Why Being Smart Does Not Guarantee Investing Success
In Singapore, we’re constantly being judged on our cranial capacity in schools starting from a young age. Parents of primary school children and most working adults (that’s me!) would be very familiar with the Gifted Education Programme (GEP), which aims to “develop intellectual rigour, humane values and creativity” in intellectually-gifted children.
Intelligence is important and nurturing it is vital. But being intelligent in certain areas does not necessarily translate into investing or money-smarts.
I think most would agree that MENSA members would probably be amongst the smartest group of people around, given that they’re a group comprised of individuals with IQs belonging to the top 2% of the population. And if intelligence would equate to investing success, then these group of individuals would stand the highest chance of delivering stellar returns over time.
But, did you know that the investment club of MENSA members in the USA only managed a meagre return of 2.5% per year for 15 years ending on 2001 and lost to the S&P 500 Index (a broad, stock-market index used as a collective gauge for the American stock market) by a laughable margin of almost 13% per annum in the process?
That interesting nugget of information, recounted in Larry Swedroe’s book, The Quest for Alpha: The Holy Grail of Investing, flies in the face of anyone who thinks intelligence is incontrovertibly linked to investing-smarts.
That’s not all. A recent article from the Sunday edition of The Straits Times with the title Docs may not be in the pink of financial health recounts how highly educated doctors and lawyers in the USA seem to exhibit financial-IQ that’s way below their overall smarts. In fact, one of the most spectacular melt-downs in the history of professional money-management happened to a hedge-fund called Long Term Capital Management that boasted PhDs and Economics Nobel Prize winners in in its ranks.
So, it seems that being highly educated or having a high IQ does not necessarily confer an edge to individuals in their financial activities. The MENSA investment club director thought he could leverage on the intelligence of his members to out-guess the market by following exotic short-term trading strategies but as we know, it failed. It’s sad to say that his club’s returns could have been a lot better if he realised that frequent trading is hazardous for long-term wealth.
Instead of betting on intelligence, perhaps investors should bet on discipline instead. That includes having the discipline to buy stocks when they’re cheap or undervalued; to hold onto shares with solid underlying business fundamentals even if its shares start falling; and to have the patience to invest for the long-term (measured in years or decades, not months or weeks!) to build lasting wealth.
Investors in companies like engineering firm Boustead (SGX: F9D), instant-beverage manufacturer Super Group (SGX: S10) and multinational conglomerate Jardine Matheson Holdings (SGX: J36) would have gotten gains of more than 1,000% if they had the patience to simply hold on to those shares for a decade.
That’s right; investors with the discipline to remain invested tenaciously through the difficult Global Financial Crisis (GFC) of 2007-2009, which saw their stock prices tank, and the more recent Eurozone debt debacle could have gotten such outsized returns from those growing businesses.
Indeed, investors who exercised discipline to invest when stocks are cheap would have done very well by investing even in a plain-vanilla Straits Times Index (SGX: ^STI) tracker like the SPDR STI ETF (SGX: ES3). The STI had hit a Price-Earnings multiple of 6 near the trough of the GFC, way below its historical average-valuation of a PE in the high-teens, suggesting that the stock market in Singapore was really cheap. Turns out, the STI went on a 130% rally from its bottom on March 2009 to current prices and investors in the SPDR STI ETF would have gotten very similar returns, more than doubling their money in the space of four years.
Warren Buffett once said that “investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ” and that’s very true. Without discipline, intelligence alone can’t get an investor anywhere.