

So you should ask your manager to have a couple of decades of industry experience, be well-informed, consistent, and opinionated, and write some "interesting" letters thus demonstrating being well-read. Don't bother looking for IQs. If they do all that, it's probably high enough.

In contrast to that most people have little experience, are completely uninformed (very few people can tell you the current oil price, as well as the USD/GBP rate, what kind of men's wear is currently popular, which is the best-selling CPU, and what the AGW implications are for Arizona), largely inconsistent, changing their mind as the wind blows, and are generally as interesting and well-read as a wet paper bag. They may have a very high IQ though.

Here's the Buffett quote that was referenced:


"Success in investing doesn't correlate with I.Q. once you're above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."

Businessweek, July 5, 1999, http://www.businessweek.com/1999/99_27/b3636006.htm


The second sentence of the quote is the most important, I think. Simple strategies, like value investing, require extraordinary emotional intelligence but only average I.Q.

The marshmallow test is probably more relevant than IQ.

Thanks Jacob for the insight. It makes clear I would need to dramatically increase my daily reading of relevant material to start on a road towards competency.

Bibacula - thanks for pointing out that I misread Browne. Buffett's actual quote makes it much clearer, implying a scaling from average to 125 for results, while I quite incorrectly read Browne as "you only need 125 IQ points to be a successful investor" as if it wasn't very much.

Having been dragged to an IQ test as a child, I can tell you first hand that high IQ means nothing at all when it comes to investing (and most other things). As pointed out by workathome, you mostly end up doubting all your decisions because you become aware of all the factors. Jacob is right there when he points out that making sound financial decisions depends heaviest on knowledge of relevant information, i.e. almost everything. The only thing I've ever noticed about myself compared to others is I tend to absorb information somewhat faster. That's about it; I still need the information. You don't magically see all connections in the investing world (or other things), that's called being a genius.

Index investing requires enough intelligence to click a mouse. it's basics can be explained to an average 2nd grader in 10 minutes. and long term, it'll make money.

if your capabilities are lower than that, odds are, you aren't an independent adult. Now if your definition of success is higher, well, now you are talking about eliminating the vast majority of folks, due to simple lack of interest, emotional maturity, attention span, etc. so why worry about the elimination of one more factor (IQ)?

Investing isn't unique in this. if you want to be a successful triathlete, you can easily find 95% of adults self selecting out of the qualifications, as well.

Here in the Netherlands research has shown that people with higher education (university) are as susceptible to bad investments (very high fee vehicles) as less educated people. On average they have a higher IQ and think they understand investing better, but in practice they fall in similar traps then less educated people.

According to that scale I should be a great investor, but all the investing research I've done makes it clear that I'd be awful. Also, having tested with a relatively high IQ, I can tell you that it really just tests your ability to think in certain ways (patterns and recognizing what doesn't belong) and certain kinds of knowledge. It's not relevant for most things.

Jacob's post seems a lot more insightful than the book that was quoted.

Well, good news for me. Just need to focus & dramatically increase reading. I'll guesstimate my own IQ around the 115 level, based on college education + high-achievement in masters level courses. Certainly not near the same league (125+) as physicists though.

I e-mailed Michael Burry's company, but they're not taking private capital.

IMHO I don't think a high IQ is any better than a moderate IQ in the investing game. I have worked with some pretty high IQ types and they were pathetic investors. The money game seems to require a kind of smarts but I marvel how little money my pals who got the high SAT scores have now. Those who didn't hit the options lottery are a pretty sad bunch. And we were all physicists and EEs.

As I think about it these nerds used to call me a generalist while laughing that I wasn't good at any one thing like them. So maybe that is it. They can solve really tough differential equations all day analytically but they can't pick a stock.

Maybe there is some risk aversion also baked into the high IQ. Maybe they are afraid to be wrong. Maybe they cannot admit they know nothing. One thing I observed is hyper intelligent physicists can be quick to give reasons for observed phenomena but when asked to bet monthly paychecks on it they shrink away. Proposing a bet was like putting water on a raging fire during nerd arguments in my experience. The loudest mouthed most arrogant nerds were scared to risk capital.

In my own family it was always pointed out I was the dull sibling and I agree my IQ was tested substantially lower. My sharper and less prosperous brother and sister hire financial planners. They're dumb with money. Again, all anecdotal, flame at will.