It was 23 years ago and I, an intrepid, determined young man, wanted to prove to the middle aged baby boomer interviewing me that I was indeed the best man for the
And so there I sat, answering questions the slightly rotund, middle aged man posed to me, until he asked me a question that I had never been asked before:
"So what investment ideas do you have?"
This question threw me off because I didn't really think much of investing because I had no money to invest. If anything I was just trying to pay cash for college so I wouldn't incur any student debt. But I did have one investment idea which had been battling about in my brain, that though elementary, was the first that popped to mind. And so circa 1996 I said, "I would buy up property in the outer suburbs from farmers, hold onto it, and sell it at a gain."
The then-middle-aged baby boomer looked at me, wholly unimpressed, looked back at his notepad, scribbled something down and I obviously did not get the job.
Fast-forward to today and we of course, with hindsight, realize just what a - ahem - BRILLIANT (and devilishly handsome) young man I was. Because any dope investing and buying up farmer land in 1996 would have made a killing to the point of paid-retirement had he sat on that property for 10 years.
But there is a more important lesson lurking in this story and one that my readers can gain from. And that lesson is not to overestimate competition, enemies, people, or society as a whole. Do not play 4D chess when these entities aren't even capable of playing checkers. For if you overestimate your adversary, society, an economy, a market or any other system, you inaccurately diagnose what is going on, and thus make wrong decisions that will cost you in the future. And the entity I want to discuss today is the financial markets.
To be succinct, the financial markets operate at an IQ of 105. Not dumb, but certainly not smart. But to the untrained (though logical eye), you may view the financial markets as this vast, complex, overly intelligent entity that only Harvard and Ivy league "financial geniuses" can understand. However, if you do, you are over estimating the "intelligence of the market" and therefore going to fail to predict it. This unfamiliarity most people have with financial markets allow people who work in the financial markets to "bluff." To present a fake front or air about them, making it seem they're much smarter than they actually are. But if you look at the type of people who compose the financial market system, you'll see financial markets for what they truly are - a ho-hum, terribly UNimpressive lot.
First there are the clients, namely individual and corporate investors. I differentiate between "corporate" and "institutional" investors as institutional investors (hedge funds, quants, insurance companies, etc.) are the ones who might actually have some smart people about them, while "corporate" investors I consider your mindless HR managers who manage 401k and 403b plans. Regardless, individual and corporate investors are your you rank and file sheep who never ask "why does the stock market keep going up," never bother to ask "what if everybody invests in a 401k? won't that inflate the stock market," and can often be found at the sports bar, horking down wings, wearing another man's jersey. These people have an IQ on average of around 90 and think The Stephen Colbert Show is news.
Second, there are the actual "professionals" in the finance industry. I use that term loosely because most professions in the finance industry don't require any real intellectual rigor or effort. Nearly everybody in the financial markets (no matter what they say) are salesmen. Bankers, brokers, even investment bankers do nothing more than sell, sell, sell, and then claim to be "geniuses" when they get a commission on a deal. The majority of day traders fancy themselves geniuses when the stock market is booming, but oddly enough disappear when the general trend in the stock market is down. M&A types think borrowing at an artificially low 3% to buy back stock in LBO's is somehow "genius" when in reality the federal reserve's charitable monetary policy makes it so a three year old could do it. And let's not forget the talking heads at CNBC, the financial news media, and the legions of professors and "experts" they have on the show. I still fondly remember the days they were talking about Krispy Kreme's IPO. In the end and in their totality, these are not brilliant financial geniuses who know something about the financial markets you don't. They are your run of the mill aged "dude bros," with IQ's solidly in the 105's, who are only capable of graduating from business school and all want to be "the big idea guy."
Then there is a modicum of smart people. These are more of your truly renegade maverick types who not only possess intelligence, but the courage to rebuke group think and think independently. Schiff, Shiller, even moi. Quants, econometricians, and other data science types. And traditional finance professionals who happen to also be genuinely intelligent (as profiled in the movie "The Big Short.") These people certainly have IQ's above 120, but their numbers are so small, and the financial industry so unmerocratic, they have no affect on the market's overall intelligence.
The result is an industry that not only has an unimpressive IQ of 105, but is completely obsolete. Additionally, because it lacks true, genuine intelligence, it often gets caught with its pants down, or even its hands in the cookie jar.
In terms of obsolescence, most finance professionals are simply not needed in that the vast majority of them cannot beat the stock market returns of the S&P 500 index. The average person, without a day of finance education, can invest in the index and beat 85% of the professionals, all replete with their MBA's from Harvard. Even sales people are obsoleted through in the advent of roboadvisors. All one has to do now is go to a site like Betterment, answer some questions online, and the roboadvisor will come up with a portfolio of index funds that will match your target retirement date (I believe in this product so much I offer it as an affiliate program). One could even say crowd-funding will inevitably replace investment banks...that's if most crowd funding ventures didn't completely suck. These people never did anything truly intelligent or genius-like. And so now that the technology exists that can do 105 IQ level tasks, there's really no need for the majority of finance professionals today.
Of course, this doesn't stop people from entering the world of finance. Plenty of ex-high school football players, dude bros, frat boys, and other normies who watched too much "Wolf of Wall Street" want to make their millions. But instead of doing it honestly like say an entrepreneur, a STEM major, or surgeon, that requires too much work and sadly, an IQ around 120. So off to business school they go where they think they're going to "break their way into Wall Street" and all become investment bankers.
And some do!
But remember, these aren't terribly intelligent people. They're conformists and morons who were wearing their hats on backwards in the 90's. And thus, even though it is PAINFULLY obvious there's something wrong with the stock market or economy, they lack the intelligence to see it. Thus we get;
The dotcom crash
The housing crash
The Great Recession
And then there's getting your hand caught in the cookie jar. Some of these people are so egotistical, so desperate to be rich and successful, but lack the mental strength to do it, they'll resort to outright theft. Bernie Madoff, Tom Petters, Edward Woodward, Jon Corzine, Jeffery Skilling, the list goes on of ponzi schemes, embezzlement, fraud and other financial sins where "financial geniuses" just couldn't make an honest buck. And yet, all the sheep look in amazement as if there's a thing called "financial geniuses" or something actually intelligent going on in the stock market instead of hustling, sales, and lying.
The cost in overestimating the financial market's intelligence is you spend money you simply don't have to. Financial advisors, financial planners, brokers, mutual fund managers, consultants, and salesmen, none of them are doing a job you can't. These "super smart people" can easily be replaced with roboadvisors, Berkshire Hathaway, investing in the index, or simply spending less than you make. So I implore you. Do not be intimidated by what is simply "the unknown." Financial markets are not that complicated and you can quickly self-educate yourself on their basic functions. And if you're willing to do this, you will save yourself thousands in managerial fees and commissions, not to mention ensure you never get scammed by the Bernie Madoff's out there.
Aaron Clarey is a banking veteran who knows the world of finance inside and out. And he only wants to help people realize they don't need it. He is the author of many books on finance and economics, and also offers an introductory course to stocks, bonds, and investing. You can tune into his ranting, curse filled podcast here, and visit his consultancy here.