5 Kinds of Smart That Investors Need to Cultivate

It's been 115 years since Alfred Binet and Theodore Simon crafted the first reasonably useful "intelligence test," but even Binet said publicly that it was a limited measure of just one type of intelligence among many. In the years since, smart individuals have classified those varied intelligences in a number of ways -- noted developmental psychologist Howard Gardener described nine, for example.

Recently, Morgan Housel of venture capital firm The Collaborative Fund -- and a former Motley Fool writer -- took his own run at the idea when he blogged about five kinds of smart that wise investors would do well to nurture in themselves. In this episode of Motley Fool Answers, co-hosts Alison Southwick and Robert Brokamp invited Morgan Housel to talk about those particular types of intelligence, the good they do us, and what goes wrong for our portfolios when we devalue them.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on April 16, 2019.

Alison Southwick: You are here today to help us talk about different kinds of smart. Should we start with this Jeff Bezos quote?

Morgan Housel: Yes, do it.

Southwick: I don't know if this inspired you to write this story.

Housel: It did, yes.

Southwick: Then let's start with the inspiration. It's a little photo that Jeff Bezos took that... No, I'm kidding. That's not the inspiration for the article you wrote. And Morgan writes over at the CollaborativeFund.com, so if you want to read more, he's an awesome writer and I would say that even if you weren't.

The inspirational quote we have for you today comes from Jeff Bezos. "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." So today we're going to talk about five different kinds of smart. You're like yes, let's do this. The first one is 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.

Housel: I think this is especially true in investing, where the core of investing is not necessarily whether you can become a master of finance. Can you memorize all the formulas? Investing is the study of how people behave with money. And since it's a study about behavior, there's all these other fields out there that have nothing to do with investing that are critically important to learning those fields that help you become a better investor.

Psychology, sociology, history, and all these things that you might think, "Why would I study sociology to help me become a better investor?" There's a lot of lessons in there that teach you how people think about risk. How they think about opportunity. How people run with the herd and don't want to be left out of the herd.

Those are all very relevant topics to investing, so I think if you take a more multidisciplinary approach to your learning; it's true in, I think, most fields but I definitely think it's very meaningful in investing.

Southwick: It's a liberal arts degree approach to investing.

Housel: I think that's right. And you'll see this a lot. A lot of the best investors -- Warren Buffett, Howard Marks, Charlie Munger is probably the most common example -- even when they're writing and speaking about investing, they're very often doing it through the lens of something completely unrelated, because their skill that's made them great investors is they understand how people make decisions around risk and opportunity, and that's what investing is. And a lot of those skills have nothing to do with finance, per se.

Southwick: You can see that a lot just in Warren Buffett's writing. He's always using analogies and metaphors...

Housel: Something totally different.

Southwick: Often Munger's are special-hug related, but you see that a lot in their writing. Good writing is telling stories. Whenever I nail a metaphor or come up with a good connection to help me explain something, there's like a little spark of joy in my brain where I'm like yes!

Housel: You start connecting the dots.

Southwick: I connected some dots. This is going to help me understand this better because it's totally different but it makes sense.

Housel: It starts to make sense.

Southwick: The next one. A barbell personality with confidence on one side and paranoia on the other is willing to make bold moves, but always within the context of making survival the top priority.

Housel: This is like the difference between getting rich and staying rich like we were talking about earlier. To get rich you need to be able to swing for the fences, take risk, and do something different. Step away from the herd. But staying rich requires conservatism and a level of pessimism and a level of not wanting to take a risk so that you can keep what you've gained.

And that conflicting or barbell personality is rare. This is where you have a lot of, particularly, traders who will make a huge fortune and then lose it all at some other time because they have the personality that will let them get rich, but not the personality that will let them stay rich.

If you become a billionaire in investing or your businesses, those people by and large don't have the personality that's going to let them say, "OK, now that I've made $1 billion I'm going to put it all in Treasury bonds."

Southwick: [laughs] This is so exciting!

Housel: If they had that mentality, they would not have become a billionaire in the first place and that's why there's so much turnover on the Forbes Richest Americans list. The kind of personality that helps you get to the billionaire list is also the kind of personality that's going to push you off it very quickly.

Southwick: No. 3 is 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.

Housel: It's obvious that there are people in your workplace or that you know who have the right answers and have great ideas but can't articulate them very well. And because of that, people in the workplace don't pay as much attention to them as people who may not have an answer that's as good as the others, but if they can articulate it very well and tell a great story about it, that's what people cling to.

Something I realized a couple of years ago is that basically every job, no matter what you do, is sales. Because even if you're not a salesman, per se, you're trying to convince your co-workers, clients, customers, and your boss that your decision was right. That requires a level of storytelling and just being clear and crisp about what you're saying.

I think [this] often goes unnoticed by people who think that because they have the common type of smarts -- high IQ, high SAT scores -- that they can calculate the right answer and because it's the right answer, people will pay attention to it; whereas, you have to be able to communicate that in a way that people find interesting and will cling to.

Robert Brokamp: I enjoy reading about history, so I've read about the Civil War. We live in Virginia, so you can go to all kinds of Civil War sites, but I think 90% of what I remember about the Civil War is from the Ken Burns series.

Housel: It's so good!

Brokamp: It's so good and it's so true! It just burns it into your brain, no pun intended.

