Buffett on Trading Off Intelligence and Discipline

MJG

Hi Guys,

Recently, Farnam Street’s Shane Parrish has been revisiting interviews that Warren Buffett and Charlie Munger granted over the last few years. Each review offers financial wisdom and investing gems.

Here is a Link to a current release that addresses the question “What makes Warren Buffett a great investor? Is it the intelligence or the discipline?”:

http://www.farnamstreetblog.com/2014/08/what-makes-warren-buffett-a-great-investor/?utm_source=feedburner&utm_medium=feed

As always, Buffett is very succinct in his assessments. For example, here is a brief but pithy excerpt: “But to win at this game, and most people can’t, you need discipline to form your own opinions and the right temperament, which is more important than IQ.”

It’s heartening that Buffett downgrades the importance of IQ in the investment process. You need not be brilliant to succeed.

But take note of the qualifier that the Wizard of Omaha slipped into his statement: “…..to win at this game, and most people can’t……”. He doesn’t have confidence in the investment abilities of the average investor. That’s sad, but consistent with his recent quotes.

I suspect that Mr. Buffett is not very conversant with IQ scores. Note in his opening statements how he introduced trading off an IQ score of 160 as follows: “If you’ve got 160 IQ, sell 30 points to somebody else because you won’t need it in investing. What you do need is the right temperament.” Not many of us have IQs in the elevated and rare atmosphere.

For most IQ tests, the average score is set at the 100 level. The actual scores are typically Bell shaped so a Normal statistical distribution adequately models the data. The standard deviation for the IQ scores is 15.

This means that 68% of the scores fall between 85 and 115 (one standard deviation), and that 95% of the scores register between 70 and 130 (two standard deviations). A score of 160 (four standard deviations) is reserved for a select few in our population (much less than 0.1%). Any person scoring over 160 is considered by experts in the field to be a genius, exceptionally gifted individual. Approximately 1 out of 30,000 folks have IQs above 160. I’m definitely not in that group.

Since the Bell curve is symmetrical, even a relatively low IQ rating of 130, according to the Buffett comparison measure, is achieved by only about 2.5% of the overall population. I really do not believe that Warren Buffett was restricting his comments to that elite cadre. Investing is not that demanding. Buffett just doesn’t understand the IQ stats or how they’re computed. That’s unlike him, but rare exceptions always exist.

Please enjoy the interview. It is rich in investment guidance.

Best Regards.

rjb112

Always nice to hear about Buffett. I have tremendous respect for him. And I've heard him speak (or read what he said in interviews) just what you reported about intelligence. I think Buffett doesn't realize just how intelligent he is. I think he is way up there, a superbly intelligent person. And his memory seems to be exceptional.

He apparently doesn't see just how smart he is. Every time I have seen him on TV at CNBC or elsewhere, he has total command of his subject, details, facts, etc.

MJG, thanks for posting. I like hearing about Munger too, but not nearly as much as Buffett. On a side note, I just read his 2013 Letter to Shareholders. I think it is a real gem. He gives extremely important and practical investment advice there, and lots of it.

He did catch some flack for saying that in his will, he has left instructions to the trustee to put 90% of his wife's portfolio in the S&P 500 index fund, and 10% in short term government bonds