Blessed is the Intelligent Investor, for he knows that “smart money” is often arrogant money; and that arrogant money is usually dumb money. In the Preface to the newly-published revised edition of Benjamin Graham’s The Intelligent Investor: A Book of Practical Counsel (Harper Business Essentials, 1949, 2003, ISBN: 00605556621), Warren Buffett stated that “to invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” An amusing but significant item on the Dow Jones Newswire (15 May 2001) confirms Mr Buffett’s point. Eleanor Laise’s article “If We’re So Smart, Why Aren’t We Rich? The Inside Story of How a Select Group of the Best and the Brightest Managed to Bungle the Easiest Stock” profiles an investment club whose “recent record has been nothing short of a fiasco, thanks to an overweighting in trendy tech stocks and pitifully bad timing … All told, the club saw the value of its assets fall by more than 40 percent over the past 12 months.” One member said “we can screw up faster than anyone else”; another, a member since the mid-1960s, describes its investing strategy as “buy low, sell lower.”

From 1986-2001, the club’s investments returned an average of 2.5 percent a year (versus, for example, the S&P 500’s 15.3 percent.)Laise writes that it “sounds as if this group could really use an intelligent investing strategy. And that’s ironic, given who its members are. This is the Mensa Investment Club. That’s right, Mensa, the organization founded in England in 1946 with the aim of assembling the brightest Britons to advise the government in times of crisis. The cost of admission: an IQ in the 98th percentile (or better). A half-century later the organisation, which Vanity Fair once dubbed ‘a dating service for dorks,’ has 47,000 members in the U.S. (100,000 worldwide) and one of the sorriest investment clubs you will ever see.”

The club’s chairman of stock selection and editor of its newsletter says “it was my hope that a special-interest group within Mensa would have the intellect that would give us some kind of advantage.” What, then, explains the huge difference between the club members’ formidable intelligence and laughable results? Laise provides a strong hint: its chairman-editor has also been “a committed chartist and incorrigible techie [who] has transformed the club, which has $70,000 in assets, from a small-cap, value-oriented group to a highflying, momentum-buying Nasdaq nightmare. The centrepiece of his strategy is the TC 2000, a technical charting program that seems like a prop from the set of Star Trek. [According to the chairman-editor], ‘this program is the coolest thing … You can show various types of graphs and add indicators, like linear regression, moving average, Bollinger bands. Then there’s volume, stochastics, MACD, time-segmented volume, stuff like that. You can add all kinds of indicators and really confuse yourself.’”

TC 2000 has dictated that the club frequently change its approach to “investing.” The chairman-editor says, “I keep readjusting our strategies every quarter or so …. My latest is to watch the 10-day versus 40-day moving average of relative strength compared to the S&P 500.” Laise adds that constant monitoring of technical price indicators has led the club to trade at a dizzying rate. In 2000 it made “88 trades, or roughly one every three trading days. And instead of searching out the solid small caps that were once the heart of the club’s strategy, [it now] zeroes in on trendy tech stocks with sky-high valuations.”

Indeed, according to Laise, the club’s president-editor “touts his technical indicators on the financial Web site ClearStation, where he enjoys ruminating on chart patterns. … ‘That’s a bullish formation,’ the president explains, tracing the pattern of one large dip followed by a smaller dip. ‘The second dip is people who bought in at the bottom, saying, Oh, gosh, it’s caught back up to where it was. I want to get out of here. Then you have everybody out who’s gonna get out based on all this dippy crap, and then you figure for all the rest of the people it’s going to be buying activity.’” The high-IQ president-editor describes his method of analysis: “I’ll go out and see what these idiots [on ClearStation] have to say about [the chart of a stock’s price], because sometimes they’ll observe something about the chart that I didn’t see.” He admits that he has taken some of the club’s stock picks straight from Internet message boards. The president concludes that the club “is philosophical about [my] … stock picks. The philosopher Karl Popper had the idea that we learn mainly by making mistakes … That’s been part of [my] approach.”