Even as many investors may want to believe that high IQ may lead to better investing, legendary billionaire investor Warren Buffett says that investors with IQ over 150 may be better off selling 30 points away. “If you have a 150 IQ, sell 30 points to someone else. You need to be smart, but not a genius,” Warren Buffett is often quoted as saying. In fact, Warren Buffett places more emphasis on rationality and emotional stability. “Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ. Rationality is essential,” says the Oracle of Omaha. In the preface to the ‘Intelligent Investor’ penned by his mentor Benjamin Graham, Warren Buffett notes, “To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework.”
In the updated version of the same classic, Jason Zweig shares an anecdote relating to Sir Isaac Newton. Isaac Newton, one of the greatest physicists to have ever lived, too wasn’t spared by ‘Mr Market’, as he ended up losing £20,000 by investing in shares back then in 1720.
Isaac Newton held stocks of South Sea Company, one of the best performing stocks in England at that point in time. The stock posted a meteoric eight fold rise in less than six months. Isaac Newton didn’t time his exit too well, but doubled his investment nevertheless. Jason Zweig explains , “Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000.”
As the shares of South Sea continued its upward journey, Isaac Newton, just like any other gullible investor re-entered the stock at a much higher price. The bubble soon burst, and the stock plunged, losing more than 80% of it’s value, leaving Isaac Newton with losses to the tune of £20,000. Jason Zweig writes, ”Swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price – and lost £20,000 (or more than $3 million in [2002-2003’s] money.”
Expressing his view on the direction of the markets back then, Isaac Newton had exclaimed, “I can calculate the motions of the heavenly bodies, but not the madness of the people.” Disappointed by the entire incident, Isaac Newton forbade anyone to speak the words ‘South Sea’ in his presence for the rest of his life writes Jason Zweig.
In his assessment of the episode, Jason Zweig observes, “Sir Isaac Newton was one of the most intelligent people to have ever lived, as most of us would define intelligence. But, in Graham’s terms he was far from an intelligent investor. By letting the crowd override his own judgement, the world’s greatest scientist acted like a fool.” Warren Buffet says, “Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”