“In theory, there is no difference between theory and practice. In practice, there is.”
– Albert Einstein and Yogi Berra
It has been four months since my father passed away. I think about him constantly. Mostly, I miss hearing his voice and feeling his presence. I realize he is not coming back and it hurts.
My father had a positive impact on my intellectual development, as well as a great influence on my thinking.
Although, he took strong positions on many things, he never once told me what I should think or believe. He encouraged independent thought and respected sound arguments, despite our difference of opinion at times.
He believed in facts, data and outcomes. Growing up, I often heard the phrase, “Put-up or shut up” around the dinner table. He would exclaim, “Talk is cheap,” or “Opinions are like assholes, everyone has one.”
He was tough at times, but also an excellent role model. He taught me about the unpredictable nature of the world, and if I were to thrive, I better get comfortable operating with this uncertainty.
If he were alive today, we would have discussed the below blog post written by Morgan Housel of Collaborative Funds, “Intelligent vs. Smart.” He very well understood the difference between these two human traits, and surely would have bet on smarts over intelligence all day, every day.
Intelligent vs. Smart
by Morgan Housel
August 22, 2023
Here’s an important distinction to make in life.
Some people are intelligent but don’t have a lick of smarts. Their ability to succeed in the world might surprise you on the downside.
Others lack intelligence but gush smarts. Their potential will surprise you on the upside.
On rare occasions you meet people who are both intelligent and smart. They run laps around everyone.
I’d define intelligence vs. smart like this: Intelligent people understand technical details, smart people understand emotional details.
Intelligence: Good memory, logic, math skills, test-taking ability, rule-following.
Smart: High degree of empathy, bullshit detection, organization, communication skills, persuasion, social awareness, understanding the consequences of your actions.
Both are important. But there’s a critical difference in how each is valued.
Schools are good at teaching and measuring intelligence, so that’s what people tend to value and aspire to. But in almost any field, smarts is what gets rewarded long term.
You cannot measure empathy like you can SAT scores, so it’s not surprising that one is given more weight on resumes. But who is more likely to succeed in life – a person whose main skill is memorizing formulas, or someone who can instantly relate to the emotions of coworkers, customers, spouses, and friends?
It’s so obvious.
And it’s why the world is filled with intelligent jerks who have gone nowhere, and middling students who struggled through calculus but go on to live successful, happy lives. The most important decision most people will ever make is whether, when, and whom to marry. But that’s never taught in schools – how could it be? You can’t distill it down to a formula, or a one-size-fits-all answer. It’s a decision that requires lots of smarts and very little intelligence.
The core here is realizing that people are not spreadsheets. They are emotional, hormonal, misinformed, status-seeking, insecure creatures trying their best to make it through the day. So if you have to choose between understanding how the world should work in theory vs. how it actually works in practice, lean towards the latter. It’s like historian Will Durant once said: “Logic is an invention of man and may be ignored by the universe.” That is so smart.
Here’s an extreme example.
George Soros says that whenever he sees a bubble, he rushes in to buy it.
If you’re an intelligent person, that might seem crazy. Why would you purposefully want to buy an overvalued investment?
But if you’re a smart person, maybe it makes sense.
You know that bubbles are likely to grow larger and last longer than most people imagine. You understand what’s going through people’s minds, and you know investors will keep frantically buying for some time not because the numbers make sense, but because their neighbor got rich and they’ll spiral down a black hole of jealousy and bad decisions.
“That’s not irrational,” says Soros. (But please don’t try this; you’re probably not as smart as Soros).
Derek Thompson of the Atlantic makes a beautiful point that baseball has become boring over the last 20 years. Why? Because every team got intelligent: they moneyballed their strategy by mining data to figure out how to get the most strikeouts. If you want to win games, that was the intelligent thing to do! But it made the game boring. It took away part of the soul, part of the fun. Now the game is in a crisis of falling interest and attendance. It took smarts to see that coming.
Here are a few other “smart” traits that are hard to measure.
Accepting that people who have lived different lives than you want different things and will see the world differently. What looks like debates are often just people with different lived experiences talking over each other.
Henry Ford said, “If there is any one secret of success it lies in the ability to get the other person’s point of view and see things from their angle as well as your own.”
The purely intelligent person will find this hard to grasp, because if you think there is one right answer to every problem, you insist on banging through more debate until the other side agrees with you.
It takes smarts to accept that for most problems in the world, the “right” answer is the one that best promotes your individual wellbeing and fits your experience of how the world works. And since everyone has different needs and experiences, the only way to move forward and get things done is to tolerate and work with some views even when you disagree with them.
The outcome, if you can pull this off, is the skill of getting along with people you disagree with. It is indispensable.
An awareness that being nice doesn’t mean being weak – it’s actually a selfish strategy for gaining cooperation over time.
The hedge fund Long Term Capital Management was collapsing in 1998, threatening to take down all of Wall Street in its wake.
In response, 14 Wall Street banks stepped in to collectively bail the fund out and halt the panic.
Every big bank participated in the bailout – except Bear Stearns, whose CEO Jimmy Cayne allegedly responded, “No fucking way,” to the request.
