Great Investors’ Little Secret


Outsiders think they know how something works. You know the type. Those armchair experts opining at the Thanksgiving table. The least experienced are the most confident in their knowledge.

Insiders actually know how something works. And that, as the muse says, makes all the difference.

Take basketball, for example. Outsiders think college basketball talent is an indicator for NBA success. Insiders know that’s wrong. The NBA is about size, strength, and speed. Can’t shoot? No problem. They’ll teach you to shoot. But you can’t teach someone to be 7 feet tall or have a 44″ vertical leap. There’s a reason the 5’11” shooting guard from Pepperdine goes undrafted despite breaking college records. Too short, too weak, too slow. Insiders know it’s true.

Giannis Antetokounmpo – arguably a top 3 player in the NBA right now – has put on 50 pounds of muscle since entering the league. It’s not to help his jump shot. It’s so he can outmuscle the strong competition.

How about golf? Non-golfers assume golf is about smashing the ball 300+ yards. Weekend amateurs know you “drive for show, putt for dough,” so they think putting wins the Masters. Real insiders know the best players in the world do it all. They drive it 340 yards down the middle, hit a 7-iron to 18 feet, then sink hard birdie putts.

Better Tech + More Muscle = 50 yards further over 40 years

And of course, poor outsider assumptions plague investing, too. One of the biggest misconceptions is:

Outsiders think investing is about intelligence.

  • “Warren Buffett is just smarter than everyone else.”
  • “Wall Street knows more than anyone else.”
  • “You don’t know math? You’re screwed.”

But insiders know investing is about temperament. And it’s an understandable misconception! After all, the most popular investing book of all-time is…

The Intelligent Investor! It’s not The Well-Tempered Investor.

But one of the great ironies of The Intelligent Investor is that its most famous chapters and quotes are all about…temperament!

“…investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
– Benjamin Graham, The Intelligent Investor

The list goes on. The biggest investors all talk about temperament more than intelligence.

“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.”
-Warren Buffett
“I also think people who are inherently unemotional will have it much easier. A lack of emotionality is a gift (in investing, that is, but perhaps not in other areas, like marriage). It’s not my point that emotional people can’t be good investors, but it will require a great deal of self-awareness and self-restraint.”
-Howard Marks
“Even research communities of highly intelligent and well-meaning individuals can fall prey to confirmation bias, as IQ is positively correlated with the number of reasons people find to support their own side in an argument”
-Annie Duke

Good investing does not require intelligently predicting that 2022 would be a uniquely bad year.

Instead, good investing is to have the emotional stability to zoom out from 2022. And the discipline to build a responsible portfolio and avoid traps that force you to sell to survive.

Sure, intelligence doesn’t hurt your investing outcomes. But, paradoxically, the most important knowledge an investor can possess meta-knowledge. That is, knowing that knowledge has diminishing returns. Or as Buffett put it, that investing is “not a game where the guy with the 160 IQ beats the guy with 130 IQ.”

Panic-selling is not a decision of intelligence. It’s temperament. Same with chasing the hot stock or fund. Or dumping your college loan money into Tesla stock.

Investing is about decision-making. That’s a good thing: we’re all experienced decision-makers! We all know certain decisions are based on synthesizing evidence (“intelligence”). But many decisions are based on gut feel, behavioral biases, or simple hormonal drives.

Was that donut the intelligent thing to eat? Or was it a temperamental decision? Intelligence vs. temperament is the difference between knowing the nutrition facts of every food and implementing good eating habits.

“Thinking in bets starts with recognizing that there are exactly two things that determine how our lives turn out: the quality of our decisions and luck.”
– Annie Duke

And what determines Duke’s “quality of our decisions?” It’s mostly temperament, with a sprinkling of intelligence.

Insiders know it’s true. And now you do too.

This post was previously published on The Best Interest.


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