Warren Buffett: Success in investing doesn't correlate with IQ
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Warren Buffett
The efficient market hypothesis does not preclude the possibility that share prices could be improved by a buyout or activist shareholder.
> If it were, as Buffett has noted frequently, his success would have been completely impossible. Indeed, the most money is made from the highest inefficiencies.
Survivorship bias? I don't know, but in any case market efficiency is a very general claim, it doesn't rule out some "special" people with innate talent to predict future prices.
>And there's no inherent or guaranteed mechanism that drives under or over valued stocks back into any theoretical fair value line. Stocks are governed by human judgment ultimately - which typically swings emotionally to extremes - there's nothing efficient about that.
Just empty rhetoric. Look into the literature of econometric tests of the efficient market hypothesis.
The "efficient market hypothesis" is one of those hypotheses that has Strong and Weak versions, with the weakest versions being obviously true, and the strongest versions being equally obviously false, and practically pseudo-religious. The strongest version of the Strong Efficient Market Hypothesis does indeed rule out the existence of such exceptional people (or at least their ability to profit), because it says that the market will always instantaneously reflect the knowledge of all participants. Such a prognosticator would find their ability to beat the market asymptotically approach zero, as his attempts to take advantage of opportunities cause those opportunities to evaporate in his hands at the instant of investing.
But I get your point, the single sentence
"Put as much of your income into VFINX as you can afford."
gets you 95% of the way there - doubtful that you will really increase your performance that much by studying books like these - http://www.amazon.com/Top-Investment-Books/lm/R3OSLG8NX7CO8W.
Temperament really is everything, and investing and/or gambling brings out the worst in people.
I used to play a lot of poker (which I consider a pretty good proxy for investing) in college and it was amazing to me how some of my smartest friends could be so horrendously bad at it.
For example, one of my Math major friends just couldn't control himself. He'd start with e.g. $1,000 playing online, get up to $10,000 in a few hours, and then blow it all soon after. He repeated this cycle too many times for me to count.
One of my pre-med friends was so smart and so confident both academically and socially, but he'd be the most timid and passive person at the poker table, never being able to raise or bluff anyone and usually losing all his money to more aggressive players.
I'd also venture (no pun intended) to say that most VCs are terrible investors as well - Following the herd, short-sighted, and little to no appetite for big ambitious long-term investments of time and money.
Of course, that also requires more than just intelligence--you won't get far without the discipline to test everything thoroughly and to follow the strategy even if it loses money in the short term.
Also, I imagine the two styles of investing require vastly different sorts of intelligence and are best suited to people of different temperaments. Making decisions about investments is very different from making decisions about how to make decisions about investments :P.
The title conveniently left out "once you're above the level of 125.", which yields a completely different statement from the title.
What Warren Buffett said actually allows room for IQ to correlate to success in investing. From the way he said it, it actually seems as though he believes that IQ might correlate with investing under 125.
AFTER EDIT: Dean Keith Simonton's several writings on "genius" in a wide variety of domains provides the citations to other authors for that IQ figure.
That is an empirical question, and the historical answer is that that IQ level suffices.
He was in a different field, but Richard Feynman's mathematical genius is in dispute by nobody. However his measured IQ is widely quoted at 125.
IQ is somewhat correlated with intelligence, which is somewhat correlated with mathematical ability. You cannot be a mathematician without the mathematical ability. But your ability may or may not get fully reflected on an IQ test.
"Feynman was universally regarded as one of the fastest thinking and most creative theorists in his generation. Yet it has been reported-including by Feynman himself-that he only obtained a score of 125 on a school IQ test. I suspect that this test emphasized verbal, as opposed to mathematical, ability. Feynman received the highest score in the country by a large margin on the notoriously difficult Putnam mathematics competition exam, although he joined the MIT team on short notice and did not prepare for the test. He also reportedly had the highest scores on record on the math/physics graduate admission exams at Princeton. It seems quite possible to me that Feynman's cognitive abilities might have been a bit lopsided-his vocabulary and verbal ability were well above average, but perhaps not as great as his mathematical abilities. I recall looking at excerpts from a notebook Feynman kept while an undergraduate. While the notes covered very advanced topics for an undergraduate-including general relativity and the Dirac equation-it also contained a number of misspellings and grammatical errors. I doubt Feynman cared very much about such things."
http://www.psychologytoday.com/blog/finding-the-next-einstei...
http://www.nature.com/news/chinese-project-probes-the-geneti...
