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We know that the intelligence and success has a direct relationship. People with higher intelligence have a higher chance of succeeding into any field. The level of intelligence is what separates the geniuses from the mediocre. People with high IQ (Intelligent Quotients) are considered to be more likely to achieve the higher success than those with the lesser IQ.
But when it comes to the stock market investment, having IQ doesn't guarantee the success. There is no sure shot correlation between higher IQ and chances of success when it comes to the investing into the stock market.
What matters more for investment success : IQ or EQ?
For being successful into the stock market you need to have high level of EQ (Emotional quotient). EQ is more important than IQ for earning money from equity market. Emotional intelligence (EI) refers to the ability to perceive, control, and evaluate emotions. Some researchers suggest that emotional intelligence can be learned and strengthened, while other claim it is an inborn characteristic
Having intelligence can only guide you about what the right course of action is, but it is EQ which determines whether we would act on the right course of action and stick to it or not.
There are many tests developed by various people to measure the IQ level, many of the tests are also available online. When it comes to measuring IQ level, world's renowned scientist Sir Isaac Newton is believed to had the IQ of 190 plus, which is very rare. As only 0.13% of the people have the IQ of 160 plus.
I found out the classification of the people based on their intelligence level (IQ level) from the link http://www.free-iqtest.net/iq-score-guide.asp.
Sir Isac Newton was considered to be having an IQ of 190 (Higher than Einstein's IQ of 160). Though he never gave any IQ test so it is difficult to know the exact IQ level of Newton but these are the approximation I found after taking the help of Google. There might be dispute among the scholars about the exact IQ level of Newton as I also found one webpage mentioning the IQ of 250 for Newton, but there is no doubt about the high level of intelligence level of Sir Newton.
We all know about the great contribution of Sir Isac Newton in the field of Physics. Laws of Motion were some of his main contributions. He discovered these laws in 1687. Without the laws Newton discovered we would not be as far as we are today in modern physics.
Sir Issac Newton's investment in South Sea Company
But very few people actually know the fact that the Sir Isaac Newton lost his life saving in 1720 in stock market. Newton lost almost every penny into the stock called south sea company which was established in 18th century and granted a monopoly on trade in the South Seas in exchange for assuming England's war debt.
Being a high profile and intelligent investor he identified the bubble in making into this company's stock price and exited at the right time. He doubled his money and earned the handsome gain of approximately £7000. Having made the handsome gain from the deal, Newton then watched with some perturbation as stock in the company continued to rise.
Newton went on to reenter with even a bigger amount and bought the stock of South Sea Company shares at more than three times the price of his original stake. In this venture of reentering into the Stock of South Sea Company, Newton lost almost £20,000, which in 1920 was amounting to almost his life saving. Converting the same into the today's worth would be approx Rs 17 to 18 Cr in INR terms.
Above is the graphical representation of South sea company's stock price, and effectively of Newton's emotional journey from greed to satisfaction and then from then to envy and more greed, ending in despair.
As a result of this crisis, he stated "I can calculate the motions of heavenly bodies, but not the madness of people."
We as an investors (not as intelligent as Sir Isaac Newton for sure) must learn from this story of sir Isaac newton and South sea company.
It's the logic (IQ) which tells you what is ideal and logical step we should take in investing, but it's EQ which actually decides our final course of action. We need to learn to check whether our decision is based on the emotional impulse or it's purely based on the intelligence.
Ask yourself before any major investment related decision the following questions,
Which is the primary guiding factor of guiding your decision, logic or emotion? If your investment decision is based on some emotion like greed or envy same as those of Newton while reentering into the stock at three times the price of his first entry, you need to stop and do some soul searching. If you are investing into the stock just because your friends and relatives have made are good deal of money in particular stock or fund, then chances of you getting broke may be as good as those of Newton.
Also one more thing to note from this story is that Newton lost his life saving also because, he invested his life saving in single stock and investment. Had he been diversified his portfolio into multiple stocks, his loss might have been smaller. We as an investor should also ensure the proper diversification in our portfolio.
Unfortunately, Newton didn't had an option at all to invest into the stock market through Mutual Fund, as the modern form of Mutual fund first started in 1822 in Belgium and then soon took root into Britain and France.
Fortunately we have got the option of diversifying our investment in stock market with the help of Mutual Funds and ensuring that we don't get emotionally attached to single stock and in turn create a big risk of losing the life saving.
As Chanakya rightly said, "Learn from the mistakes of others....you can't live long enough to make them all yourselves."
All content in MasterMind is created by Wealth Forum and should not be construed as an opinion of Sundaram Mutual Fund.
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MasterMind is a joint initiative between Sundaram Mutual and Wealth Forum, in which we offer insights into how you can become a more effective advisor to your clients, by understanding them better, understanding how they think, understanding how they take financial decisions. This gateway into your clients' minds we believe will help you relate better to them, communicate more effectively with them and thus serve them better. Mastering your client's mind is your gateway to becoming a more successful advisor. Its not for nothing that they say, "Its all in the mind!"