Good reads from around the Web.
I learned an amusing bit of trivia about high I.Q. investors from Monevator fave Larry Swedroe this week.
In an article for CBS Moneywatch on the woeful performance of investment clubs, Larry notes:
If any group should be capable of showing that more heads are better than one and that intelligence translates into market-beating returns, it should be Mensa.
The June 2001 issue of Smart Money reported that over the prior 15 years the Mensa investment club returned just 2.5 percent, under-performing the S&P 500 Index by almost 13 percent per annum.
Warren Smith, an investor for thirty-five years, reported that his original investment of $5,300 had turned into $9,300. A similar investment in the S&P 500 Index would have produced almost $300,000.
One investor described their strategy as buy low, sell lower.
I’m pretty sure even cash would have beaten this brainy bunch. And it backs up my own observations about I.Q. and intelligence.
Though he’s no fan of stockpicking of any kind, Swedroe’s charge here is particularly against investment clubs. It seems about the only thing that can do worse than a private investor at beating the market is a committee of private investors.
But I think the point applies to high IQ lone rangers, too.
Clearly there are a few very smart individuals running successful hedge funds or wot not. Monevator has unusually clever readers, for sure. And modesty forbids me revealing my own…etc.
But as a generalisation, I’ve noticed many extra clever people make extra terrible stockpickers.
The worst are probably engineers. If I was charged with recruiting for a hedge fund by degree alone, I’d pick maths and physics grads first, then high-flying arts students – as in history, philosophy, and so on. Not as in Tracey Emin.
Engineers would come last.
This is no disrespect to engineers, who play one of the least appreciated roles in modern society – heck, they pretty much gave us modern society.
But boy do they get themselves in a muddle with investing.
I suspect it’s an innate distaste for uncertainty and fuzziness that’s helpful for engineering but lethal to active investing.
If you’re a structural engineer, you build a bridge that will take several times the maximum load you can imagine passing over it, just to make sure.
Apply that mindset to active investing and you’ll either cower in cash, or else you’ll become wedded to certainties: “I just KNOW this stock is good enough!”
Certainty has no place in the murky – and for most futile – world of stockpicking.
Other kinds of engineers construct very elaborate machines, and their skill set can lend itself to spurious precision about business and economic cycles, and how they intersect with the stock market.
Yes, they all affect each other, but your path is like that of a cyclist negotiating a roundabout at rush hour in Rome. Much better to trust instinct and quick reflexes than to think you can plot a precise path in advance.
As Warren Buffett – himself no intellectual slouch – puts it:
“Success in investing doesn’t correlate with I.Q. 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.”
I wonder how an investment club of investing blog writers would fare?
Actually, don’t answer that!
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From the blogs
Making good use of the things that we find…
Passive investing
- How to argue with a couch potato – Canadian Couch Potato
- Drawdowns and the permanent portfolio – Crawling Road
- Maximize or satisfice? – Abnormal Returns
Active investing
- Wexboy’s tips for tackling fear and greed – Part 1 and Part 2
- The case for Personal Assets Trust – DIY Investor (UK)
- Screening for dividend growth stocks #1 and #2 – Clear Eyes Investing
- Value investing when debt levels are high – Aleph blog
Other articles
- How should an annuity affect asset allocation? – Oblivious Investor
- The surprising effect of small efforts over time – Mr Money Mustache
- Your spending may not drop in retirement – Simple Living in Suffolk
- The problems with starting financial adviser review sites – Kitces
- TV is dead, long live TV – AssetBuilder
Product of the week: The FT [search result] says that banks are making it easier for the self-employed to get mortgages. In particular, well-paid contractors (who abound here in London) can now access all Halifax’s standard mortgages, provided they earn at least £75,000 a year.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
Passive investing
- How to invest your $200,000,000 portfolio – Forbes
- Diversification isn’t broken, it just takes a while – N.Y. Times
- Bond investing in a rising rate environment – Vanguard
- Swedroe on size, value, and momentum – Index Universe
Active investing
- CAPE may still be best measure of market froth [Search result] – FT
- The case for investment trusts – Telegraph
Other stuff worth reading
- Avoiding Sudden Wealth Syndrome [Well, the bad parts] – Vanguard
- …what about a lottery win? Could you survive that? – Motley Fool
- How to tackle the pension crisis [Search result] – FT
- Mortgage affordability highest since 1999 – Telegraph
- Martin Lewis: Let’s rebrand student loans – Telegraph
- Tales from the UK property market – Guardian
- Entrepreneurship: The ultimate white privilege? – The Atlantic
Book of the week: Want to know more about the world of insider trading? Then read Circle of Friends
- Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” [↩]
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Funnily enough, the gain on my portfolio for this financial year matches my IQ to the very last digit!
If only it was in percentage terms rather than pounds sterling…….
A thousand curses on that damned Centamin, the king of glisteners in the land of Glisten.
Not surprised about investment clubs – a pretty good reverse indicator is a consensus about where the market is going
“A drawdown in the sense of an investment portfolio is basically a loss it has experienced in the past.” Then why not call it a loss?
some engineers are/were Physics grads 😉
@ermine — Oh dear, not your week on Monevator. 🙂 But you’ve shown the right mental flexibility — e.g. Buying when shares were cheap for long term income despite your economic prognosis.
I’d be getting maths/physics grads for quant stuff not for behavioural stuff but maybe the quantum mechanics does help? 😉
My experience of an investment club at the Motley Fool was horrendous.
It essential came down to buying whatever had been in the news recently and was going up. Democracy has no place in investing.
