Rocket Scientists Need Not Apply
When asked how smart an investor must be to make millions in the markets, Warren Buffett once said, “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
So, so true.
Back in my days trading on the London Futures Exchange, there was a trader in the coffee futures pit who had Rain Man-like intellect (for anonymity purposes, we will call him Jonathon). He was a human calculator, he could recite line after line of classical literature from memory, and he could retrieve detailed information on a wide range of topics from the recesses of his mind like you and I do when we run a Google search today. Jonathon should have been a contestant on Jeopardy. He would have cleaned up.
When trading was slow in the pits, to test Jonathon and amuse ourselves, we would randomly choose a bible verse, and Jonathon would instantly recite the paragraph.
“Give us Philippians 4:13”
Jonathon: “I can do all things through him who strengthens me.”
He would give us the answer before we could even look it up. And Jonathon was not at all religious.
We would give Jonathon a ridiculously long random mathematical computation, and without any calculator he would give us the answer almost instantly.
“What is 24 x 17 + 138 ÷ 19 x √5 + π ÷ 15?”
Jonathon: “62.1129” (The correct answer, and all the way out to FOUR decimal places? Are you kidding me?!?)
But while Jonathon was a brilliant genius, he was almost too smart to be a great trader. Jonathon could calculate risk better than the rest of us, but he did not have the emotional fortitude to then go ahead and take risk as part of the normal process of creating trading profits. His raw intellect would cause him to second guess every decision the moment any bit of emotion came into play. Jonathon’s fear and greed would pollute his judgment, offsetting all of his incredible brainpower. He would often buy high on greed, then sell low in fear, and then stop trading altogether to stop the bleeding.
It is essential to remember the importance of discipline when investing. The person with ice water in their veins beats the impetuous Mensa member every time. The markets try to stoke your greed during powerful up cycles, and your fear during miserable down cycles. All in an effort to force you to overthink, and make expensive emotional decisions.
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