Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 78

What types of people should manage your money?

Warren Buffett, who claims that high IQ and investment success are not correlated, suggests a trade: swap 20 IQ points for a better temperament. Again the Sage of Omaha challenges a shibboleth, and again the challenge will be dismissed as ‘Warren being Warren’. Yet Ben Graham, too, has declared that “the main point is to have the right general principles and the character to stick to them.”

Seth Klarman of Baupost poses a pithy first filter for value investors:

“Ultimately, value investing needs to fit your character. If you’re predisposed to be patient … appreciate the idea of buying bargains, you’re likely to be good at it. If you have a need for action, if you want to be involved in new and exciting technological breakthroughs … you’re not a value investor, and you shouldn’t be one.”

Answers to two questions might help develop such simple filters into operational ones:

  • Which characteristics of temperament inhibit or enhance investment success? A decisive temperament is crucial in much investing but is only tested under pressure. John Meriwether of Long-Term Capital Management (in)famously had it until confronted by two Nobel Prize–winners with stratospheric IQs.
  • How do these characteristics vary across asset classes, investment styles, and strategies? The temperament needed for success in long-only equity management is likely almost orthogonal to that needed for short-biased management. The former tend to be positive and optimistic; the latter, sceptical and pessimistic.

The Oxford English Dictionary defines temperament as “a person’s nature especially as it permanently affects their behaviour; from the Latin ‘temperamentum’, correct mixture”. What, then, are the “correct mixtures” for investors?

Temperament, being unmeasurable, is likely to be ignored, yet in politics, war, and sport its importance has long been recognised. Franklin D. Roosevelt was described somewhat positively as having a “first class temperament and a second class mind” (Walter Lippmann, qtd. in Different Class 2009). The temperament to craft stable coalitions, not raw intellect, was the key to his success. Leon Trotsky’s temperament was ideally suited to the post-revolutionary chaos in which he transformed a rabble into the fearful Red Army, but was ill-suited to the (relative) order that later prevailed. While the strong functional parallels between investing and warfare (low signal-to-noise ratios, a mix of strategy and tactics, and, as Napoleon well knew, immodest doses of luck) are well known, of potentially greater value are the temperamental parallels implicit in Norman Dixon’s On the Psychology of Military Incompetence.

Successful investors are likely to be overweight a number of the following traits:

  • A paradoxical blend of arrogance, to discover and arbitrage opportunities ahead of the market, and humility, to simultaneously be sceptical about those discoveries.
  • A commitment to ‘knowing thyself’. For instance, recognising that previously justified contrarianism had degenerated into unjustified stubbornness.
  • The ability to make effective decisions under uncertainty, ambiguity, and pressure. A temperament that seeks comfort and stability will likely be ill-suited to investing.
  • The confidence to encourage and absorb dissent yet to know when to act. Almost all organised human endeavours have at their core a paradigm of broadly agreed beliefs, stylised facts, and patterns of thought that impose a uniformity of views. Ideas that challenge the paradigm tend to be ignored, not absorbed: Markowitz’s thesis was not rated as genuine economics, while Akerlof’s ground-breaking Lemons paper on the pricing impact of information asymmetry was twice rejected. Both eventually won Nobel prizes.
  • The wisdom to know when to cooperate, a rare trait in a culture that imbues competition with religious status. Much (but not all) investment information is ‘non-rival’, whereby its value increases through sharing, as evident in open-source ventures. Yet by temperament, training, and incentives, many are antithetical to sharing. One study engaged students in a game where participants do better by cooperating. 60% of general students cooperated while only 40% of economics students did.
  • The self-control to value patience, and so resist the short-term imperative and its eternal concomitant, being busy.
  • A willingness to question and be curious, traits lacking in many boards that oversee other people’s money. After being embedded in US pension funds, the anthropologists O’Barr and Conley reported “a surprising lack of interest in questioning and surprisingly little interest in considering alternatives”.

Isaiah Berlin bequeathed a crude but useful typology of people: hedgehogs view the world through the lens of a single defining, and usually substantial, idea; foxes view it through multiple lenses. Both types are needed in investing, but we are over-populated with hedgehogs who better fit compartmentalised corporate structures and are more fecund. We need more foxes, people with broader perspectives willing to trespass — a notion coined by Albert Hirschman — into foreign fields. No investment organisation would hire a sociologist; yet Winslow Jones, who created the first ever hedge fund, was one. One of the best analysts of Jim Chanos, a famous short-seller, is an art historian. “She had no formal business school training. She was so good because she was very intellectually curious. She was never afraid to ask why ... This is almost something that you can’t train.” The Bank of England showed similar courage in seeking insights on complexity from a theoretical biologist, recognising that markets behave more like evolving, adaptive non-stationary biological systems than physical engineering systems.

Cultural change is needed to recognise, support, and reward foxes, who tend to be spurned by tribal hedgehogs as soft-headed dilettantes. To Charlie Munger, having different mental models is the most important thing in investing, because they expose new opportunities and drive a dialectic of risk. Investment organisations should seek more people with 'contrary imaginations', as the psychologist Liam Hudson phrases it: people with exceptional intelligence in alternative but meaningful ways; people with intelligence about the humanities, especially history and psychology, the disciplines that underlie and drive markets; people with emotional intelligence to direct and manage others; and people with organizational intelligence to get things done.

The latter are rare, because our training idealises companies as rational profit maximisers populated by homo economicus. The anthropologist and investment banker Karen Ho paints a more realistic picture: “Capitalist organisations are not simply motivated by … profit or governed by rational actors. They are sociocultural organisations with complex contradictory world views.” Getting things done in such organisations requires a temperament different to that required in ideal ones. The investment industry should adopt a strategy of ‘mental and temperamental heterogeneity’. That will require another Buffett-style trade: swap much of the prized but value-detracting ‘comfort’ for the much-avoided but value-enhancing ‘courage’.

 

Dr Jack Gray is a Director at the Paul Woolley Centre for Capital Market Dysfunctionality, Faculty of Business, University of Technology, Sydney, and was recently voted one of the Top 10 most influential academics in the world for institutional investing. For a full list of references or an expanded version of the paper contact jackgray08@live.com.au.

 

RELATED ARTICLES

Unfortunately, all fund manager presentations are good

What game is your fund manager playing?

The paradox of passive investing

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Latest Updates

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Economy

Australia's economic report card heading into the polls

Our economy grew by a nominal rate of 7% per annum from 2017 to 2024, but it benefited from the largesse of fiscal and monetary policies, both of which are now fading. We need a new, credible economic growth agenda.

Preference votes matter

If the recent polls are anything to go by, we are headed for a hung parliament at the upcoming federal election. So more than ever, Australians need to give serious consideration to their preference votes.

SMSF strategies

Meg on SMSFs: Tips for the last member standing

It’s common for people as they age to seek more help in running their SMSF if their capacity declines. An alternate director may be a great solution for someone just planning for short-term help in the meantime.

Wilson Asset Management on markets and its new income fund

In this interview, Matthew Haupt from Wilson Asset Management discusses his outloook for the ASX, sectors such as REITs that he likes, and his firm's launch of a new income-oriented listed investment company.  

Planning

‘Life expectancy’ – and why I don’t like the expression

Life expectancy isn't just a number - it's a concept that changes with survival rates over time. This article breaks down how age, survival, and societal factors shape our understanding of life expectancy, especially post-Covid. 

The shine is back on gold, and gold miners

Gold mining stocks outperformed in 2024 and are expected to do well in 2025. At this point in the rally, it's worth considering what has driven gold prices higher and why miners could still have some catching up to do.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.