“Stupid is as stupid does,” is a memorable line from the Forrest Gump movie. The quote is a play on an old Southern expression, “beauty is as beauty does,” which means true beauty is as dependent on how a person acts as it is on how they look. Likewise, being stupid has very little, if anything, to do with one’s level of intelligence. People with genius level I.Q.s can still be stupid if they do stupid things.
If you don’t believe that smart people can be stupid, then you obviously have never been in love. We all know that love is blind, but it is also “…deaf, dumb, and stupid…” writes the poet, Kahlil Gibran. And that is not only a poet’s opinion, but also a scientific fact. The February, 2006 issue of National Geographic reported, “…scientists [have discovered] that the brain chemistry of infatuation is akin to mental illness.”
What’s interesting is the science of neuroeconomics has found that the brain chemistry of investors is similar to that of people who are passionately in love. That’s why the observations of behavioral economist Teresa Ghilarducci could just as well apply to lovers as to investors. According to Ghilarducci, “[Investors]…tend to focus on the short term rather than thinking about the long-term consequences.” Investors also “…tend to think that whatever the current trend is will always be the trend.” So, like lovers, investors tend to make emotional instead of rational decisions.
The repercussions of these emotional acts often can be devastating. Just ask Joe Nocera, a well-known business journalist and author who admitted in a recent New York Times column (April 27, 2012), that his “…401(k) plan…is in tatters.” Like some kind of irrational financial Romeo in a Shakespearian investment tragedy, Nocera counts the ways his unchecked emotions decimated his retirement savings.
Nocera says his first mistake was arrogance. Early success driven by the “…great bull market…” gave him “…an inflated sense of [his] investment skills.” Thinking he was a Casanova of investing, he eschewed diversification and instead concentrated his portfolio in the hot sectors of the time. His next mistake was not tempering his attitude with reason. Flush with success and overconfident in his abilities, he went all in with the tech bubble. When the bubble burst, his account “…was cut in half.”
A divorce cut Nocera’s account in half again. That loss, along with the emotional impact of the market crash in 2008, led to his most recent mistake: capitulation. Having lost at love and failed at finances, he reasoned, “…that I might as well get some use out of the money while I could…” So he took “…another chunk…” out of his 401(k) to renovate his house.
Assessing the damage, Nocera acknowledged that a good financial advisor would have advised him “…to be disciplined, to create a diversified portfolio, and to avoid trying to time the market.” But, Nocera says, “Sound as that advice is, it’s just not how humans behave.” On that point, I could not disagree more. As humans we do have the ability to control our behavior. Just because nature has given us investment I.Q.s in the Forrest Gump range, doesn’t mean we have to do stupid things. Investment success has little to do with brains and everything to do with actions. That’s why the best financial advisors, says Benjamin Graham (Warren Buffett’s mentor) “…don’t need extraordinary insight or intelligence. What they need most is the character to adopt simple rules and stick with them.” And that’s how smart investors avoid being stupid. Because “Stupid is as stupid does.”