Thursday, July 9, 2009

Is there a relation between Stock Market success and your Intelligence Quotient (I.Q.)?

What are some of the character traits of people who have a high I.Q.?

1. Quick on the uptake - ability to grasp new concepts faster
2. Curiosity - eager to learn and try new things
3. Out-of-the-box thinking - looking for alternative and unconventional solutions - the story of how Columbus made an egg stand on a table without spilling its contents comes to mind;
4. Inability to concentrate on routine or boring tasks
5. Intolerant towards those who can't or won't follow their arguments and advice

I'm generalising here. You may not agree about some of these traits, or, may think of other characteristics that apply better.

The point is, the above traits of a high I.Q. person are not conducive to achieving fame and fortune in the stock market. The most well-known example is that of Sir Isaac Newton, discoveror of Gravity and the Laws of Motion. He lost his shirt by investing in stocks.

People with high I.Q. excel in fields like science, mathematics, economics, engineering. There are set formulae with predictable results. Stock market investments don't work as per formulae. Even detailed analysis may lead to wrong choice of a stock. Unforeseen things happen. It is part of the game.

Intelligent people find this difficult to accept. They are accustomed to success, not failure. Their ego gets in the way - "How can I be wrong?" So, they hang on to their shares, convinced that the market is wrong and the share price will soon hit the roof.

When it dawns on them that they are still losing money, they try to think of 'smarter' alternatives, like 'hedges', 'averaging down' and 'puts'. A bad situation gets worse.

The attitude of a sales person works better in the stock market. Failure and success are accepted with equanimity. He may not be very bright, but has learned to be diligent in regularly updating his prospects list.

When one door gets shut on his face, he just moves on to the next prospect on the list. When he makes a sale, he is pleased but not elated. Each day is the same as the day before. Routine work. Not very creative. But a plan of action that works and meets targets.

That was the long answer. The short answer? Stock market success and high I.Q. tend to be inversely proportional.


Unknown said...

Good one !!!

Unknown said...

I guess stock markets need more common sense than higher IQ.

Attempts are repeatedly made at cracking the code. But, if failure of LTCM and the grand under-performance of Quant funds like Lotus AGILE Fund tells us that complexity and fixed mechanical strategies may not give consistent returns.

Less thinking and More focus may be better qualities?

Subhankar said...

Thanks, Shankar and Eswar for your feedback.

The 'thinking' should be limited to devising a plan, testing and modifying it over a period of time to ensure that it works for your investment style. Then sticking to the plan through market ups and downs - even if that means long periods of little or no 'action'.

That's not asking for too much, is it?!

Joe said...

Nice One.
Since the Stock Market moves towards majority sentiment, it cannot be very mathamatical. If one goes by the general sentiment, one should do ok-I guess.
(I am a novice in the game.)

Subhankar said...

Hi Joe

One of the lessons from the market is that the majority is usually wrong! Sentiments do guide the market during the short term. Eventually the market understands which are the good stocks with staying power and which are duds.

While all boats tend to rise with the bullish tide, only the fundamentally strong survive a long bear onslaught.