Jun 10, 2013|
Should you be less stupid or more intelligent?
What do you think is Berkshire Hathaway's secret sauce? Warren Buffett was destined for greatness right from his childhood some would say. Or that he and his partner Charlie Munger come with IQs that are way off the charts, others would surmise. However none of this could be true. There are examples galore where through sheer perseverance and hard work, people have gone on to achieve great heights even if they weren't exactly child prodigy. Also, it would not be difficult to prove that there is hardly any correlation between high IQ and success in the field of investing. This is not to say that Buffett and Munger are not intelligent people. Of course, they are. But we believe there's a more important and a bigger factor at play here.
Charlie Munger summed it best when he once said that it is indeed remarkable how much long term success has come Berkshire Hathaway's way by trying to be consistently not stupid instead of trying to be very intelligent. This is a very important statement we believe. One of the biggest reasons why Berkshire Hathaway has been so successful is because its capital allocators, both Buffett and Munger, have done a fantastic job of being much less stupid than their counterparts rather than try and be more intelligent.
You see, the bigger thing in investing is not how many winners one has found. It is about avoiding huge losses and it is this aspect that has a greater impact on long term performance. For one big loss can undo the gains earned from years of hard work.
And it certainly does not need more intelligence to figure this out. All that is required is an attitude of strong risk aversion. In fact, more intelligence can only backfire we believe. For intelligence has a habit of making people arrogant and fosters a belief that nothing is impossible. This then leads to a tendency of taking more risks than usual and setting oneself up for disaster.
It is perhaps the same arrogance that led to the collapse of the famous hedge fund LTCM that was believed to have some Nobel prize winners on its rolls. The people in charge of making investment decisions got so confident in their analysis that they took leveraged bet and when it didn't work out, it all ended in tears. Knowing Buffett and Munger, we don't believe they will ever take leveraged bets on anything no matter how confident they are with respect to their calculations. For they know, the future is always uncertain and hence, one should always approach every investment with caution.
In the end, investing is not rocket science. Its simple enough that even a moderately intelligent person can understand it and also make a huge success out of it. However, what should be avoided at all costs are some stupid errors that get even the most intelligent people in trouble.
||Rahul Shah (Research Analyst), Managing Editor, Microcap Millionaires has led the team from the front in developing some of our most stringent and rewarding research processes. As per his own admission, the turning point in Rahul's life as a financial analyst came a few years back when he got introduced to the works of Warren Buffett and Charlie Munger. From Buffett, he understood the value of investing in good quality business with powerful moats and strong management teams. Charlie Munger on the other hand inspired him to be a lifelong learner and use mental models in order to arrive at the crux of matters across most disciplines. Rahul firmly believes that in order to be successful at investing, you have to do the big things right and possess a great temperament and a contrarian streak.
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