Financial Literacy

Why Temperament Trumps Intelligence in Trading and Investing

  • You would expect that the world’s most intelligent business experts would also be the most successful investors, but that’s not the case.
  • Today, Nicholas Vardy explains why a high IQ is not the key to success in investing and trading.

Throughout my investment career, I have studied many of the world’s leading traders and investors.

The majority of these folks were smart by most conventional measures.

But very few had the sky-high IQ of a mathematics professor like Renaissance Technologies founder Jim Simons.

Warren Buffett agrees that high intelligence is not necessary to be a world-class investor.

As Buffett put it…

Success in investing doesn’t correlate with IQ 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.

I will go a step further than Buffett.

Being too smart is a hindrance to successful investing.

Greatest of All Time

Click here to watch Nicholas Vardy’s latest video update.Here’s why…

Intelligent people are used to being 100% right. After all, that’s the grade they usually got on every test they took.

Smart people also put a lot of thought into their decisions. They are emotionally invested in them.

As a result, the brilliant have a tough time admitting when they are wrong.

Some even act with “righteous indignance” when someone challenges their model of reality.

Translated into the world of investing and trading, it means they rarely cut their losses.

After all, they are never wrong. The market is.

Think about it this way…

If academic prowess were the key to successful investing, business school professors would be the wealthiest investors on the planet.

Yet that is clearly not the case.

Instead, the world’s top investors and traders in the Forbes 400 dropped out of academic programs as often as they completed them.

Ironically, none of these future billionaires could have gotten a job as a professor at any business school.

Street Smarts Trounce Book Smarts

Book smarts are almost irrelevant to extraordinary investment success.

The market does not care where you went to college.

It does not care what your grades were in economics class.

It does not care about the valuable connections you made in business school or even whether you went to business school at all.

This was driven home to me early in my investment career.

At that time, I spent three years studying at the knee of one of the United Kingdom’s star fund managers. I had hoped that his experience and wisdom would rub off on me.

Sadly, I came away from the experience frustrated.

At the end of three years, I hadn’t learned a darn thing.

He said he was just a stock picker. Yet he was unable to communicate his investment style. I discovered no method to his madness.

As an aside, this star fund manager, as the Brits say, “left school at 16.”

Yes, one of the most successful investors in the U.K. was a high school dropout.

Lessons Learned

His “secret” is now clear to me: He made outsized contrarian bets on small cap companies.

But more importantly, I learned that pontificating on investment ideas calls on a different set of skills than acting on them.

I came to think of market strategists who never make concrete recommendations as being like the radio color commentators for Pirates baseball games I listened to as a kid in Pittsburgh.

Sure, these commentators knew a lot about baseball. They could recite endless reams of statistics on each player and team.

But they weren’t out there swinging a bat.

The analogy to successful trading or investing is clear.

You don’t need genius-level capabilities to be a successful investor for the same reason baseball players don’t need a high IQ.

Commenting on the investment game is a different skill than actually playing it.

The Takeaway

How can you use this insight to improve your trading and investing?

If you are smart, be particularly careful. Don’t assume that your decisions will always be right.

Bring that attitude to your trading, and you will have your head handed to you in short order.

If you have average intelligence, take comfort that you have all the brains you’ll ever need.

After all…

Warren Buffett was rejected from Harvard Business School.

George Soros repeatedly failed his financial analyst exams – and eventually gave up.

Yet this pair of octogenarians are among the two best investors the world has ever seen.

So Warren Buffett is right.

In investing and trading, temperament trumps intelligence.

And that’s an insight you can take to the bank.

Good investing,

Nicholas


About

An accomplished investment advisor and widely recognized expert on quantitative investing, global investing and exchange-traded funds, Nicholas has been a regular commentator on CNN International and Fox Business Network. He has also been cited in The Wall Street JournalFinancial TimesNewsweek, Fox Business News, CBS, MarketWatch, Yahoo Finance and MSN Money Central. Nicholas holds a bachelor’s and a master’s from Stanford University and a J.D. from Harvard Law School. It’s no wonder his groundbreaking content is published regularly in the free daily e-letter Liberty Through Wealth.

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