If an applicant for a chief investment officer position is equipped with a temperament suited to leadership, trustees and chief executives should feel comfortable that the person in question need not necessarily be the smartest member of the investment team. This was one of the seeds of information planted in the minds of delegates at CMSF this month by former CIO Jack Gray, now an adjunct professor for the Paul Woolley Centre for the Study of Capital Market Dysfunctionality at UTS.
He tackled the subject as part of the long running assessment of the excesses and mistakes of the GFC. His thoughts start with the Warren Buffett observation that a high IQ and investment success are not correlated. Gray suggests if you subtract 20 IQ points from a highly intelligent investor and swap it for a better temperament you will be more likely of investment success.
“Those with very high IQs suffer from problems which make them less effective,” he says. “They cannot suffer fools gladly, which means they do not handle dissent or disagreement very well. They tend not to like being challenged, but that is the essence of risk management.”
He makes several analogies with other professions.
He notes how many great sports coaches, such as Jose Morinho and Alex Ferguson in the English Premier League, were never great players. He relates it to basketball stars too.
“If you are Michael Jordan most things you do are pretty easy for you. It is very hard to motivate others to understand what that is.”
He extends it to politics too. He points out how a prime minister is surrounded by people who are more knowledgeable about economics than they are.
“It was said of Roosevelt that he had a second class mind and a first class temperament,” he adds.
Gray lists several reasons for the importance of temperament over high intelligence. He notes that successful investors are likely to be skilled in making effective decisions during uncertainty, ambiguity, and pressure.
“A temperament that seeks comfort and stability is likely to be ill-suited to investing,” he says.
He adds a good chief investment officer will know when to feel rather than to think. A good temperament means the confidence to encourage and absorb dissent yet to know when to act. Such good political decision making is crucial, as highly bright people tend not to be good at getting things done in organisations.
Gray attributes the blow up of the hedge fund Long-Term Capital Management in 1998 to the ill-suited team of a successful trader John Meriwether with two Nobel Prize–winners, Myron S. Scholes and Robert C. Merton, with “stratospheric IQs”.
Gray goes as far to imagine the ideal CIO as someone who can adapt contrarian ideas, but he believes this is a step too far for superannuation. Part of the problem is the peer risk of underperforming one year even if that is turned around the next year.
“A few funds say we do not look at performance but I know from the outside that is the first thing they look at. Could someone who did not do that survive in this industry?
“Part of being human is that we want to feel accepted and part of a group, so to be contrarian is a bit odd. Silicon valley stands out as having a culture where you are encouraged to do new and crazy things, but in superannuation everything tells you no, do not do anything different.”
