As an Investor what is More Important: IQ, EQ or MQ?

Investment Perspective – November 2015

“Neither the investing method nor the fundamentals of the business are right or wrong because the mood of the market is favourable or unfavourable toward the “stock”. That is because when you really think about it, “stocks” (shares) are all about the financials and the trading price, the share price… the cash up value. What matters more is the economics of the business” 

Peter Flannery

Warren Buffett said many years ago that it’s not the guy with an IQ of 160 that will always beat someone else who has an IQ of 130. 

Investing can be a bit complicated. Like anything else though, once we have the right amount of experience (the obligatory 10,000 hours) we develop an understanding, an intuition, a wisdom.

IQ

Intellectual Quotient (IQ) is seen by many as a pre-requisite for investing and financial success. Without doubt, those with greater intellectual capacity have an advantage over others in that they can grasp concepts, ideas and methodologies that others may be less able to. 

There are many intelligent people who are also investors however; we know that a high IQ is not a pre-requisite for investing success, as there are many educated intellectuals who fail financially. The popular book “Rich Dad, Poor Dad” by Robert Kiyosaki explains how that works.

EQ

Emotional Quotient (EQ) is a more recent development explaining an individual’s ability to cope with life. Many studies have shown that those who are “well adjusted” as it were generally tend to be more successful than others. They do not get caught up in the so-called “small stuff” that slow down or stop others. They problem solve easily on a day to day basis.

For example, fear of excessive debt has stopped many a defensive individual from expanding their property investment portfolio. Also, sharemarket hysteria and a lack of understanding that price and value are different things has kept many an investor away from big business opportunity (direct shares).  

Fear of losing money (because it can be so hard to get in the first place), being let down or taken advantage of or just looking bad in front of others if things don’t work out can seriously hold even intelligent people back from real financial success. Fear also applies to those with a high IQ too.

MQ

And then there is Mentality Quotient (MQ), which relates to an individuals mentality as a human being (and an investor too), which is driven by their mindset. 

Mindset is driven by an individual’s experience of life, their habits, attitudes and therefore their behaviour. 

If a defensive outlook on life drives behaviour, an investor may never get past reducing debt, saving money in the bank and hoping that being nice to everyone will mean that all will be well in the future. 

For those who demand more from life realise that personal growth and “monetary growth” (financial success) is necessary to achieve what they want. They will be conservative rather than defensive. They dislike unnecessary risk. They look for growth and opportunity, taking the trouble to understand and minimise risks where possible. They trust others and get help.

Depending on their outlook on life, their experience and their desires, these investors can be comfortable investing in the so-called sharemarket, property and owning their own business when others with a different mentality quotient may see them as taking very high risks.

Indeed, many of my clients have commented that they are happier investing in properly carefully selected investments whether it be their own business, a property in which they invest or large companies listed on the sharemarket using the Value Investing methodology and are more comfortable in those investments than investing in the bank. 

They understand that if markets become particularly complicated and dangerous that in fact the bank is not the place to be. We only need to think about the recent global financial crisis and the experience of many Greek people to be reminded that this in fact is correct. Closer to home finance companies come to mind.

Those with an appropriate MQ tend to be successful investors – to the amazement / bewilderment sometimes of others who may have a higher IQ.

Are Bond Investors Really Smarter than Equity Investors?

There is an old adage that floats around the market suggesting that bond holders and investors somehow have greater insight into the vagaries of the markets than equity investors. As an equity investor of course I personally am very biased towards investing in equities! 

Longer term though we only need to look at the difference in returns that can be achieved. 

In the short term bonds can offer some growth as interest rates decline, revaluing the value of the bond. You know, as interest rates drop the bond you hold offering a higher interest rate is worth more because of that higher interest rate that it generates.

Bonds therefore have offered above trend gains over many years as interest rates have declined over the last 25 years or so. Equities tend to outperform bonds long term though.

Speculating on the share market or “playing the markets” is not something that I would bother with (neither does Warren Buffett). What about you?

Investing in a good business though with the right underlying business economics is something that Value Investors are very comfortable with, regardless of the economic environment. 

They “know” that price and value are different things. They “know” that as prices decline value emerges.

“Well, if I liked the business at $200 I like it better at $175.“

Warren Buffett