Overview
I could go on and on when it comes to recommending books, but one of my favourite non-investing books has to be Angela Duckworth’s Grit: The Power of Passion and Perseverance. Although I read this book back in 2016, it still remains one of my all-time favourites.
A lot of people severely underestimate the power of perseverance. Nowadays, it’s so easy to try something and give up just as fast when we don’t see any immediate success. It seems that instant gratification is what more and more people desire.
As your experiences may have already taught you, any endeavour that is worth pursuing is never going to be easy. Whether you want to get into your dream university, achieve your dream body, master a new skill, or even create the “perfect” investment portfolio, all these tasks require an individual to put their best foot forward and to keep moving forward, regardless of how many times they may fall.
What Exactly is “Grit”?
Duckworth defines grit as “a combination of passion and perseverance, applied over a sustained period of time”. In other words, grit is a trait that helps people achieve long-term goals.
Central to Duckworth’s hypothesis was how much of a role natural traits, specifically intellectual capacity (i.e., a person’s IQ), play in determining a person’s success. This is because Duckworth wanted to test the widely held notion that a person’s innate intelligence is the key indicator in predicting the likelihood that a person will succeed at an intellectual endeavour they pursue, such as working towards a degree.
She found that IQ is a very poor indicator of future success. Just because someone has a high IQ doesn’t necessarily mean they would automatically succeed at any future endeavour. What she instead found out was that people who weren’t as naturally smart but had a very strong personal drive to keep persisting were the ones that ultimately ended up experiencing major success.
It’s easy to conflate “grit” with “perseverance”, but that’s not entirely true. Remember that grit is a combination of both perseverance and passion. You could be the most persistent person in the world, but it will be very mentally exhausting to keep pushing if you aren’t really passionate about what you’re doing. You can’t expect someone to keep pursuing an endeavour if they don’t genuinely enjoy what they’re doing.
While the concept of “grit” has faced some resistance, her findings are critical because it helps weaken the widely held belief that all people need to achieve any sort of success in an intellectual endeavour is to have a high IQ. I say “weaken” instead of “disprove” because Duckworth never explicitly said that IQ plays no role whatsoever in determining future success.
Intellectual Prowess: a Prerequisite for Investing?
It’s no secret that investing is an intellectually demanding activity. Because an investor performs so much study, analysis, and critical thinking, it comes as little surprise that an investor’s most prized possession is their intellect.
Because investing is an activity that requires a lot of brainpower, we quickly run into the same assumptions that Duckworth did when she performed her research – individuals who are naturally smarter (in terms of IQ) have a better chance of succeeding as investors than those with lower IQs. Investing isn’t spared from the belief that success and IQ go hand in hand.
The question of whether a person’s intellect has any bearing on their ability to achieve financial success has been discussed before, but the consensus is slowly leaning towards the conclusion that being naturally smart isn’t the make-or-break trait when it comes to achieving financial success.
Take for example the infamous (and long-defunct) hedge fund Long-Term Capital Management (LTCM). LTCM was widely considered the “smartest” hedge fund to have ever existed. A look at LTCM’s partners shows that almost all partners held an advanced degree and even included two Nobel laureates (Myron Scholes and Robert C. Merton) within their ranks.
Despite the copious amount of brainpower, LTCM dissolved after just six years of operation.
Among the many quotes attributed to Warren Buffett, he famously said that when it comes to investing: “You don’t need to be a rocket scientist. Investing is not a game where the guy with a 160 IQ beats the guy with a 130 IQ”.
Similarly, Warren Buffett’s close friend and long-time business partner, Charlie Munger, isn’t a fan of the notion that a high IQ means you are an excellent investor.
Now, although Buffett and Munger both agree that intelligence isn’t necessarily an indicator of investment success, this does not mean that they believe being intelligent isn’t important. Buffett holds a master’s degree in Finance, and Munger holds a J.D. (he practiced law before joining Berkshire Hathaway), so it’s reasonable to say that both of them are intelligent people in terms of IQ.
What they’re saying is that intelligence isn’t the sole indicator of investment success, but rather is just one of many variables that influence whether an investor will succeed or not.
Applying Grit to Investing
At the end of the day, investing involves a lot of hard work. Despite this reality, it seems that a lot of people severely underestimate just how much effort it takes to stay at the top of your investing game.
Investment analysis, personal study & training, reading through quarterly reports, reading through daily news sources – there is no shortage of work for investors to do. Natural intelligence won’t save you here: if you aren’t willing to put in the time and energy needed to be an investor, then you will quickly find yourself losing interest, regardless of how high your IQ may be. This is where grit enters the picture.
There will be times as an investor when you don’t want to continue: maybe your investment analysis is taking longer than you anticipated, or perhaps you are still struggling to wrap your head around an investment topic.
Remember that “grit” is a mixture of both passion and perseverance, applied over a long time. So, investors who remain investors for many decades are those who are genuinely passionate about investing and aren’t afraid to pick themselves up when they inevitably stumble.
Many smart people pursue investing with the hopes of making a fortune for themselves, but it’s not unheard of for smart people to stop investing after encountering their first major setback or when they find out that they aren’t really that passionate about investing in the first place.
Grit is what separates investors who give up at the first sign of trouble and those who go on to have a very successful career, regardless of how many challenges they may face. An investor with average intelligence but with phenomenal grit will always outperform the genius who isn’t willing to get past a minor roadblock.
Grit and Intelligence Must Go Hand in Hand
There are two extremes that an investor could theoretically operate at: relying solely on their intelligence without having a shred of grit, or, having a copious amount of grit but still failing to make any considerable progress, regardless of how much effort is expended.
Natural intelligence and grit lie on opposite ends of the same spectrum. Having too much of one trait will do an investor no good. Instead, an investor will need to have both grit and intelligence if they want to make any sort of progress.
By “intelligence”, I don’t necessarily mean just IQ. While IQ is still important, an investor needs to be book smart (IQ) and emotionally smart, or in other words, possess emotional intelligence (EQ). EQ is a hot topic in psychology, and its importance has long been discussed in several contexts, including business and investing.
Based on my experience, I argue that being emotionally smart is a greater indicator of investment success than being book smart. This is because, as I’ve mentioned countless times, investing is a constant struggle of keeping your emotions in check. No amount of book smarts will save an investor if they constantly succumb to their emotions.
Wrapping Up
If getting rich quickly from investing was possible, then everyone would be an investor. As we all know, that is not the case.
Being an investor is not without its trials and difficulties. Not everything will work out in your favour, and there will be times when you want to give up.
There are some people who believe that all you need to succeed as an investor is to have a high IQ, but being naturally intelligent isn’t going to be your saving grace.
What sets investors apart from one another is whether or not they possess grit. You could boast the highest IQ in the world, but all those IQ points won’t do you much good if you become disheartened after your first investment setback.
Now, grit alone won’t guarantee you investment success, but it will surely improve your chances.
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