Overview – What It Means to Be an “Intelligent Investor”
In the world of motorsport, a race driver’s overall level of skill is known as their “racecraft”.
A driver’s racecraft is comprised of several elements: tire management, fuel management, overtaking ability, the ability to defend against potential overtakers, vehicle control, recovering from a loss of control, qualifying pace, and race pace, among many other things.
It’s possible for someone to be a naturally good race driver (a prominent example being F1 Driver Max Verstappen), but that doesn’t mean they have exceptional racecraft. There’s more to being a skilled race driver than simply going pedal to the metal.
It’s no secret that investing requires you to have a reasonable level of intelligence if you want a fighting chance of succeeding. For many investors, “intelligence” is simply a matter of having a high IQ; however, there’s more to investment intelligence than just that.
An “intelligent investor” isn’t someone who’s born with a certain set of genes or disposition that only a select few have. Just like racecraft, an investor’s level of intelligence is comprised of several factors, some of which are naturally ingrained, and others that can be developed and improved.
Understanding the Components of Investor Intelligence
Whenever you’re told that someone is “intelligent”, what’s the first thing that usually comes to mind? Perhaps you imagine that they’re good at analyzing things, can work well with numbers, and are able to effectively solve problems.
This sort of “logical” intelligence is what many people think about, but what about those who don’t have this ability, but are instead able to negotiate with others effortlessly, can read other people’s emotions without much effort, or know how to come up with seemingly perfect strategies? Surely these people would be considered intelligent as well, right?
As was mentioned earlier, an investor’s level of intelligence isn’t some single, innate characteristic that you possess or not. Rather, investment intelligence is a combination of several traits, some of which are innate, and others that are malleable. Some of these traits may include:
- Theoretical Knowledge
- Numeracy
- Emotional Control
- Investment Habits
- Creativity/Non-Conventional Thinking
- Problem-Solving
- Strategic Thinking
- Critical Reading
- Ability to efficiently gather all necessary information
This is by no means an exhaustive list, but the point is that an intelligent investor has competencies across a variety of domains – an investor’s intelligence isn’t something that can be distilled into a single trait. The result is an investor who can effectively navigate a variety of intellectual tasks without too much difficulty.
Being naturally good at some of these traits certainly helps, but it’s no guarantee of investment success. Sir Isaac Newton is arguably one of the smartest people to have ever existed, yet he lost a fortune during the infamous South Sea Bubble because he succumbed to his emotions.
Back to our racing example from the overview, going pedal to the metal is relatively easy to do, but the ability to go fast is useless if you don’t know how to maintain control of your car at this speed or if you fail to take the optimal racing line.
Similarly, having extensive book knowledge is great, but it’s ultimately useless if you don’t know how to think outside of the box or how to create effective strategies when you face circumstances that you never read about before. There’s so much more to an investor’s education than just reading.
It’s true that some people are naturally skilled in some of these areas more than others, but being exceptionally good at one thing usually isn’t enough to compensate for weakness in others.
An Intelligent Investor Is Strong in Several Areas
One of the unique challenges that investors face is that they’re required to use several, seemingly unrelated skills in order to work effectively.
When reading through an annual report, you need to use your reading comprehension skills to understand how a company is doing and to read between the lines when necessary. Once you get to the financial statements, you’ll need to use your numeracy and analytical skills to extract meaning from the deluge of financial data presented to you.
Whenever something unexpected happens and markets are thrown into disarray, your emotional intelligence will prevent you from losing your cool, allowing you to avoid making any rash decisions. The specific actions you perform during this hectic time will be influenced by your habits and your ability to strategically navigate this mess.
Although investing is widely seen as an intellectually demanding activity, and it certainly is, an intelligent investor is someone who knows how to seamlessly jump between certain forms of intelligence based on the situation they presently find themselves in.
Investing isn’t an activity where all you need to succeed is to have a higher IQ than everyone else. Having a high IQ certainly helps, but if that’s all an investor has then they won’t go very far. This is true not only for investors but even for other professionals.
There’s little debate that professionals such as doctors, lawyers, and engineers need a high level of technical knowledge and skill in order to perform their jobs effectively. Nobody would hire a lawyer if they had a poor understanding of their field of law, and a doctor or engineer would struggle to attract clients if they had lacklustre problem-solving skills.
