Wisdom vs Intelligence

For investors, it’s more valuable to be wise than intelligent.  The investment world is littered with the carcasses of funds run by the ‘smartest guys in the room’.  In the investing ecosystem, intelligence is a given.  Ivy League credentials saturate fund manager bios.  Sophisticated quantitative models crunch numbers while algorithms trade by the microsecond.  Meanwhile, Charlie Munger and Berkshire Hathaway have a system of three stacks:  Yes, No, and Too Hard.  If a deal comes along that sounds good, but isn’t in their wheelhouse, they put it in the Too Hard bucket.  Intelligence is a commodity.  Wisdom is a scarce resource.

Which brings me to “How do I play [headline] here?”

Today the news story is oil or energy.  No one is really knows where ‘here’ is, though.  Is oil rallying or about to plunge to $10?  Commentary around news headlines makes it feel as though investors should be continuously trading their portfolios to keep up with new information.  People who do that are traders, not investors.  “Ok, but what’s a good oil bet here?”  A diverse asset allocation should already have exposure to the energy sector and if it’s been rebalanced diligently, the investor has already been buying energy stocks as they dipped.  The first place to look for sector exposure is the existing portfolio.  Many investors are surprised to see just how much they already have invested in energy, tech, or whatever.

A smart person can crunch output and demand numbers, quantify the impact of striking Kuwaiti oil workers, follow rig counts, and measure bulk freighter contracts to create an investment thesis around whether to buy or sell.  A wise person may conclude that the price of oil depends as much on irrational human behavior as it does on quantitative metrics and set a sector bet in the Too Hard pile.

Too many people fall into the trap of trying to outsmart the market or prove how clever their investment skills are.  This adversarial relationship with the market is unhealthy.  Fighting the market is stressful and usually a losing proposition.  Investing with the market is the wise choice.

Photo by ACK1974