The psychologist who sent me the link, and another psychologist colleague of his who was copied on the same email, are both experienced and astute human behavior geneticists (the other recipient was a math major as an undergraduate who became a psychology research after a mathematical career) and they don't agree with Hsu's conclusions about current data.
The sample size is indeed too low to have the statistical power to draw any solid conclusions. However it could be large enough to produce a set of candidate genes which reasonably might have small individual impacts on IQ. If you then could do a follow-up on a large population just looking at those genes, some of those candidates are likely to prove out.
It is a fishing expedition. You never know what you'll find. The odds that you come back empty handed are high. But it is still worth doing.
But to excel in any specific field does NOT so much require top mental abilities of all kinds as exceptional ones required by that field. Not having a decent baseline of all abilities will be a handicap - you need that - but a Richard Feynman does not need to be a genius grammatically.
IQ tests are a very limited tool. They test a breadth of abilities and can indicate that you can do reasonably well at many things. (Indeed for a wide range of jobs, an IQ test is a better predictor of performance than your performance on the job interview!) However they can't recognize that you're truly exceptional at any particular thing.
An IQ of 120 is the top ~10%. Here's a 25 year longitudinal study [1] of over 1,500 students that were all in the top 1% and it shows significant differences between the lowest and the highest quartile (who were in the top .01%):
> Ability Differences Among People Who Have Commensurate Degrees Matter for Scientific Creativity > ABSTRACT: A sample of 1,586 intellectually talented adolescents (top 1%) were assessed on the math portion of the SAT by age 13 and tracked for more than 25 years. Patents and scientific publications were used as criteria for scientific and technological accomplishment. Participants were categorized according to whether their terminal degree was a bachelor’s, master’s, or doctorate degree, and within these degree groupings, the proportion of participants with at least one patent or scientific publication in adulthood increased as a function of this early SAT assessment. Information about individual differences in cognitive ability (even when measured in early adolescence) can predict differential creative potential in science and technology within populations that have advanced educational degrees.
This is just one example, but the results seem to be pretty consistent.
[1] https://my.vanderbilt.edu/smpy/files/2013/02/ParkPsychScienc...
Would you be able to send me some more info? Email's in my profile.
It's an educated guess, sure. And it might be entirely correct. But I'm sure Buffett has lots of useful advice that people will take at face value, so there's no need for him to dress wisdom up with unsubstantiated scientific language.
It's almost as if he's trying to channel Malcolm Gladwell's claim in "Outliers" that any IQ points above 120 don't provide any advantages.
I'll let Steven Pinker to set the record straight [1]:
> It is simply not true that a quarterback’s rank in the draft is uncorrelated with his success in the pros, that cognitive skills don’t predict a teacher’s effectiveness, that intelligence scores are poorly related to job performance or (the major claim in “Outliers”) that above a minimum I.Q. of 120, higher intelligence does not bring greater intellectual achievements.
[1] http://www.nytimes.com/2009/11/15/books/review/Pinker-t.html...
He's not saying high I.Q. doesn't have its advantages at all. He says overly high I.Q. doesn't give you an advantage when it comes to investing and there are plenty of examples.
Probably the biggest one from your M.I.T. alumnus, a partner in Long-Term Capital Management[1], creators of the Black Scholes Formula for options pricing. Their firm lost billions of dollars because said "perfect" hedging formula failed to account for shit going south in Russia one day.
It doesn't take a genius to observe a few really smart guys drawing some conclusions based on Brownian Motion, and the thing works most of the time, until someone tosses a boulder into the particle system and fucks everything up.
Don't forget about the fellow who whined: "I can calculate the movement of the stars, but not the madness of men" when he lost today's equivalent of 2.5M in the South Sea Bubble[2]. That'd be Sir Isaac Newton.
[1] https://en.wikipedia.org/wiki/Long-Term_Capital_Management [2] http://en.wikipedia.org/wiki/South_Sea_Company
I'm just saying that Buffett's quote sounds like the abstract from some scientific paper. I'm surprised he didn't include a p-value.
