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What makes innovators & ace investors?

Dec 23, 2011

Malcolm Gladwell, the famous author of bestseller books like Blink, The Tipping Point, etc., has an amazing knack for unraveling hidden layers and patterns in the world of human beings. What is even more interesting is that he has had a pretty neat track record for turning conventional wisdom on its head. And it seems he is set to repeat the feat with his next book which revolves around 'true innovators'.

Before we share his findings, let us ask you a question. What, according to you, is the most vital ingredient for becoming an innovator? Conventional wisdom would bring to mind the image of an inborn-genius with a very high IQ with qualifications from top notch institutions. Well, these factors may not be so important if Gladwell's study is to be believed. According to him, innovation often comes from 'outsiders' who take 'social risks'. By 'outsiders' he means people who do not belong to the mainstream. An example will make things clear.

Take the US subprime crisis of 2008. Apart from all the massive losses and bankruptcies that we have heard of, there were quite a few investors who made a killing by playing bets against subprime lending. Who were these investors? What was so different about them that they could see what others could not? In Gladwell's words, "Those who shorted subprime were outside Wall Street with no social status to lose."

This means that being outsiders with no social status to lose, they were unaffected by the crowd mentality of Wall Street. They were able to look at things from a different perspective. There was no pressure to do what others were doing. So while others cheered the housing boom, they stayed skeptical. And when things started getting out of hand, they were able to take big contrarian bets and reaped immense gains.

What went wrong on Wall Street? Isn't it known to employ some of the most intelligent minds? Surely, Wall Street people were no fools. But because they were 'insiders' they were overwhelmed by the collective bias of Wall Street. Legendary investor Warren Buffett often uses the term 'institutional imperative' to define tendencies of peer companies to mindlessly imitate each other. That is exactly what plagued Wall Street at the time. With so much pressure and social status at risk, it was best to do what others were doing. If everyone's heading towards hell, it may not be so appalling a place, isn't it?

We believe herein lies a very pertinent lesson for investors. Often we tend to exaggerate the role of genius in any kind of success or innovation. Many small investors think they do not have the IQ for becoming great investors. But nothing could be further from the truth. If you have some basic common sense and a rational mind, you are pretty well-equipped. The one important thing you have to make sure is that your decision-making is not influenced by what others are saying or doing. If you do talk to fellow investors, always ask for facts and reasons behind what they are prophesying. If they fail to answer, which they often will, you know how much they really know. As long as you keep your mind clear of biases and flawed thinking tendencies, and are able to think without the pressure of what others think and without fearing the loss of your social status, you're very much on track to becoming a great investor.


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