The Investment U e-Letter: Issue # 710
Friday, September 14, 2007 Smart Investing: How to Invest Like Albert Einstein
by Alexander Green, Chairman, Investment U; Investment Director, The Oxford ClubAlbert Einstein is the universal symbol of genius. He discovered the theory of relativity, won the Nobel Prize in physics, and made scientific advances in gravity, cosmology, radiation, theoretical physics, statistical mechanics, quantum theory and unified field theory. Wouldn't an investor be blessed to have an IQ like this? Actually, no. Einstein lost his investment capital - including his Nobel Prize money - on bonds that defaulted. For all his genius, he was a failure at smart investing. Some may think this was an anomaly of some kind. But a recent study done by researchers at Brown University disagrees. It shows that people with high IQs are no wealthier than folks with average intelligence. This is particularly perplexing when you consider that the average worker with a college degree makes 70% more than one with a high school education. (The job market is practically begging kids to stay in school.) Clearly, if the highly intelligent are worth no more than the Average Joe, they're either spending a lot more money (rather than saving it) or they're much poorer investors. It may be the latter. Choose A Smart Investing Approach… And Stick With It Back in my years as an investment advisor, I found that doctors, for example, were often notoriously poor investors. "Don't hesitate to take any short-term capital gains," an anesthesiologist once told me. "I've got enough losses carried forward to last me forever." But why would really smart people be worse investors than those of average intelligence? It could be that successful investing has more to do with reacting unemotionally to events in the financial markets than having incredible insights. Or, more simply put, successful long-term investing is less about doing something absolutely brilliant than about not doing anything profoundly stupid. Many smart folks seem to learn this lesson the hard way. It may be that people who are blessed with high intelligence also develop a surplus of confidence. And nowhere is hubris punished more severely than in the stock market. (Unless, of course, you want to include the futures and options markets.) In short, you may be a smart guy. But if you think you've got inflation, interest rates, currency fluctuations and business conditions all figured out, you still have a lot to learn. Or, as Warren Buffett famously said, "Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ." Most people with long records of success in the markets find a discipline and stick with it. You can make money in growth stocks or value stocks, large caps or small caps, foreign stocks or domestic stocks. It doesn't matter. But there are going to be times when any particular approach is out of favor and other systems work better. Still, the investor who sticks with his discipline - rather than chasing the latest fad - tends to do better over the long haul. So don't try to invest like Einstein. You just might, however, benefit from trying to live like him. After all, it was Einstein who said, "The trite objects of human efforts - possessions, outward success, luxury - have always seemed to me contemptible… I believe a simple and unassuming manner of life is best for everyone, best both for the body and the mind." At the very least, you're likely to have more left to invest this way. Good Investing, Alex
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