It's fairly easy to find things that are undervalued and then sit on them. The problem comes when you enter the trade and real, serious amounts of money are on the line. You know like the "thousands of hours you put into your life savings" kind of money.
I distinctly remember the first time I put on a significant trade (significant fraction of my total net worth). My heart was beating, adrenaline was pumping, and my hands were shaking.
I had the same response as people who jump out of an airplane, or experience some other type of stressful situation. I would watch that trade like a hawk for hours at a time (it was fairly concentrated), and my emotions pretty much followed the ticker. As the stock bubbled up I was elated; as it fell, I quickly became depressed. I couldn't take it, and after one day I exited my position at a loss of $250. Probably one of the most stressful periods of my life. This is even after I had paper traded for years beforehand, and had a strong conviction for both my valuation and the stock at hand.
I got myself together and told myself that the next time the stock was at valuation minus 40% I would go all in, and I wouldn't touch, look at, think about, or check on the stock, and my holdings for at least 3 months; a total news blackout.
That situation soon arose and I did just that. The second time around my response was similar, but more muted, and my resolve stronger. Once in, I kept my promise and didn't do anything for 3 months and by the end of that period I was up 30%.
I then reviewed the history of the trade and noticed that had I been watching the market day in and day out, I would've experienced periods over that time where I would've lost 20-30% in one day. After noticing that, I knew that I could steel myself against these kind of movements by simply looking at the prices once a day and basically telling myself that "This too shall pass". Over a period of one year I basically trained myself to stop caring what the market thought, and successfully experienced draw downs of 20-30% without reacting one bit. Market movements no longer effect me emotionally (at least on the same level). Losses don't hurt any more (I have full faith in my own valuation and the stock) and gains no longer made me happy. Just by experiencing the pain and elation so many times, over such a long period of time, trained me to basically become numb to any changes, and in turn my response to market movements essentially flatlined.
Since then I've been up over 700% over the last year and a half, and I know that wrestling with my emotions has been, by far and away, the greatest battle I've had to fight when investing. Not finding good companies (easy), not valuing them (excel spreadsheets), not executing the trade (although my hands still shake whenever I try a new derivatives strategy, which is good), but taking the day-to-day fluctuations of 10-20% in my total net worth day-in and day-out without giving one single shit.
And that, I can tell you, is hard to do. Very hard. Most people won't be able to take it, with the global financial crisis being the prime example. When things go to shit, they freak out (just like I did at the start), and do the most idiotic things you could possibly imagine (not their fault). They go to cash when everything is cheap. The go to stocks when everything is expensive.
All because of emotions.
Emotions rule. And I practice emotional arbitrage.
Most people never trade stocks that move that much, that contain within them that level of risk, or deal with losses as often as I have had to do.
The problem with down markets is they happen so rarely that most people who invest in good, solid companies don't know how to react them when they do enter one - just like I didn't at the start of my trading career.
When every other week has one losing significant fractions of their total net worth relatively quickly, then the global financial crisis just becomes another day in one's year.
I see what people call black swans on a monthly basis. They no longer surprise me.
I usually concentrate most of my money in the one investment that I believe would provide me with the highest probability of high returns.
And yes - I do trade options, and no I don't need a lecture on diversification, I know what I'm doing.
I think the problem physicians face is that they spend everyday all day as the smartest person in the room, and are paid to make snap decisions that are rarely scrutinized. That is a recipe for disaster when it comes to investment.
I personally don't believe markets are always efficient, but I always think from the perspective of why I think the market is right or wrong.
I think a better way of describing the market is as a competitive game. Roger Federer may not play tennis "perfectly" -- what would that even mean? -- but you know what's going to happen if you or I step out onto the court with him.
Marginally related: nice old article about Taleb vs Neiderhoffer: http://www.gladwell.com/2002/2002_04_29_a_blowingup.htm
Both brilliant guys, IQs off the charts, but the difference is clearly temperament. Neiderhoffer was the genius and squash champ at Harvard. The typical M.D. probably has life experience closer to his.
In contrast, Taleb writes a lot about his family suffering through the Lebanese civil war. I know who I would trust with my money :)
Even professional mutual fund managers systematically underperform the market.