There were some high IQ guys before the financial crisis hit proper in late 2006 who told us we should take more risks… In my experience it’s in this risk assessment where many go wrong. The guys in the book on millionaire ISA investors, which IIRC Monevator recommended, had quite diverse backgrounds and suggested that for some their success was down to a certain emotional calm which for a few of them might’ve been brought about by being long term chronically sick. This chimes with the Buffet quote on temperament.
I don’t know about their personal investment portfolios but I’ve known engineers who’ve been great businessman, and don’t forget that they’re basically mathematics graduates. I know what you mean about a certain logical mindest but, meh. The guys at Man aren’t very good investors and they’re probably the maths grads you fancy. We probably need a more scientific study.
Btw, I think your bridge example is out of date: we know a lot more about the properties of materials now and so don’t need to do the Victorian over-engineering thang, but whatever.
“Rule 1, never lose money. Rule 2, Never forget Rule 1” I’ve been thinking about what Mr Buffet’s has said (maybe from a short term perspective), given the fact that there’s a little bit of volatility in the equities market, and government fixed income high quality bonds funds are likely to be loosing money in the current environment due to attitudes towards the tapering of QE & the pricing in of eventual rising interest rates, are there ever times then you put the breaks on adding to your portfolio?
The study of investment clubs covers the period from 1991-1997. There are a number of factors which will have contributed to their decline in popularity:
a) The growth of the internet and the ability to exchange views with other investors without having any formal relationship or shared investment.
b) The huge quantity of information available on the internet.
c) The importance of asset allocation (paper by Brinson et al, 1986) seeping into public consciousness.
d) Increasing awareness of investment costs and increased availability of low cost trackers.
e) Awareness that active funds tend to under-perform trackers in the
long term and people asking themselves why they think they can outperform professional fund managers.
f) Awareness of behavioural finance issues (Anyone hear Daniel Kahneman on ‘Desert Island Discs’?)
Good stock-pickers are very few and far between. I doubt that there is any relationship whatsoever between academic discipline and stock-picking ability. I’d compare it to betting on horses. Yes, there are professional gamblers who make a living that way but they are hugely outnumbered by people who lose money but only tell you about their successes!
If stock-picking was something that bright folk could do, then long-short pairing total return funds would have a stunning track record which would not be correlated with market movements or the strength or weakness of individual sectors. BlackRock UK Absolute Alpha anyone?
So far as Mensa is concerned, I have a few points. Did their investment club perform worse than your average investment club? Secondly, the people who join Mensa are unlikely to be typical of highly intelligent and successful people who are a) likely to be confident enough in their own abilities and achievements not to require external verification and b) far too busy to participate in an organisation which is essentially narcissistic.
The under-performance of the Mensa investment club only tells us something about those people who a) joined Mensa and b) joined an investment club but absolutely zilch about stock-picking abilities and intelligence or stock-picking skills and IQ or even stock-picking and the ability to pass Mensa entry tests!
Incidentally, I’ve not lost money on individual shares but don’t see myself as stock-picker. As a Vodafone employee in the 1990s, I did very well via various share purchase schemes but sold shares annually to use my CGT allowance, getting out totally when I retired in 2003. But I was just lucky, in the right place at the right time and sceptical of the TMT bubble which I regarded as part of “pre-millenial madness”. Never owned an individual share since and now semi-passive with just a few active funds where I can’t find a suitable tracker or ETF.
I know a lot of engineers who are very good investors and I know a lot of people who aren’t engineers who haven’t got a clue. I’ve always put my investing success down to the clarity of thought that an engineering background provides, but what do I know?
As long as both my engineering projects and my investing keep on performing as well as they have over the last few decades, then it doesn’t bother me if such a background should theoretically be a hindrance!
@Willem @GadgetMind — Yes, clearly it is subjective, but I only share my experiences. Clearly there will always be exceptions, likely thousands, and I’m glad if you’re one of them GM.
Happily I can’t imagine any circumstance where I’d have to choose someone to run money based entirely on their graduate degree, so it doesn’t really matter. But for me it is interesting how I’ve consistently seen them make poor — and almost invariably over-thought — decisions. Perhaps there is some cognitive bias in there, as I have several friends who did engineering as an undergrad and I my degree was in the science side of things too, so maybe I have tended to look out for it.
@GOP — Very interesting thoughts, particularly on the implicit traits of the typical Mensa member.
The key of course is not that picking stocks is easy or hard or that you shouldn’t lose money. The keys it that lots of people — smart and dumb — are all trying to do it, and that the price reflects their best guess, and that best guess is very hard to beat.
If all companies cost them same per share and you faced no competition from other stock pickers, many of us would have fabulous investing returns based on looking for winning businesses and buying their shares. Perhaps most of us?
Reality is the inverse of that situation though! 🙂
Isn’t it odd, in the light of the recent Cass Business School study, that the research on investment clubs didn’t uncover any that either comprised primates or chose shares at random at the start of each year and beat the S&P 500 Index hands down!
I am interested what stocks do IT guys pick?
Nice articles here. It doesn’t surprise me either that investment clubs don’t work.
Yeah, Larry Swedroe is a big index fund guy. I’ve read Bogle’s “Common Sense on Mutual Funds” and used to have a lot of money in index funds. Index funds are great in bull markets, but terrible in bear markets. You just get beat up when the markets go down, there is no attempt to avoid a loss whatsoever.
STEM backgrounds can be useful for developing systems for security selection or asset class rotation, but such systems mostly fail to beat broad market indices. The problem is not with the mentality of engineers (or of lawyers, doctors etc) per se; but rather it lies in the belief, common to many professionals, that there’s a right answer which outworking and outhinking the competition will obtain. Indexing, in contrast, requires only sufficient humility and self awareness to know that the odds are stacked against you, and you’re better of assuming that you don’t, on average, know any better than Mr Market.