Southwick: Here at The Motley Fool my other job is doing PR and often helping train Fools to do interviews. I have a series that I put people through and most of that series is about how to be a compelling person on TV, or on camera, or up front speaking. Just tell stories. Just tell one story after another.

Tom and David Gardner, founders of The Motley Fool, are great public speakers.

Housel: They're masters, yes.

Southwick: And if you listen to them, all they do is tell the same 50 stories over and over again. And they're great stories. One time I talked to David Gardner -- and this is so David -- and he said, "It would be fun if sometimes I had every one of my stories," because he keeps them secure somewhere, "and I numbered every one of them and I just went and spoke publicly and I told them to just pick three numbers and then I would tell whatever those random stories were." He said, "And it would probably make a pretty good speech. It would probably work."

Housel: Just roll the dice. Which one is it today?

Brokamp: Actually, I did this the other day. David loves these little randomized things, so he'll randomize his to-do list. So I enumerated my to-do list and rolled the dice to figure out which thing on my list I should do. A thing I got from David.

Southwick: He said, "I should randomize a speech one day." But it's true. Often when you have people who tell these moving stories, stories help because they have emotion. They make you emotional and as much as we like to tell ourselves we make decisions based on logic, we really make decisions based on emotion and then spend our time trying to back it up with logic. But I am a firm believer that storytelling is one of the most important things you can do.

And it's easier to create a PowerPoint slide that's got four bullet points. It's easier to be like, "This is what I want you to know." But people will walk away not remembering.

Housel: People are not interested in that. They're going to remember the story.

Southwick: They won't feel moved. I'm a firm believer in the power of storytelling. The next way you can be smart -- 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.

Housel: It's just this idea that people's view of the world is heavily influenced and guided by their own unique personal past. The generation that they're born into. The country that they were raised in. Where they went to school. A lot of these things are completely outside of your control and are completely different from person to person.

And what I've experienced as someone my age in the United States -- as an investor, let's say -- is completely different than someone who grew up in Germany in the 1940s. Do you think we're going to have the same view about how the stock market works, or how the economy works? It's completely different.

One of the areas we saw this in was the last decade when gold, as an investment, became very popular. As the Central Bank was pulling a lot of money after the financial crisis, the generation it was most popular with, by far, was the baby boomers. And I think a lot of the reason that was is because baby boomers came of age in the 1970s and 1980s when inflation was double-digits.

My generation has never experienced significant inflation, ever. So we were looking at the baby boomers panicking about this coming inflation, and I think my generation couldn't really understand why they were so worried. But if you are a baby boomer who remembers gas lines and remembers 50% inflation, you just had a different life experience than other generations who didn't experience that couldn't really understand. I think that idea, that example, applies to millions of different things. Like everyone's definition of risk is just rooted in what they've experienced.

So if you can realize that your personal experiences are just a tiny fraction of what else has happened and what other people have experienced, and what is going to influence the decisions of other people, I think that's a really important thing to do, but it's incredibly hard to do.

Southwick: You can't imagine anything outside of your own experience unless you are open to listening to what other people have gone through. It can be easy to dismiss other people's experiences.

The fifth and final way that people can be smart is convincing yourself and others to forego instant gratification, often through strategic distraction.

Housel: Especially in investing, but also in a lot of things. If you think your competitive advantage is, "I'm smarter than everyone else," particularly in investing the answer is almost always, "No, you're not." Especially the combined average intelligence of millions of other people: They're always going to be smarter than you.

Then it's like what your competitive advantage is. And I truly think that the only one that individual investors can practice in real time as a competitive advantage is to have a longer time horizon than other people. It's not easy -- it's still incredibly difficult -- but I think if you can use patience as your competitive advantage.

And, like I said in the article, have ways to distract yourself -- not looking at your portfolio -- to set up your situation as an investor to keep yourself distracted from being tempted to make short-term decisions. I think that's one of the only ways that people can have an advantage over the average investor. And if you want to call that "smarts", then that's what it is.

Brokamp: When I was looking at that, my first thought was not investing as much as saving.

Housel: Yes.

Brokamp: Not spending as much, because you've got to get something in your account before you can worry about investing it. And in your article you brought up the classic marshmallow test, which we've all heard of. The example of how the kids would come up with all kinds of ways to distract themselves from the marshmallows so they wouldn't eat them.

Housel: The kids in the famous marshmallow test were the kids who could delay their gratification and not eat the marshmallow. They ended up doing better in life than the kids who just took it right away. And the kids who didn't take the marshmallow right away -- it's wasn't that they sat there staring at the marshmallow and exercised self-control. They played with their shoelaces, and some hid under the table. They were distracting themselves.

And it's very difficult if you're a child or an adult staring at the marshmallow. Staring at your brokerage account following the market all day. And the sooner that you're going to stare at it and still exercise self-control is very difficult to do. Much easier to just not buy the cookies and not have them on your counter than it is to stare at the cookies and assume that you're not going to take them.

Southwick: Get a hobby to distract you!

Housel: Get a hobby!

Southwick: Get a good hobby!

Housel: Go hang out! Go for a walk! Play with your family!

Southwick: All right, Morgan. Do you have any closing thoughts for our listeners about how to be smart?

Housel: Just be smarter!

Southwick: Just do it! Yes, that's a dumb question. I'm just looking for you to put an end on this.

Housel: Just don't be so stupid!