July 2, 2016

There is no correlation between intelligence and trading

Many people assume that those who regularly make money in stock markets must be very clever. Or that you must be blessed with some intelligence to "make it big" in the markets.

This is a very wrong assumption as there is no correlation between intelligence and trading.

If clever or intelligent people were good traders, then all your classmates from school or college who were toppers or other clever people (like doctors, engineers etc) you meet in life would be excellent traders. That is certainly not the case.

On the other hand, a lot of ordinary people  have earned excellent returns by simply buying a stock and not doing anything for years or decades (Warren Buffet). While people with far shorter timeframes and wanting to "do something everyday" have lost a lot several times over.

In both cases, the returns or losses have nothing to do with the intelligence or lack of it. It is more a case of "cut your losses fast and let profits runs". In case of long term investors, provided you have invested in a good stock (no intelligence required - common sense is enough) and have held on to something for years (not difficult), prices invariably catch up and you will be in profit. For traders, it becomes "follow the trend", respect stoplosses and hold winners. Again no intelligence required.

Another example is of star traders in brokerage houses or in hedge funds. They all go through their ups and downs. When they are at the peaks, they are the toast of the media and articles are written about how they succeeded. It is when they go through severe drawdowns you realize that their previous winning streaks were just random events and they were at the right place and the right time and they traded in the direction of the trend. We tend to call this intelligence but if they were really clever, they should not have been affected by trend reversals but they too lose fortunes or fail to capitalise on the reverse trend.

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