The equation (You + Smartness = Rich) appeals to common sense. Its natural to believe that smart people know things that help them get rich. Isn’t it? Even I believe that on an average, smart people will be far wealthier than no-so-smart ones.
But still, when it comes to investing in stocks or managing money in general, there doesn’t seem to be much correlation between being extremely smart and being extremely rich.
Why is it so?
Jason Zweig has something to tell us about this (source):
It’s remarkable how much you need to learn in order to discover how little you ever needed to know. Smarts are overrated; the world is awash with smart people. What’s in short supply is wise people.
Apply the basic principles of the wisdom you’ve acquired from your experience elsewhere to investing, and you will probably fare better than many “smarter” investors.
Be skeptical, think for yourself, ask for evidence and probe it for weakness, control your emotions, distrust the fashionable, remember to assess not just how much you will make if you are right but how much you will lose if you are wrong — steps like these are basic good judgment and simple wisdom.
Often, people who know a lot about investing become so taken with their own knowledge that they forget the power of a few obvious questions.
To master investing, you don’t need more than a basic understanding of economics. What you need to understand is psychology and history, because human nature doesn’t change and financial history is an endlessly repeating chronicle of all the mistakes other people have made.
The single greatest asset any investor can have is self-control — not a higher IQ, not better computers, not the earliest glimpse at information, but self-control.
…The journalist Carol Loomis tells the story of a dinner party at which a woman finds herself seated next to Charlie Munger and asks:
“Tell me, Mr. Munger, what’s your investing secret?”
“I’m rational,” growls Munger, and goes back to eating his salad. 🙂
But there’s more to it than that, I think. It isn’t that great investors are unemotional; they’re inversely emotional. They have an ability to sense when other people’s emotions are getting out of hand, and then they take the other side of that trade.
Like his principles that I published a few days ago, even these words by Zweig make a lot of sense. More so when I think about all the smart people (I know personally) and who make tons of dumb investing mistakes.
Investors often sabotage their results when they try to get fancy. And rest assured, I have done my MBA from a good college and I can vouch for the fact that you don’t need an MBA to manage your money well or to reach your financial goals.
People think that MBAs (from good colleges) are smart and can do anything. That’s bullshit. 🙂
Investing successfully and achieving your financial goals is not about being smart or having the highest IQ or being popular. Rather, common sense and becoming incrementally wise (on a daily-basis) will get you there.
Some people are too smart to be rich. They give a lot of importance to what they know. But unfortunately and due to their personality (or maybe arrogance), they chose to ignore what they don’t know.
And that is exactly what does them in. And as Charlie Munger says:
“If you think your IQ is 160 but it’s 150, you’re a disaster. It’s much better to have a 130 IQ and think it’s 120.”
We all know that we are simply supposed to buy low and sell high. But that doesn’t happen. The majority have trouble following that sequence and instead end up buying high and selling low. And then there are those who become wise and find the right questions to ask themselves – but only when it’s (almost) very late.
Why? Not because they have less IQ or are not intelligent. But because they let their emotions and biases take over. A wise one will listen to his emotions but will act as the rational section of the brain advises.
When I was writing this post, I got a call from my childhood friend. On being asked, I told him about what I was writing. Now this friend of mine (based in US) is a successful entrepreneur himself. Being a Y-Combinator alumni, he told me about something which Paul Graham (founder of Y-Combinator) wrote in 2009. Though it was in the context of successful startups, some of it made sense in this discussion of (You + Smartness = Rich)’s context as well. This is what Paul wrote:
We learned quickly that the most important predictor of success is determination. At first we thought it might be intelligence. Everyone likes to believe that’s what makes startups succeed. It makes a better story that a company won because its founders were so smart. The PR people and reporters who spread such stories probably believe them themselves. But while it certainly helps to be smart, it’s not the deciding factor. There are plenty of people as smart as Bill Gates who achieve nothing.
But that’s about investing (and startups) in particular.
What about money (and getting rich) in general? I came across an interesting Q&A on Quora where a responder said:
Getting rich requires dealing with other people. Smart people spent a lot of time beefing up their IQ and not their EQ.
In most cases of highly intelligent people who are not rich, they have applied their brains to analytic reasoning. That’s a skill that might help calculate the odds of winning, but will not tell you what the other person is thinking.
IQ won’t give you the social EQ to turn a competitive situation into a cooperative one.
Don’t play chess at a poker game.
I think the last line nails it. 😉