Do you need to be clever to invest well?

What is intelligence?

We can probably all remember from school days peers that took academic achievement in their stride, yet in some instances the very same people could barely tie their own shoelaces or deal with social situations easily.

An intellectual quotient or ‘IQ’ is a traditional measure of intelligence based upon standardised aptitude tests, but while a single number might indicate something useful about raw ability it has limitations in terms of measuring behaviour.

It’s well known that high achievers from certain industries tend to underperform as investors due to over-confidence & the flawed assumption that specialised knowledge in one area of life can be seamlessly translated into another.

Designing & then sticking to a plan sounds straightforward enough, but as the heavyweight boxing champion Mike Tyson once said: ‘Everyone has a plan ’til they’re punched in the mouth.’

4 quotients

The good news for budding investors is that while a high IQ is useful for identifying & understanding a strategy, it’s far from the sole determinant of success, and an average IQ might even be helpful if it means that you retain humility.

Indeed, Warren Buffett famously said that ‘investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ. Rationality is essential.’

Emotional intelligence or ‘EQ’ is likely to be critical, with young men in particular being prone to excitement & chasing the latest fad with a high-risk approach.

Since every investor will experience market corrections, downturns, and times when things just won’t seem to go right, an ability to deal with adversity (‘AQ’) is potentially at least as important too.

Investors don’t necessarily need to be too creative (‘CQ’), since it’s possible to model strategies, and learn from the successes & failures of others.

Simple but not easy

To be successful as an investor, ideally you should develop a balance of skills across the quotients.

You need a strategy, the discipline to stick to it, and the mental fortitude to keep going when times get tough.

To conclude with Buffett again: ‘What is needed is a sound intellectual framework for making decisions, and the ability to keep emotions from corroding that framework.’

As the adage goes, investment is simple, but it is not easy.