Throughout human history, people have recognized a distinction between intelligence and wisdom, something that has been written about in ancient literature all the way up to our present time. Today, it seems like what is celebrated most is intelligence and relatively little is given to the value of wisdom, and yet I was reminded this week that intelligence only gets you so far. Wisdom often carries the day. There’s a no-so-well-known story regarding Sir Isaac Newton that I believe is useful for investors to know that highlights the difference between these two heralded characteristics.
A Brilliant Mathematician
Sir Isaac Newton was an English mathematician, physicist, astronomer, theologian, and author (described in his own day as a “natural philosopher”) who is widely recognized as one of the most influential scientists of all time, and a key figure in the scientific revolution. His book Mathematical Principles of Natural Philosophy, first published in 1687, laid the foundations of classical mechanics. Newton also made seminal contributions to optics, and shares credit with Gottfried Wilhelm Leibniz for developing the infinitesimal calculus. So, I think we can all agree that Newton was intelligent. In fact, he was brilliant by any measurement of cognitive ability.
A Colossal Error in Judgement
But was Newton wise? I think history suggests otherwise, at least as far as investing goes. Here’s a short story as told by Wall Street Journal columnist Jason Zweig:
“Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he ‘could calculate the motions of the heavenly bodies, but not the madness of the people.’ Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price – and lost £20,000 (or more than $3 million in [2002-2003’s] money. For the rest of his life, he forbade anyone to speak the words ‘South Sea’ in his presence.”
The Role of Wisdom in Investing
How could a man of such intelligence, and specifically a man of such staggering knowledge of mathematics, make such a colossal error when investing? Well, he violated basic investment principles having to do with knowing a business well enough to estimate the true value of the investment relative to its price. As a result, he lacked the wisdom to make a prudent investment. Obviously, it made all the difference in his results.
Don’t Celebrate Mere Intelligence—in You or in Others
I’m telling you this week in this blog entry, don’t celebrate mere intelligence in such a way that you crowd out the need for wisdom. In fact, many of you who are reading this may not feel like you’re particularly intelligent when it comes to investment matters. And yet your wisdom could carry you through to be a highly successful investor, something that Sir Isaac Newton was never able to achieve.