However, all these professions require their practitioners to have strong interpersonal, communication, and even teamwork skills as well.
You could be the smartest doctor, lawyer, or engineer, but that won’t matter if your clients find you extremely hard to interact with, you struggle to convey important information to others, or your colleagues refuse to collaborate with you because of your insufferable attitude. There’s a reason why employers look for more than just technical skills when posting jobs.
Investors are no different than many other professionals. Even if you aren’t a professional investor such as a hedge fund manager, this doesn’t mean you’re excused from needing to develop other skills as well. You still need to develop a wide variety of skills, traits, and other competencies in order to effectively navigate the investment landscape.
Learning to Synthesize Your Different Strengths
Being strong across different competencies is crucial for any investor, no doubt, but the hard part is synthesizing these different elements such that they work together seamlessly.
Once again going back to our racecraft example, having a variety of strengths as a race driver is important, but the ability to combine these different strengths into a unique driving style is what truly defines a race driver’s ability.
All high-level race car drivers possess a myriad of different skills, but what sets them apart from their competitors is how they combine these different traits into a single, cohesive driving style that works best for them. All Formula One drivers are extremely skilled, yet they differentiate themselves from the rest of the grid based on how they synthesize their different skills.
Theoretical knowledge, numeracy, emotional control, and the ability to stay rational are all key competencies for any investor to have, but if each of these traits is mutually exclusive and fails to blend in with the others then an investor won’t be nearly as effective as they’d hope to be.
The whole is greater than the sum of its parts, and an intelligent investor knows this. You can’t expect to work effectively if your different skills and competencies only work in isolation – knowing how to unify your different strengths in a cohesive manner is what will set you apart from other investors.
Investor Intelligence Is Malleable, for Better or for Worse
Although some of the skills that investors need are innate, many of them can only be developed with time and effort. Theoretical knowledge, critical reading, analysis: these are just a few out of many traits that investors will need to actively work on and refine.
Because of this, an investor’s level of intelligence is highly malleable. Just because you struggle in certain areas today doesn’t mean you’re forced to stay that way forever.
If you’re just starting out in investing and you find yourself struggling, don’t lose heart – assuming you continue to work on yourself then you’ll inevitably become better. Nobody starts out as a world-class investor, that’s something that develops over years, if not decades, of continuous improvement and countless experiences.
While an investor’s intelligence can improve over time because of its malleability, then the opposite is also true: an investor’s level of intelligence will deteriorate if they don’t actively work to improve themselves.
There’s a reason why highly skilled and experienced professionals still undergo professional development, and why elite athletes continue to train relentlessly every day: to make sure that their level of skill doesn’t fade away. The higher your level of skill, the more effort you need to maintain it at that level.
An intelligent investor is someone who constantly puts in the work needed to stay at the top. If they don’t, then it doesn’t matter how skilled they currently are – it’s only a matter of time before they lose their touch. Rest on your laurels for too long and you’ll soon discover just how much your level of investment intelligence has declined.
Wrapping Up
Many investors take pride in the fact that their investment success is heavily dependent on their level of intelligence: if you implement the right strategies, perform thorough analysis, and pick up on nuances that no one else has seen, then you put yourself in a very advantageous position.
But what exactly makes someone an “intelligent investor”?
An investor’s intelligence isn’t some single, inherent trait that only the “select few” have. Rather, it’s an aggregate of several distinct skills and competencies that, when unified, determine how an investor navigates the investment landscape.
It’s one thing to be skilled in a variety of intellectual areas such as creativity, logical thinking, and emotional control, but investors are ultimately responsible for synthesizing these different competencies into a unified, coherent manner. How investors synthesize their different forms of intelligence is what ultimately sets them apart.
One of the nice things about an investor’s level of intelligence is that it’s comprised of traits that are innate and those that can be learned and developed. As a result, an investor’s level of intelligence is malleable and can improve, or even deteriorate, over time. Just because you’re a very intelligent investor today doesn’t mean you’ll stay that way forever – this is something that needs to be actively maintained.
