Source/Contribution by : NJ Publications
Intelligence is a word that people love when added to their name. It is a common belief that a person with high IQ is likely to succeed in all endeavors of his/her life.
But, when it comes to investing, a high Intelligence Quotient (IQ) is no guarantee of investment success. One of the biggest misconception people have about investing is that only one with a considerably high IQ can pick out the successful stocks and earn big money through investing. However, in reality, intelligence might not be the most important foretelling factors of investment success.
Even Warren Buffett, one of the world’s most influential and successful investor, said "Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ."
What if I tell you, Mr. X bought stock of Y company @180 and exits the stock @360, booking a 100% profit. But just months later, as the market rocketed up and seeing his friends becoming rich, Mr. X re-enters the stock @680 and exits the stock @175 when it crashed. You might say - Ha! the guy must not be smart or perhaps not well informed.
But, you will be astonished to know that Mr. X was Sir Isaac Newton, the greatest mathematician and scientist of his time.
He was a conservative investor most of his life. Yet, in 1720 when the london stock market started booming he got caught up in the South Sea Company stock market mania and lost half of his life’s savings. A man who calculated logarithms to 50 places had failed to do the math.
Albert Einstein, one of the greatest scientist, invested almost his entire prize money from the 1921 nobel award in the stock markets. However, he lost a bulk of it when the markets crashed in 1929.
Einstein and Newton, both were brilliant and numbers were their lifelines; all their scientific calculations were based on time risk and mathematics. Yet, none of this worked in their favour when it came to the investment in stock markets.
If high intelligence was the key to successful investing, top business school professors and economists would be the wealthiest guys on the planet.
Financial trading offers a perfect example of how conventional measures of intelligence are irrelevant to success. The market does not care where you went to college. It does not care what your grades were in statistics class. It does not care about the valuable connections you made in business school.
Then, what's the recipe for investment success?
Warren Buffett, said: “To invest successfully does not require a stratospheric IQ. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework.”
According to Michael Batnick, director of research at Ritholtz Wealth Management,
"Emotions are a far more important driver of success than IQ. What made Warren Buffett such a great investor was not just superior intellect, but emotional fortitude to stay true to his strategy during deep drawdowns,"
IQ may be useful when it comes to analyzing complicated investments. However, patience, discipline and perspective are all more closely-tied to Emotional Quotient (EQ) than IQ.
The most iconic investors of all time, including Warren Buffett, Carl Icahn, George Soros and Benjamin Graham, have all demonstrated emotional intelligence in their investment decisions.
EQ is about the ability to control our emotions from running wild and interfering with our investment rationale. Examples are: not being influenced by peers or market rumours, not getting too excited when we spot a good investment and buy beyond our means or position limits, not chasing the stock as it goes above our target buy price for fear of missing out, not losing our nerves as the stock keeps on rising or falling, etc.
If we have the IQ to spot a good investment but do not have the EQ to hold on to it until its full potential is realised, our competency as investors will be diminished.
Sometimes it doesn't matter how much complex quantitative analysis you perform on a stock. At the end of the day, share price is determined by the market and not by a number that an algorithm spits out. Financial markets are made up of millions of people around the world. Understanding how other investors are feeling, identifying why they are buying and selling and anticipating what they will be doing next all involve emotional intelligence.
Warren Buffett has pointed out that you don't have to be brilliant to become a great investor. Buffett said:
"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."
So in Buffett's eyes, the right temperament and not high intelligence is the key to profitable trading and investing.
Our emotions are extremely intertwined with our money and our financial decisions often have more to do with our EQ (emotional intelligence) than our IQ. To experience better outcomes, we need to make better decisions. To make better decisions, it’s crucial to better manage our emotions and raise our emotional intelligence.
Investing is no rocket science. To be a really good investor, along with intelligence, you should also have high EQ.
