Weekend reading

Good reads from around the Web.

I learned an amusing bit of trivia about high I.Q. investors from Monevator fave Larry Swedroe this week.

In an article for CBS Moneywatch on the woeful performance of investment clubs, Larry notes:

 If any group should be capable of showing that more heads are better than one and that intelligence translates into market-beating returns, it should be Mensa.

The June 2001 issue of Smart Money reported that over the prior 15 years the Mensa investment club returned just 2.5 percent, under-performing the S&P 500 Index by almost 13 percent per annum.

Warren Smith, an investor for thirty-five years, reported that his original investment of $5,300 had turned into $9,300. A similar investment in the S&P 500 Index would have produced almost $300,000.

One investor described their strategy as buy low, sell lower.

I’m pretty sure even cash would have beaten this brainy bunch. And it backs up my own observations about I.Q. and intelligence.

Though he’s no fan of stockpicking of any kind, Swedroe’s charge here is particularly against investment clubs. It seems about the only thing that can do worse than a private investor at beating the market is a committee of private investors.

But I think the point applies to high IQ lone rangers, too.

Clearly there are a few very smart individuals running successful hedge funds or wot not. Monevator has unusually clever readers, for sure. And modesty forbids me revealing my own…etc.

But as a generalisation, I’ve noticed many extra clever people make extra terrible stockpickers.

The worst are probably engineers. If I was charged with recruiting for a hedge fund by degree alone, I’d pick maths and physics grads first, then high-flying arts students – as in history, philosophy, and so on. Not as in Tracey Emin.

Engineers would come last.

This is no disrespect to engineers, who play one of the least appreciated roles in modern society – heck, they pretty much gave us modern society.

But boy do they get themselves in a muddle with investing.

I suspect it’s an innate distaste for uncertainty and fuzziness that’s helpful for engineering but lethal to active investing.

If you’re a structural engineer, you build a bridge that will take several times the maximum load you can imagine passing over it, just to make sure.

Apply that mindset to active investing and you’ll either cower in cash, or else you’ll become wedded to certainties: “I just KNOW this stock is good enough!”

Certainty has no place in the murky – and for most futile – world of stockpicking.

Other kinds of engineers construct very elaborate machines, and their skill set can lend itself to spurious precision about business and economic cycles, and how they intersect with the stock market.

Yes, they all affect each other, but your path is like that of a cyclist negotiating a roundabout at rush hour in Rome. Much better to trust instinct and quick reflexes than to think you can plot a precise path in advance.

As Warren Buffett – himself no intellectual slouch – puts it:

“Success in investing doesn’t correlate with I.Q. once you’re above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

I wonder how an investment club of investing blog writers would fare?

Actually, don’t answer that!

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From the blogs

Making good use of the things that we find…

Passive investing

Active investing

  • Wexboy’s tips for tackling fear and greed – Part 1 and Part 2
  • The case for Personal Assets Trust – DIY Investor (UK)
  • Screening for dividend growth stocks #1 and #2 – Clear Eyes Investing
  • Value investing when debt levels are high – Aleph blog

Other articles

Product of the week: The FT [search result] says that banks are making it easier for the self-employed to get mortgages. In particular, well-paid contractors (who abound here in London) can now access all Halifax’s standard mortgages, provided they earn at least £75,000 a year.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • How to invest your $200,000,000 portfolio – Forbes
  • Diversification isn’t broken, it just takes a while – N.Y. Times
  • Bond investing in a rising rate environment – Vanguard
  • Swedroe on size, value, and momentum – Index Universe

Active investing

  • CAPE may still be best measure of market froth [Search result]FT
  • The case for investment trusts – Telegraph

Other stuff worth reading

  • Avoiding Sudden Wealth Syndrome [Well, the bad parts]Vanguard
  • …what about a lottery win? Could you survive that? – Motley Fool
  • How to tackle the pension crisis [Search result]FT
  • Mortgage affordability highest since 1999 – Telegraph
  • Martin Lewis: Let’s rebrand student loans – Telegraph
  • Tales from the UK property market – Guardian
  • Entrepreneurship: The ultimate white privilege? – The Atlantic

Book of the week: Want to know more about the world of insider trading? Then read Circle of Friends, which might be this summer’s The Big Short. With some hedge fund titans falling as fast as their returns as the FBI crackdown in the US continues, this expose has caught the zeitgeist. (Perhaps an insider at the FBI tipped off the publisher as to a propitious release date?)

  1. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.”

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