Ten years later, Bear Stearns itself teetered on the edge. And guess how many other Wall Street banks were willing to lend Jimmy Cayne a hand?
Charlie Munger once pointed out that Benjamin Franklin didn’t say honesty is the best morals – he said it’s the best policy. It’s what’s going to help you, and put you in the best position, earning you the most money, in the long run.
There’s a corollary there with kindness.
There are two reasons to be kind to everyone. One is moral, the other is selfish. Morally, you should do it because you’re empathetic. Selfishly, you should do it because it’s easy to underestimate how many people you may eventually rely on to help you, and you’ll only gain their cooperation if you remain in their good graces.
I serve on the board of directors of Markel. Someone recently asked me what I’ve learned from Markel’s CEO Tom Gayner – truly one of the most accomplished investors of recent decades.
My response is that no matter what we’re talking about, Tom has a perfect analogy from something totally unrelated.
If we’re talking about insurance reserves, Tom will say something like, “You know, this reminds me of that scene from the Sound of Music …”
If we’re talking about market valuations, Tom might say, “It’s kind of like Winston Churchill used to say …”
In each case, the analogy gets right to the heart of the topic at hand.
This is more than mere entertaining chat. I think Tom is a good investor because he understands how the world works – connecting dots between various fields – which is so much broader than just understanding finance. People who understand finance might be intelligent, but understanding how the world works requires smarts.
Too many intelligent people become siloed in their field, oblivious to how interconnected the world is.
True independent thinking.
Kevin Kelly has this great idea that you’re only thinking independently if your views on certain topics can’t be predicted from your views on other topics.
Many views can be predicted, because true independent thinking is so rare.
Tell me your views on immigration and I can probably guess your views on abortion.
Tell me who you voted for president and I can probably guess whether you think today’s economy is strong or weak.
When your views on certain topics can be predicted from unrelated statements, there’s a good chance you’ve outsourced part of your thinking to tribal affiliations.
True independent thinking is rare because most people would rather be comfortable than right, and there is comfort in knowing you are a good-standing member of your tribe. Thinking independently also doesn’t mean you’re right, because the crowd is usually pretty close to accurate. Going against the tribe can also be interpreted as arrogance – suddenly you might look like Jimmy Cayne.
But poet Rudyard Kipling writes, “If you can talk with crowds and keep your virtue, Or walk with Kings, nor lose the common touch,” you’re on your way to greatness. One way to test that is whether there are people who you agree with on some topics but not others. If there is someone whose views you agree with on every topic, be careful. If there is someone whose views you disagree with on every topic, be even more careful.
I think my own dog – who is such a good girl – is crazy half the time, so I shudder when people can’t find any faults in their favorite politician or investing guru.
Recognizing that the best story wins.
Not the best answer. Not the accurate answer. Not the answer people need to hear. The winner is just whoever gets people to pay attention and nod their heads in agreement.
If you’re merely intelligent, you might focus all of your effort on finding precise truth. If you’re smart, you’ll focus just as much effort on delivering an effective message around that truth, realizing that the most powerful truth does no good if you can’t get people to pay attention to it.
A doctor once told me there’s a difference between an expert in medicine and an expert in healthcare.
An expert in medicine knows all the right answers out of the textbook. They can diagnose with precision and are up to date on all the latest treatments.
An expert in healthcare understands that medicine from the patient’s view is intimidating, confusing, expensive, and time-consuming. Nothing you diagnose or prescribe matters until you’ve addressed that reality with patients, because even a perfect solution makes no difference to the patient who doesn’t follow it.
It’s similar in investing. Hedge fund manager Kyle Bass summed this up well, saying: “It’s easy to maintain conviction. It’s harder to maintain investors.” The most successful investors tend to be expert communicators, because you have to compel your investors to stick with you during inevitable times of underperformance. Buffett. Sequoia. Even Vanguard; they are so skilled – intentionally so – at delivering an effective message beyond the numbers.
Warren Buffett – amazing writer.
Charlie Munger – amazing writer.
Seth Klarman – amazing writer.
John Bogle – amazing writer.
Joel Greenblatt – amazing writer.
Howard Marks – amazing writer.
I don’t think this is a coincidence. These investors’ ability to write let them effectively tell their story, set expectations, and reassure investors. That made their investors more likely to stick around when times got rocky.
It’s hard to teach that. Storytelling is a soft, emotional skill. It’s not found in intelligence. It’s found in smarts.
My opinion on markets has not changed much over the past few months. We are overweight cash and money market instruments, as well as intermediate and long-term US government debt. I believe these positions should provide good hedges and/or benefits against our overweight in large capitalization technology stocks. The economy continues to slow, which means weaker/marginal players may continue to lose out to the large, well-capitalized industry leaders.
Justin Kobe, CFA
Founder, Portfolio Manager & Adviser
Pacificus Capital Management
A referral is the best compliment.
Feel free to forward this email to friends and colleagues.
Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Cambridge and Pacificus Capital Management are not affiliated. Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. These are the opinions of Justin Kobe and not necessarily those of Cambridge Investment Research, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing in the bond market is subject to risks, including market, interest rate, issuer credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counter-party capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification and asset allocation strategies do not assure profit or protect against loss.