

Warren Buffett: Success in investing doesn't correlate with IQ - Pasanpr
https://www.facebook.com/wb.warrenbuffett/posts/659616364053545

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sachingulaya
Actual text: Success in investing doesn't correlate with IQ once you're above
the level of 125. Once you have ordinary intelligence, what you need is the
temperament to control the urges that get other people into trouble in
investing.

Warren Buffett

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mc-lovin
It should be the other way around: below a certain IQ all you need is the
efficient market hypothesis and you will be an adequate investor.

~~~
gfodor
Buffett's entire investment philosophy is rooted in the idea that the market
is not always efficient.

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bcoates
I don't think that's true. Buffett's investment philosophy involves active
intervention in the companies he owns, not just blind stock picking.

~~~
gfodor
He acts on what he perceives as mispricings in the market. That these
mispricings may be caused or magnified by his own actions in the companies he
is involved with isn't really the point.

~~~
mc-lovin
You don't seem to understand what is meant by the term "efficient market".

The efficient market hypothesis does not preclude the possibility that share
prices could be improved by a buyout or activist shareholder.

~~~
gfodor
Yes but most of what Buffett does is not activist shareholder action or
buyouts, it's security/company analysis. Then once he finds an underpriced
company (as was the most recent case by Heinz) he _then_ takes an action to
get the best price for the shares for Berkshire. The market won't digest the
information of these private negotiations of course but up until that point
Buffett's idea generation is largely driven by the public price of securities,
at least according to what he tells us.

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pshin45
> _Once you have ordinary intelligence, what you need is the temperament to
> control the urges that get other people into trouble in investing._

Temperament really is everything, and investing and/or gambling brings out the
worst in people.

I used to play a lot of poker (which I consider a pretty good proxy for
investing) in college and it was amazing to me how some of my smartest friends
could be so horrendously bad at it.

For example, one of my Math major friends just couldn't control himself. He'd
start with e.g. $1,000 playing online, get up to $10,000 in a few hours, and
then blow it all soon after. He repeated this cycle too many times for me to
count.

One of my pre-med friends was so smart and so confident both academically and
socially, but he'd be the most timid and passive person at the poker table,
never being able to raise or bluff anyone and usually losing all his money to
more aggressive players.

I'd also venture (no pun intended) to say that most VCs are terrible investors
as well - Following the herd, short-sighted, and little to no appetite for big
ambitious long-term investments of time and money.

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20100thibault
I find it quite unbelievable that this is an actual quote from buffet... With
any basic knowledge of statistics you know that 125 isn't ordinary
intelligence ...

~~~
rsofaer
It's about 5% of the population, so not normal in the sense that most people
have an iq of 125, but normal in the sense that meeting someone with an iq of
125 is not terribly uncommon.

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incompatible
I'd go further and say the ability to switch off the logical parts of your
brain is essential when dealing with the financial markets. Trying to
understand why the markets are doing what they are doing is not only a waste
of time when trading, but can lead you badly astray. That's when you think you
know what the market is going to do next, based on your research and
rationality. In practice, it can and will ignore your rational conclusions and
do whatever it likes.

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tikhonj
This makes sense for investing where you actually make decisions about what to
invest in. I'm completely guessing, but it is probably different for
quantitative finance where rather than investing yourself, you come up with a
strategy and follow or even automate it.

Of course, that also requires more than just intelligence--you won't get far
without the discipline to test everything thoroughly and to follow the
strategy even if it loses money in the short term.

Also, I imagine the two styles of investing require vastly different _sorts_
of intelligence and are best suited to people of different temperaments.
Making decisions about investments is very different from making decisions
about how to make decisions about investments :P.

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tokenadult
The research conclusion is actually more general than what Buffett reports. An
IQ level of about 120 is sufficient for eminence in any field, enough IQ to be
a "genius" by making a path-breaking contribution to some field of creative
work.

AFTER EDIT: Dean Keith Simonton's several writings on "genius" in a wide
variety of domains provides the citations to other authors for that IQ figure.

~~~
ekm2
Some fields have a cognitive threshold. I seriously doubt if an IQ of 120 is
sufficient to become an eminent mathematician.

~~~
tokenadult
_I seriously doubt if an IQ of 120 is sufficient to become an eminent
mathematician._

That is an empirical question, and the historical answer is that that IQ level
suffices.

~~~
clarkm
Not true - there are tons of studies that show otherwise, so I have no idea
how this myth still exists.

