“The older I get the more I realize how many kinds of smart there are. There are a lot of kinds of smart. There are a lot of kinds of stupid, too.”
– Jeff Bezos
The smartest investors of all time went bankrupt 20 years ago this week. They did it during the greatest bull market of all time.
The story of Long Term Capital Management is more fascinating than sad. That investors with more academic smarts than perhaps any group before or since managed to lose everything says a lot about the limits of intelligence. It also highlights Bezos’s point: There are many kinds of smarts. We know – in hindsight – the LTCM team had epic amounts of one kind of smarts, but lacked some of the nuanced types that aren’t easily measured. Humility. Imagination. Accepting that the collective motivations of 7 billion people can’t be summarized in Excel.
“Smart” is the ability to solve problems. Solving problems is the ability to get stuff done. And getting stuff done requires way more than math proofs and rote memorization.
A few different kinds of smarts:
1. Accepting that your field is no more important or influential to other people’s decisions than dozens of other fields, pushing you to spend your time connecting the dots between your expertise and other disciplines.
Being an expert in economics would help you understand the world if the world were governed purely by economics. But it’s not. It’s governed by economics, psychology, sociology, biology, physics, politics, physiology, ecology, and on and on.
Patrick O’Shaughnessy wrote an email to his book club years ago:
Consistent with my growing belief that it is more productive to read around one’s field than in one’s field, there are no investing books on this list.
There is so much smarts in that sentence. Someone with B+ intelligence in several fields likely has a better grasp of how the world works than someone with A+ intelligence in one field but an ignorance of that field just being one piece of a complicated puzzle.
2. A barbell personality with confidence on one side and paranoia on the other; willing to make bold moves but always within the context of making survival the top priority.
A few thoughts on this:
“The only unforgivable sin in business is to run out of cash.” – Harold Geneen
“To make money they didn’t have and didn’t need, they risked what they did have and did need. And that is just plain foolish. If you risk something important to you for something unimportant to you, it just doesn’t make any sense.” – Buffett on the LTCM meltdown.
“I think we’ve always been afraid of going out of business.” – Michael Moritz explaining Sequoia’s four decades of success.
A key here is realizing there are smart people who may perform better than you this year or next, but without a paranoid room for error they are more likely to get wiped out, or give up, when they eventually come across something they didn’t expect. Paranoia gives your bold bets a fighting chance at surviving long enough to grow into something meaningful.
3. Understanding that Ken Burns is more popular than history textbooks because facts don’t have any meaning unless people pay attention to them, and people pay attention to, and remember, good stories.
A good storyteller with a decent idea will always have more influence than someone with a great idea who hopes the facts will speak for themselves. People often wonder why so many unthoughtful people end up in government. The answer is easy: Politicians do not win elections to make policies; they make policies to win elections. What’s most persuasive to voters isn’t whether an idea is right, but whether it narrates a story that confirms what they see and believe in the world.
It’s hard to overstate this: The main use of facts is their ability to give stories credibility. But the stories are always what persuade. Focusing on the message as much as the substance is not only a unique skill; it’s an easy one to overlook.
4. Humility not in the idea that you could be wrong, but given how little of the world you’ve experienced you are likely wrong, especially in knowing how other people think and make decisions.
Academically smart people – at least those measured that way – have a better chance of being quickly ushered into jobs with lots of responsibility. With responsibility they’ll have to make decisions that affect other people. But since many of the smarties experienced a totally different career path than less intelligent people, they can have a hard time relating to how others think – what they’ve experienced, how they see the world, how they solve problems, what kind of issues they face, what they’re motivated by, etc. The clearest example of this is the brilliant business professor whose brain overlaps maybe a millimeter or two with the guy successfully running a local dry cleaning business. Many CEOs, managers, politicians, and regulators have the same flaw.
A subtle form of smarts is recognizing that the intelligence that gave you the power to make decisions affecting other people does not mean you understand or relate to those other people. In fact, you very likely don’t. So you go out of your way to listen and empathize with others who have had different experiences than you, despite having the authority to make decisions for them granted to you by your GPA.
5. Convincing yourself and others to forgo instant gratification, often through strategic distraction.
Everyone knows the famous marshmallow test, where kids who could delay eating one marshmallow in exchange for two later on ended up better off in life. But the most important part of the test is often overlooked. The kids exercising patience often didn’t do it through sheer will. Most kids will take the first marshmallow if they sit there and stare at it. The patient ones delayed gratification by distracting themselves. They hid under a desk. Or sang a song. Or played with their shoes. Walter Mischel, the psychologist behind the famous test, later wrote:
The single most important correlate of delay time with youngsters was attention deployment, where the children focused their attention during the delay period: Those who attended to the rewards, thus activating the hot system more, tended to delay for a shorter time than those who focused their attention elsewhere, thus activating the cool system by distracting themselves from the hot spots.
Delayed gratification isn’t about surrounding yourself with temptations and hoping to say no to them. No one is good at that. The smart way to handle long-term thinking is enjoying what you’re doing day to day enough that the terminal rewards don’t constantly cross your mind.
Casualties of Your Own Success
Conflicting Skill Sets
An Art Leveraging a Science