Investing requires more than intelligence: Mensa vs Market
Does intelligence equate with investment management success?
What might it take to succeed in investing? Intelligence alone? You have to be intelligent to get into Mensa. They only accept applicants with IQs that place them in the top 2 percent of the population. One might expect that if Mensa members formed an investment club, their returns would exceed market averages, or at least match them. In actuality, between 1986 and 2001, while the S&P 500 was returning a robust 15.3% annually, the Mensa Investment Club had average returns of 2.5% per year.
How did these geniuses and near geniuses manage such poor results in such a strong market? Their basic problem was a lack of discipline. Instead of using their intellects to determine a sound investment approach and sticking with it, they got sidetracked into exploring trendy new tools and theories of how to predict market trends. When one strategy didn’t work they tried another. They made frequent trades, thus increasing their transaction costs. In short, they provided a perfect example of Warren Buffett’s comment: “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.” Common sense and discipline will beat erratic genius every time.
Investing with Discipline
I acknowledge that discipline may not be everyone’s favorite word. For many of us, it is a reminder of all those things we ought to be doing but don’t get around to. The word can leave us feeling partly guilty and partly annoyed. For others, the word prompts mental images of childhood mischievousness and consequences. For our discussion, becoming financially strong, the pertinent definition is “a method of practice; mastery.”
In investing terms, discipline is not as harsh a taskmaster as it may be in other situations. If you want to lose weight, for example, you must adopt different eating and exercise habits. Sticking with that commitment demands a large share of your daily allotment of self-control. By contrast, investment management demands less frequent and more strategic forms of exertion. Moreover, you can delegate or automate a large chunk of the effort required.
It is imperative that you have discipline when it comes to financial matters, but by “you,” I do not necessarily mean you personally. I mean you in the larger sense of your support team. The idea is to minimize the activities that demand your personal effort. We all have personal limitations in terms of our time, energy, and attention. The lion’s share of it can be outsourced.
Joseph J. Janiczek is the founder of Janiczek Wealth Management. This article is adapted from his book, Investing from a Position of Strength.