An IQ of 120 is the top ~10%. Here's a 25 year longitudinal study [1] of over
1,500 students that were _all_ in the top 1% and it shows significant
differences between the lowest and the highest quartile (who were in the top
.01%):

> _Ability Differences Among People Who Have Commensurate Degrees Matter for
> Scientiﬁc Creativity_ > ABSTRACT: A sample of 1,586 intellectually talented
> adolescents (top 1%) were assessed on the math portion of the SAT by age 13
> and tracked for more than 25 years. Patents and scientiﬁc publications were
> used as criteria for scientiﬁc and technological accomplishment.
> Participants were categorized according to whether their terminal degree was
> a bachelor’s, master’s, or doctorate degree, and within these degree
> groupings, the proportion of participants with at least one patent or
> scientiﬁc publication in adulthood increased as a function of this early SAT
> assessment. Information about individual differences in cognitive ability
> (even when measured in early adolescence) can predict differential creative
> potential in science and technology within populations that have advanced
> educational degrees.

This is just one example, but the results seem to be pretty consistent.

[1]
[https://my.vanderbilt.edu/smpy/files/2013/02/ParkPsychScienc...](https://my.vanderbilt.edu/smpy/files/2013/02/ParkPsychScience2008.pdf)

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tokenadult
I know David Lubinski, one of the investigators in that correlational study,
reasonably well. (He and I are alumni of the same school district and same
undergraduate university, and have many mutual friends besides meeting each
other in conferences from time to time.) It's important to distinguish the
claim about the Study of Mathematically Precocious Youth (of whom my son is
one participant) and my claim about mathematical "genius" in general. The
claim you cite is that frequency of eminent accomplishment in that study
population increases as SAT scores at age twelve increase. That may be. My
claim is that the threshold IQ score for eminent accomplishment in mathematics
and other domains that recognize "genius" is no higher than 120, and I have
Arthur Jensen and Hans Eysenck and the Terman longitudinal study on my side as
I make that claim.

~~~
clarkm
My understanding was that many of the claims of threshold effects at least
partially stemmed from the imprecision of many tests, even at the 1.5-2 sigma
levels.

Would you be able to send me some more info? Email's in my profile.

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clarkm
I agree with what he's getting at, but I'm not sure why he phrased it this
way. It's not like he did a study and this was the result (that I know of). He
has no way of knowing if IQs of 125+ _actually_ correlate with success in
investing or not -- he's just guessing.

It's an educated guess, sure. And it might be entirely correct. But I'm sure
Buffett has lots of useful advice that people will take at face value, so
there's no need for him to dress wisdom up with unsubstantiated scientific
language.

It's almost as if he's trying to channel Malcolm Gladwell's claim in
"Outliers" that any IQ points above 120 don't provide any advantages.

I'll let Steven Pinker to set the record straight [1]:

> It is simply not true that a quarter­back’s rank in the draft is
> uncorrelated with his success in the pros, that cognitive skills don’t
> predict a teacher’s effectiveness, that intelligence scores are poorly
> related to job performance _or (the major claim in “Outliers”) that above a
> minimum I.Q. of 120, higher intelligence does not bring greater intellectual
> achievements._

[1]
[http://www.nytimes.com/2009/11/15/books/review/Pinker-t.html...](http://www.nytimes.com/2009/11/15/books/review/Pinker-t.html?_r=2&pagewanted=all)

~~~
jwheeler79
No need to dress up wisdom with unsubstantiated scientific language? Where do
you get that? He sounds plainly spoken to me.

He's not saying high I.Q. doesn't have its advantages at all. He says overly
high I.Q. doesn't give you an advantage when it comes to _investing_ and there
are plenty of examples.

Probably the biggest one from your M.I.T. alumnus, a partner in Long-Term
Capital Management[1], creators of the Black Scholes Formula for options
pricing. Their firm lost billions of dollars because said "perfect" hedging
formula failed to account for shit going south in Russia one day.

It doesn't take a genius to observe a few really smart guys drawing some
conclusions based on Brownian Motion, and the thing works most of the time,
until someone tosses a boulder into the particle system and fucks everything
up.

Don't forget about the fellow who whined: "I can calculate the movement of the
stars, but not the madness of men" when he lost today's equivalent of 2.5M in
the South Sea Bubble[2]. That'd be Sir Isaac Newton.

