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Cooperman Says Earning 13% in Stocks Takes ‘Average IQ’


dcollon
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Thanks for sharing.

 

Cooperman sounds like a good person with a solid worth ethic and has an incredible passion for investing.

 

I'm (and I'm sure many on this board should be) glad he is a fan of AIG.

 

"Omega bought the shares this year for an average of $30.47 and anticipates that the price could rise to $53 by the end of 2013."

 

 

 

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Another example of the difficulty of prediction. From Cooperman's November 2006 Value Investor Insight interview:

 

“When the rate of inflation has been between 1% and 3%, historically the S&P 500 multiple on forward earnings has averaged over 17x. Inflation is now in that range, but the current S&P multiple is around 15x. In this type of environment, we think the idea of buying a 10-year government bond at a 4.6% yield makes no sense relative to the stock market…..We’re heavily invested, about 82% net long. Since we started Omega, our average net exposure has been closer to 70%. We don’t short in order to call ourselves a hedge fund, but when we think we can make money at it. With all the liquidity and buyout activity out there, we haven’t seen a lot of profitable opportunities on the short side with equities. We do think fixed income is overvalued, so we have a short position on 10-year Treasuries.”

 

And an August 2007 Fortune interview:

 

“In defense of my notion that the equity market is unlikely to fall sharply from current levels, I would note the following: First, bull markets do not die of old age, they die of excesses such as accelerating and above-trend economic growth, rapidly rising inflation, and interest-rate hikes from a hostile Federal Reserve. Those excesses are simply not with us today, nor do I expect their arrival anytime soon……Despite credit worries, Bank of America (Charts, Fortune 500) is still a favorite. It has $1.5 trillion of assets, a 10% deposit market share in the U.S., and more than $21 billion in net income. I believe the company is attractively priced with an above-average dividend yield of 5.4%, vs. the present 4.7% yield on ten-year U.S. governments. It's hard for me to believe that Bank of America stock won't outperform ten-year government bond returns over the next decade -- the company raised its dividend 14% in July. Bank of America is currently trading at roughly nine times earnings, a 20% discount to large regional bank peers. The financial sector has been hit by subprime mortgage problems, an inverted interest rate yield curve, and by a widening in credit spreads. I expect these constraints to lessen over the next several months.”

 

And a June 2008 Value Investor Insight follow-up interview:

 

“We still believe the economy won't be in a recession this year. If we're right, we'd expect the market to be higher at the end of the year than it is now….I think U.S. government bonds are a terrific short. The monetization of every financial mistake that’s been made in the last decade doesn’t square with 10-year government bonds at 4%.”

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Does he still own Fannie and Freddie?  He was buying more of them as 'bargains' as they tanked in the months before The US seized them, and he continued to tout them til the bitter end.

 

That reminds me of the story Nassim Taleb tells about the turkey that is happy every day when the farmer comes out to feed him.  The turkey is also happy on the final day when the farmer comes out with an axe in his hand.

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After reading most of the linked article, Mr. Cooperman doesn't really say that earning 13% in stocks takes average intelligence.  He thinks average intelligence and a lot of hard work will take you a long way.  And he indicates that his current expectation is in the range of 7-8%.

 

Semantics aside, I agree wholeheartedly with the point that things other than pure intelligence (e.g., proper temperament, hard work, focus, discipline, and a good process) will help your results as much if not more than just being smart.  I think Buffett has said similar things -- to the effect that IQ over 120 probably won't help you much if you don't have the right temperament and approach.  I know lots of smart people who do self destructive things with their money because they have no process and get whipsawed by emotion.

 

Additionally, I think smart people who spend all their time around other smart people lose track of what average intelligence means.  Being roughly as smart as most of the people around you is not the same as having average intelligence if you hang out mostly with rich people with advanced degrees.  If I had to guess, I'd say that the average IQ of the members of this board is well north of 100.

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i agree with mr. cooperman.

 

I sort of agree too, but only if a good workman follows the master of the craft.  Ben Graham was the master, and Warren was his star pupil.  Walter Schloss was Ben's gofer, and his arithmetic annual returns over five decades were nearly as good as Warren's. 

 

He carefully observed everything Ben did and didn't do.  He learned how to buy stocks cheap, and even cheaper, like waiting until December tax loss and portfolio dressing time -- and then putting in lowball bids for balance sheet bargains that had declined a lot in price.  He returned annual profits to his investors and escaped the curse of most fund managers, finding suitable investments for hot money.  What a guy!

