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Think You’re Smart? The Stock Market Doesn’t!

The investment game attracts lots of smart people to the stock market who believe that they should be able to think their way to investing success.

The investment game attracts lots of smart people to the stock market who believe that they should be able to think their way to investing success.

This is no surprise; smart people are always trying to solve problems with their intelligence.

It’s an example of The Law of the Instrument, which states that if you give a small boy a hammer, he will perceive that everything he encounters needs hammering on. I think this applies to everything from WD-40, duct tape and hammers to computers and cell phones. If your cell phone is your favorite tool, you’ll always be asking: “Isn’t there an app for that?”

If the tools you have at your command really do guide how you look at problems, then smart people will want to use their brains. And smart stock investors will want to bring their intellect to bear on the problem of how to make money in stocks.

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I have three comments to make on the proposition that smart people should be able to do better in the stock market than their less-brainy peers.

Intelligence Doesn’t Equal Success

For years, recruiters for hedge funds have been cruising like great white sharks around the graduating classes of brainy locales like MIT, CalTech and other centers of technical education. Hedge-fund types like to recruit smart graduates who have a practical turn of mind, much preferring a tech whiz who speaks the language of math to a brilliant English major.

Unfortunately, having a hedge fund with certified geniuses stacked three deep isn’t the guarantee of robust, repeatable returns it once was. There are too many competitors, for one thing, and the Stock market seems to be quite happy to produce as many “black swan” events as it takes to prevent trading algorithms from producing reliably.

Hedge funds returned an average of just 2% in 2014, and the industry had its worst year for fund closures since 2009. Things turned even worse in 2015, with average hedge fund performance in the negative numbers. And these are people who charge 2% management fees and take 20% of the profits. These people may be smart, but the market still outsmarts them. (Chances are results were much better for 2016, given the strength of the stock market, but those numbers aren’t out yet.)

Confidence Doesn’t Equal Success

Many smart people I’ve run into in my life are quite confident—and hanging around universities for a bachelor’s degree, graduate school and a short career as a professor allowed/forced me to meet lots of them. Being smart and being trained to think can give people the illusion that their conclusions are more accurate/useful than those of others. Or, at the very least, they can argue for them with greater sophistication.

Confident people are exactly who the market loves to see walking down The Street. Confident people are more likely to stick with their losing stocks long after their humbler cousins have sold and are sitting in cash, bruised but not beaten. The market’s favorite lesson for people with “conviction” about a stock is to deliver the Death of a Thousand Cuts. And where investors who take less pride in being right will admit defeat pretty quickly, people who think they’re smarter than the stock market will get the full lesson.

Smart vs. Knowledgeable

Smart and knowledgeable are two different things, especially when dealing with a contrary beast like the stock market. If all the smart person entering the market has to work with is a single idea spawned by a keen intellect, the market will go to Plan B and beat the person like a Turkish carpet.

The smart person who doesn’t research some market history, paper trade for a while, read a few memoirs by market legends, check out the various strategies and attempt to figure out their own investing personality is just asking the market to teach them a series of expensive lessons. And the market is always happy to take that assignment.

Fortunately, the investing veterans who write Cabot’s various advisories have all been through the market’s toughest school. And we’re here to help you become knowledgeable without the scars and expense of learning from your own mistakes.

Mike Cintolo, Cabot’s Vice President of Investments, has been a growth stock investor for his entire adult life. He began investing along with his father, then had a world-class teacher in Cabot’s founder Carlton Lutts, an engineer so fascinated by the stock market that he established Cabot Growth Investor (then called Cabot Market Letter) 46 years ago. Mike has won awards as a market timer and CGI has established a history of finding big winners and beating the market.

If you’d like to have a guy like Mike on your side, all it takes is a subscription to Cabot Growth Investor and you’re on your way. And that’s the kind of educational opportunity that puts the odds on your side.


Paul Goodwin is a news writer for Cabot’s free e-newsletter, Wall Street’s Best Daily.