[1] <https://en.wikipedia.org/wiki/Long-Term_Capital_Management> [2]
<http://en.wikipedia.org/wiki/South_Sea_Company>

~~~
clarkm
I don't disagree -- I think of markets as generally anti-inductive, so over-
thinking things is a definite risk. And some quants have the habit of
developing models so complex that when conditions change, they can't figure
out how to adjust them.

I'm just saying that Buffett's quote sounds like the abstract from some
scientific paper. I'm surprised he didn't include a p-value.

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confluence
Emotions + inactivity > intelligence with investing.

It's fairly easy to find things that are undervalued and then sit on them. The
problem comes when you enter the trade and real, serious amounts of money are
on the line. You know like the "thousands of hours you put into your life
savings" kind of money.

I distinctly remember the first time I put on a significant trade (significant
fraction of my total net worth). My heart was beating, adrenaline was pumping,
and my hands were shaking.

I had the same response as people who jump out of an airplane, or experience
some other type of stressful situation. I would watch that trade like a hawk
for hours at a time (it was fairly concentrated), and my emotions pretty much
followed the ticker. As the stock bubbled up I was elated; as it fell, I
quickly became depressed. I couldn't take it, and after one day I exited my
position at a loss of $250. Probably one of the most stressful periods of my
life. This is even after I had paper traded for years beforehand, and had a
strong conviction for both my valuation and the stock at hand.

I got myself together and told myself that the next time the stock was at
valuation minus 40% I would go all in, and I wouldn't touch, look at, think
about, or check on the stock, and my holdings for at least 3 months; a total
news blackout.

That situation soon arose and I did just that. The second time around my
response was similar, but more muted, and my resolve stronger. Once in, I kept
my promise and didn't do anything for 3 months and by the end of that period I
was up 30%.

I then reviewed the history of the trade and noticed that had I been watching
the market day in and day out, I would've experienced periods over that time
where I would've lost 20-30% in one day. After noticing that, I knew that I
could steel myself against these kind of movements by simply looking at the
prices once a day and basically telling myself that "This too shall pass".
Over a period of one year I basically trained myself to stop caring what the
market thought, and successfully experienced draw downs of 20-30% without
reacting one bit. Market movements no longer effect me emotionally (at least
on the same level). Losses don't hurt any more (I have full faith in my own
valuation and the stock) and gains no longer made me happy. Just by
experiencing the pain and elation so many times, over such a long period of
time, trained me to basically become numb to any changes, and in turn my
response to market movements essentially flatlined.

Since then I've been up over 700% over the last year and a half, and I know
that wrestling with my emotions has been, by far and away, the greatest battle
I've had to fight when investing. Not finding good companies (easy), not
valuing them (excel spreadsheets), not executing the trade (although my hands
still shake whenever I try a new derivatives strategy, which is good), but
taking the day-to-day fluctuations of 10-20% in my total net worth day-in and
day-out without giving one single shit.

And that, I can tell you, is hard to do. Very hard. Most people won't be able
to take it, with the global financial crisis being the prime example. When
things go to shit, they freak out (just like I did at the start), and do the
most idiotic things you could possibly imagine (not their fault). They go to
cash when everything is cheap. The go to stocks when everything is expensive.

All because of emotions.

Emotions rule. And I practice emotional arbitrage.

~~~
meric
10-20% a day? Are you trading options? My portfolio never fluctuated 5% in one
day, and it only fluctuated that much due to recent run up of Tesla and solar
city... But I agree the more you are in the more numb you are to the market.

~~~
confluence
I don't have a portfolio is probably the reason why.

I usually concentrate most of my money in the one investment that I believe
would provide me with the highest probability of high returns.

And yes - I do trade options, and no I don't need a lecture on
diversification, I know what I'm doing.

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jcampbell1
I once talked to someone that worked for one of the brokerage houses, and they
ran a report to measure the investment performance of the aggregate portfolio
of people with M.D. in their title (doctors). It turns out that they were
systematically terrible investors with low returns and high volatility for
every period and any measure.

I think the problem physicians face is that they spend everyday all day as the
smartest person in the room, and are paid to make snap decisions that are
rarely scrutinized. That is a recipe for disaster when it comes to investment.

~~~
hkmurakami
Well they also probably have less time than even the average person to read,
learn, and do research.

~~~
jcampbell1
I think the real problem is that they are never explained the EMH during their
lunch hour. Instead they hear about other doctor's winning investments, and it
creates a stupidity cycle. I am pretty sure if I asked about investing at any
tech company during lunch, someone would explain EMH to me. I could be wrong.

I personally don't believe markets are always efficient, but I _always_ think
from the perspective of why I think the market is right or wrong.

~~~
ScottBurson
As any engineer knows, nothing is 100% efficient.

I think a better way of describing the market is as a competitive game. Roger
Federer may not play tennis "perfectly" -- what would that even mean? -- but
you know what's going to happen if you or I step out onto the court with him.

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apsec112
This seems clearly false. What about David Shaw and Jim Simons? We know at
least two out of n were huge successes, and n here (hard science professors at
top schools who went into finance) is very small.

~~~
confluence
Ostensibly they use computers to automatically execute their strategies and
hence their own human emotions do not factor into their trades.

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rfatnabayeff
...because task to be solved to score higher IQ differ from task to be solved
to succeed in investment.

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jsnk
This title, "Success in investing doesn't correlate with IQ " is horribly
misconstruing Warren Buffett.

The title conveniently left out "once you're above the level of 125.", which
yields a completely different statement from the title.

What Warren Buffett said actually allows room for IQ to correlate to success
in investing. From the way he said it, it actually seems as though he believes
that IQ might correlate with investing under 125.