 

By the way.  Walter was undoubtedly well above average intelligence.  People with average intelligence usually aren't  very literate, don't like to do math, spend time watching TV.  Their writing involves things like posting on Facebook.

 

 

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Semantics aside, I agree wholeheartedly with the point that things other than pure intelligence (e.g., proper temperament, hard work, focus, discipline, and a good process) will help your results as much if not more than just being smart.  I think Buffett has said similar things -- to the effect that IQ over 120 probably won't help you much if you don't have the right temperament and approach.  I know lots of smart people who do self destructive things with their money because they have no process and get whipsawed by emotion.

 

Additionally, I think smart people who spend all their time around other smart people lose track of what average intelligence means.  Being roughly as smart as most of the people around you is not the same as having average intelligence if you hang out mostly with rich people with advanced degrees.  If I had to guess, I'd say that the average IQ of the members of this board is well north of 100.

I think it's probably very easy for Buffett (who I am guessing is in the 140-150 range) to say that about 120 in iq. He doesn't know the limitations that a 'meager' 120 score gives you! I find it very, very hard to believe that higher intelligence won't make you better suited to become a better investor, holding all else constant. Maybe when you get to the scores which are so high that they are hard to measure, I may grant him the point.

 

On a somewhat related note: http://infoproc.blogspot.se/2009/11/if-youre-so-smart-why-arent-you-rich.html

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In essence Buffett is just saying that there is a point of diminishing returns for IQ where other factors like temperament will be much more important. You can't make up for laziness or bad processes with higher intelligence! I think he said something like "if you can sell your IQ points above 130, do it!"*.

 

125-130 should be more than enough to understand simple businesses, their processes, accounting, etc. With that score you should also be able to deduce and reason quite a bit. Smarter people might be faster in obtaining insights but it's a matter of practice. And being too smart can be a curse as well (overconfidence, over-analysing, general issues with complexity of things/risk taking,...).

 

 

*Author in link above says it was 120 points, not 130. My mistake. I agree that a score of 130 should give some advantage over 120. But of course it remains a very limited tool.

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Realize that half of California's Nobel prize winners didn't score very high on IQ tests when they were young.  IQ tests are an imperfect way of measuring intelligence, especially very high intelligence.  Warren and his  sister both scored about the same on IQ tests in 999+ percentiles when they were young, but the test results didn't make a clear distinction between the intelligence of a very smart lady and one of the great geniuses of the world.

 

Richard Feynman was mediocre in subjects other than math and science, probably from lack of interest rather than from lack of ability.  Einstein couldn't pass the admission test for the high level technical college in Switzerland he wanted to attend, although he did well on some sections of the test.  He had to take a year of what was essentially a prep high school before he was finally admitted.  When he published three papers in one year that turned Physics upside down a couple of years after graduation, one of his professors exclaimed, "Einstein!?  That lazy dog?"

 

We've given thousands of IQ tests.  One time we got an alternate version of a test we had been using.  I asked two people who had scored 135+ on the first test they had taken during the hiring process if they would like to take the second test as well, and they agreed to take it.  They both scored about 125, probably because they weren't under any pressure to perform the second time.

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Was it Einstein who said that genius was equal to 1% inspiration plus 99% perspiration (or something like that).

 

In my experience a very high IQ can be a hinderance like the size of an engine has on the performance of a car once it gets over a certain size (at first you get the benefit of more power, as  engine gets larger + heavier the weight of the engine becomes a negative on performance).

 

Passion and work ethic can go a long way.

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No one is saying passion, ambition and work ethic aren't important. But the world is what it is; not egalitarian by design. Intelligence matters, and very much so. We don't need to stick in a 'but' after that acknowledgment everytime it's done, it just obfuscates the truth. And by the way, there are several strong reasons to believe that ambition and drive is mostly genetically influenced too - or atleast not any evidence that says it's environmentally decided :) Separate twin studies suggest that they have pretty much the same lifetime earnings even if they grow up in different socio-economic environments... 

 

Ask yourselves honestly how would you think about intelligence vs ambition if the world was differently understood and the former could be trained and perfected but not the latter...

 

twacowfca: I don't think the fact that an IQ test didn't differentiate between Buffett and his sister is some damning counter-example of its effectiveness as an instrument. After all, a high IQ may very well be a necessary but not sufficient attribute for certain tasks (like getting insanely rich, by the looks of it). Saying IQ is flawed because it doesn't catch every aspect of what makes a human being productive or smart is a bit like saying that your high-school grade in geography is meaningless because it says nothing about your knowledge of physics. 

