Investing is not an IQ contest

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24 Jul Investing is not an IQ contest

Warren Buffet once said of investing that it “is not a game where the guy with the 160 IQ beats the guy with 130 IQ”.

In January 1720, shares in the South Sea Company traded at £128. By June of the same year, they had skyrocketed to £1050 a share.

art1julyLike many esteemed members of society, Sir Isaac Newton invested in the company. However, shortly after sensing that the share price had become far more expensive than the intrinsic value of the company he sold his stake in the company and in the process, doubled his money.

Unfortunately, he then had to sit on the sideline for months and watch his friends who held their investment triple their money as the share price continued to rise.

So, Newton conceded and reinvested in the stock. The stock, however had already reached its peak and subsequently fell to £175, eroding almost all of Newton’s life savings.

The experience had such an effect on him that he later concluded “I can calculate the movement of heavenly bodies, but not the madness of men.” In his anger, he reportedly forbade anyone to utter the words ‘South Sea’ in his presence.

Sir Isaac Newton, to this day remains one of the most intelligent people to have ever lived. Yet, even he couldn’t successfully time the market. So, it must take a great deal of confidence or even ignorance for anyone to think they could do a better job.

At first, Newton accurately spotted the bubble and sold his investment. Only to be lured back in as his friends got rich. As legendary banker, JP Morgan once observed, “nothing so undermines your financial judgment as for the sight of your neighbor getting rich.

The trouble with attempting to outsmart the market is that human emotions – fear, greed, and optimism, play an immeasurable role in how stock market participants behave. It’s one thing to spot a trend on a spreadsheet, but it’s quite another to know how long that trend might continue for.

Many people in financial services treat investing as an IQ contest, with the ultimate goal of beating the competition and making a bucket load of money in the process. A great deal of time, effort, and computing power are devoted to predicting what the market will do next, spotting when the next bubble will burst and when the next bear market will begin. The reality is, much of the time, these attempts are time, effort and resources wasted.

This is why at Tandem, we never attempt to predict the market and steer clear of market-timing. Our approach is to help our clients capture market return over the long term in a way that is consistent with their risk profile, goals and objectives.