Imagine you have a child. He's smart and his IQ scores aren't just above average. It’s towering high, dwarfing kids of his age and he solves problems faster than you can explain them. He makes you proud.
Now, as he grows up, a special invitation lands in your email. It's from a society that recognizes your child’s brilliance, a society for people with high IQ. It's called Mensa.
This exclusive club, Mensa, gathers those with towering intellects, the top 2% of people in terms of IQ. Born in 1946, Mensa has become a place for these intellectual giants worldwide.
Now imagine if these high IQ individuals were asked to pick stocks. What would Happen? I simply guessed they will make a high return, beating their average since their IQ dwarfed the average. You might think so as well. But we were both wrong.
In June 2001, Smart Money magazine reported a surprising fact. The Mensa Investment Club, over the prior 15 years, had managed to return only 2.5 percent. To put this in perspective, they underperformed the S&P 500 Index by almost 13 percent annually.
Let's look at the case of Warren Smith, a seasoned investor who had been in the game for thirty-five years. He reports that his initial investment in Mensa investment club of $5,300 has grown to $9,300.
Doesn't sound too bad, until you consider this: the same investment in the S&P 500 Index would have ballooned to almost $300,000.
A member of the Mensa Investment Club described their approach quite candidly: "Buy low, sell lower." This is in contrast to the common investment wisdom of "buy low, sell high,"
But why, despite their towering IQs, did they fail to generate high returns and beat the average? The key lies in their stated strategy: "Buy low, sell lower." This sentiment reveals the emotional turmoil that the stock market can induce.
You see, the stock market is a rollercoaster of fear and euphoria. When the price of a particular stock jumps it;s natural to be excited but when it plummets, it's also natural to be fearful
As you watch your investment value dwindle, your anxiety builds. Adding fuel to the fire, the media often broadcasts news that can drive the stock price even lower.
In such times, what you need is not a high IQ, but self-control. The ability to withstand fear, to resist the impulse to sell at a loss just because everyone else is doing so – that's emotional intelligence at play, not cognitive intelligence.
If you think self-control only matters in the realm of finance, think again. It plays a pivotal role in decision making and it can change the trajectory of your thoughts in ways you never expect.
Let's take an interesting example from Dan Ariely's book "Predictably Irrational".
In the study, students were assigned to be in either a state of sexual arousal or a neutral state. They were then asked to make judgments and hypothetical decisions on a range of topics: how appealing they found various sexual stimuli and activities, their willingness to engage in morally questionable behavior to obtain sexual gratification, and their readiness to engage in unsafe sex when sexually aroused.
The results were revealing. Sexual arousal had a more impact on all three areas of judgment and decision-making. Students who were aroused were willing to do unusual things in terms of sex.
This study demonstrated that in the heat of the moment our feelings can drastically change our decisions, and we're often bad at predicting this.
Much like the study, the men know the risk of unusual sexual behavior but still consider it in the heat of the moment or when they are aroused.
The same can be said for our smart investors from Mensa. They knew the golden rule of "buy low, sell high," but when the market dropped and fear took over, they forgot it. Instead, they sold their stocks at low prices to avoid further losses
So, if you were betting that a high IQ guarantees high returns, You are wrong.
The stock market doesn’t care about your IQ or your diplomas; it's indifferent to how good you are at math or how complex your stock-picking algorithm is.
What really makes a difference is your Emotional Quotient (EQ), your ability to keep a cool head when the market takes you on a wild ride. It's your capacity for self-control when you're bombarded with fear-inducing headlines and tempted to abandon your well-reasoned investment strategy.
As acclaimed investor Howard Marks famously declared in his book "The Most Important Thing", "The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological."
www.researchgate.net...xual_decision_making
monevator.com/weeken...-to-beat-the-market/
Now, as he grows up, a special invitation lands in your email. It's from a society that recognizes your child’s brilliance, a society for people with high IQ. It's called Mensa.
In June 2001, Smart Money magazine reported a surprising fact. The Mensa Investment Club, over the prior 15 years, had managed to return only 2.5 percent. To put this in perspective, they underperformed the S&P 500 Index by almost 13 percent annually.
Let's look at the case of Warren Smith, a seasoned investor who had been in the game for thirty-five years. He reports that his initial investment in Mensa investment club of $5,300 has grown to $9,300.
Doesn't sound too bad, until you consider this: the same investment in the S&P 500 Index would have ballooned to almost $300,000.
A member of the Mensa Investment Club described their approach quite candidly: "Buy low, sell lower." This is in contrast to the common investment wisdom of "buy low, sell high,"
But why, despite their towering IQs, did they fail to generate high returns and beat the average? The key lies in their stated strategy: "Buy low, sell lower." This sentiment reveals the emotional turmoil that the stock market can induce.
As you watch your investment value dwindle, your anxiety builds. Adding fuel to the fire, the media often broadcasts news that can drive the stock price even lower.
If you think self-control only matters in the realm of finance, think again. It plays a pivotal role in decision making and it can change the trajectory of your thoughts in ways you never expect.
Let's take an interesting example from Dan Ariely's book "Predictably Irrational".
The results were revealing. Sexual arousal had a more impact on all three areas of judgment and decision-making. Students who were aroused were willing to do unusual things in terms of sex.
This study demonstrated that in the heat of the moment our feelings can drastically change our decisions, and we're often bad at predicting this.
Much like the study, the men know the risk of unusual sexual behavior but still consider it in the heat of the moment or when they are aroused.
The same can be said for our smart investors from Mensa. They knew the golden rule of "buy low, sell high," but when the market dropped and fear took over, they forgot it. Instead, they sold their stocks at low prices to avoid further losses
So, if you were betting that a high IQ guarantees high returns, You are wrong.
The stock market doesn’t care about your IQ or your diplomas; it's indifferent to how good you are at math or how complex your stock-picking algorithm is.
As acclaimed investor Howard Marks famously declared in his book "The Most Important Thing", "The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological."
www.researchgate.net...xual_decision_making
monevator.com/weeken...-to-beat-the-market/