 

And saying high IQ won't help you because high IQ people can be/are deficient in other ways also misses the point completely.

 

And no, I'm most certainly not in the higher echelons of the scale, but it bothers me that people takes this clearly false view of IQ 'not mattering very much' because it is comforting or whatever the reason is.

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Was it Einstein who said that genius was equal to 1% inspiration plus 99% perspiration (or something like that).

 

In my experience a very high IQ can be a hinderance like the size of an engine has on the performance of a car once it gets over a certain size (at first you get the benefit of more power, as  engine gets larger + heavier the weight of the engine becomes a negative on performance).

 

Passion and work ethic can go a long way.

 

That quote attributed to Einstein has not been verified from any source I'm aware of that was in existence during his lifetime.

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Was it Einstein who said that genius was equal to 1% inspiration plus 99% perspiration (or something like that).

 

In my experience a very high IQ can be a hinderance like the size of an engine has on the performance of a car once it gets over a certain size (at first you get the benefit of more power, as  engine gets larger + heavier the weight of the engine becomes a negative on performance).

 

Passion and work ethic can go a long way.

 

That quote attributed to Einstein has not been verified from any source I'm aware of that was in existence during his lifetime.

 

I think it was Thomas Edison who said it.

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I think it was Thomas Edison who said it.

 

I think that's correct.

 

Einstein said, among other things, " Imagination is more important than knowledge".

 

But what we need to remember is that extremely smart people aren't always the best judges of how smart they are and how smart the average person is, and the sympathetic ones among them tend to be humble and downplay their achievements. You shouldn't always take them to their word...

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Was it Einstein who said that genius was equal to 1% inspiration plus 99% perspiration (or something like that).

 

In my experience a very high IQ can be a hinderance like the size of an engine has on the performance of a car once it gets over a certain size (at first you get the benefit of more power, as  engine gets larger + heavier the weight of the engine becomes a negative on performance).

 

Passion and work ethic can go a long way.

 

That quote attributed to Einstein has not been verified from any source I'm aware of that was in existence during his lifetime.

 

I think it was Thomas Edison who said it.

 

You're right, but a similar, unverified quote has also been attributed to Einstein.

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...a high IQ may very well be a necessary but not sufficient attribute for certain tasks (like getting insanely rich, by the looks of it).

 

I think this is basically correct, and much of the confusion regarding the IQ requirement could be cleared up if it was discussed this way. 

 

Sort of OT: For more on the nature of the "necessary-sufficient" relationship:

 

http://plato.stanford.edu/entries/necessary-sufficient/

 

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The ability to accurately estimate probabilities is more closely associated with investment success than the IQ.

 

How good are you?  Here is a simple 5-minute test that measures your risk intelligence.

 

http://www.projectionpoint.com/index.php/rq_test/free_rq_test/description?cookies=true

 

Enjoy!

 

Interesting test of self awareness about how much one doesn't know.  However, one of their questions (and the supposed correct answer) was misleadingly imprecise and technically wrong. 

 

I think you are right that investors and traders with the best long term records are exceptional in assessment of risk/reward.  Buffett is a great bridge player.  Thorp had the best risk adjusted record of all with a downside adjusted Sharpe ratio of 13 (only three down months and no down quarters in a couple of decades of fund management).  Ziemba says that the great majority of traders, such as Jim Simons, who have been highly successful over their careers without blowing up have, like Thorp, been successful card counters.  :)

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The ability to accurately estimate probabilities is more closely associated with investment success than the IQ.

 

How good are you?  Here is a simple 5-minute test that measures your risk intelligence.

 

http://www.projectionpoint.com/index.php/rq_test/free_rq_test/description?cookies=true

 

Enjoy!

 

Well, I don't know what that measures, but I scored 87 by answering 50% unless I was fairly certain I knew the answer.  I'd guess I answered 60+% 50.  From 0% = I'm positive it's false to 100% I'm positive it's true, 50% = I don't know (and for me I don't care).  They characterize that as gaming the score system, but to me that's just the obvious interpretation.  Either way, I'm not sure it  means I'm really "risk intelligent", just easily bored with trivial factoid questions.

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Keep in mind that IQ is just a summary of complex processes. The same number can cover people with large variations in specific aptitudes. In any case, the investing effect of "intelligence" is relevant so far as it effects your decision rules. If you strip away any romantic notions of intelligence and talent, and just look at relative strengths and weaknesses, then you can strategize accordingly.

 

I tend to be overly optimistic on companies that I own (I tried to watch as much CBS as possible when I owned it). Solution: keep separate books for long thesis (usually 2-3 paragraphs) and worry points. Something about writing the bullish story, and then setting it aside, clears my mind.

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I think the point of the test was to screen for over confidence.  Buffett always uses the LTCM example of high IQ being potentially dangerous.  I am sure there are plenty of examples where it could be very helpful.

 

My take on Buffett is that he read thousands of balance sheets and annual reports at a very young age, and developed a very high competence.  He then framed his limitations very well, and learned from his mistakes. 

 

The Mark Sellers speech posted elsewhere sums up the mix of necessary investment traits nicely.

 

We need to be intelligent enough to understand many (not all) balance sheets, particularly what may kill a company.  Then we need the  temperment to invest when we believe the crowd is wrong.

Then we need the fortitude to stick to our guns while everyone is against us.  And experience does help.  This is where I diverge from Mark Sellers.  Once you have successfully ridden through a couple of these situations you have the experience and Framework to do it over and over again.  That is assumming you learn from your experiences. 

 

 

 

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I think the point of the test was to screen for over confidence.  Buffett always uses the LTCM example of high IQ being potentially dangerous.  I am sure there are plenty of examples where it could be very helpful.

 

My take on Buffett is that he read thousands of balance sheets and annual reports at a very young age, and developed a very high competence.  He then framed his limitations very well, and learned from his mistakes. 

 

The Mark Sellers speech posted elsewhere sums up the mix of necessary investment traits nicely.

 

We need to be intelligent enough to understand many (not all) balance sheets, particularly what may kill a company.  Then we need the  temperment to invest when we believe the crowd is wrong.

Then we need the fortitude to stick to our guns while everyone is against us.  And experience does help.  This is where I diverge from Mark Sellers.  Once you have successfully ridden through a couple of these situations you have the experience and Framework to do it over and over again.  That is assumming you learn from your experiences.

 

Ironically,  Sellers blew up without good risk control during the financial panic.  No need to feel sad for him though.  He took his high water mark fees ($30m or so), closed down his fund with no attempt to gain back his clients' losses and retired to enjoy being a big fish in the microbrewery pond.

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Ironically,  Sellers blew up without good risk control during the financial panic.  No need to feel sad for him though.  He took his high water mark fees ($30m or so), closed down his fund with no attempt to gain back his clients' losses and retired to enjoy being a big fish in the microbrewery pond.

 

Not to justify Sellers but all I've heard about that situation is that he had an awful time. Friendships and business relations were finished. As a fund manager put it to me, "he is done in this business". And at the time he was very close to making it to the big leagues, like $300 million AUM and a column in the Financial Times.

 

From there to managing pubs and fighting lawsuits left and right? Not that I wouldn't like to be in his present situation but without the baggage and there is a baggage.

 

And his big sin? Everyone made so much of his concentration but I think most in this board will recognize that it is a perfectly reasonable strategy if your picks are OK. His most important pick Contango MCF, the reason for his breakout but also his fallout, had such a margin of safety that survived pretty decently a failed sale, the collapse of Lehman, and one of the outstanding commodity bear markets on record (natural gas). Premier Exhibitions? That was a bigger mistake, go to variant perceptions if you want the whole story, but many had worse sins (Fannie, AIG, Washington Mutual) and he was not alone in having to recover from a bad 2008.

 

The problem seems to me that he did not have a chance for a comeback:  too many recent investors that did participate in his breakout years, too much hot money from funds of funds, and he did not short. And those investors left him before he could get to the "oversexed man in a brothel March 2009".

 

On the other side when you have a big opportunity, a once in a lifetime opportunity like let's say TARP warrants, do you want to dilute returns over-diversifying, timing or shorting so you can:

 

1. handle investors pre-conceptions and ST time frames, like Burry had to face.

2. have space in a bear market, to survive a deepening of that bear market, like Munger had to face.

3. avoid short sellers moving against you betting your clients will desert you, like Berkowitz had to face.

 

How to build a business so we can protect investors from themselves and you can get to the other side? One of the reasons I love following this board is learning from others in this area. There is more to this business than being a good investor.

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