Identifying individuals with high IQs can be valuable to traders. It will also help investment firms stand out in a competitive investment environment. Intelligent investors can be helpful if you seek mentors to make more informed investment decisions. You may also benefit from them if you aim to reduce investment risks.
This article discusses signs of higher-IQ investing to help you identify savvy investors. If you have these investment traits, consider taking one of the best free IQ tests to measure your intelligence.
A Sell or Buy Decision
Regarding the sell vs. hold decision, studies show that investors with high IQ levels tend to sell losing stocks. They’re also more likely to engage in tax-loss selling and to sell or hold stock at a 30-day high or low.
Also, high-level investors are less vulnerable to the disposition effect and more concerned with reducing taxes. Moreover, they’re more likely to supply liquidity in response to significant shifts in stock prices.
Identified return patterns, trading fees, and tax liabilities diminish returns when behavioral elements drive traders. For instance, low-IQ investors have a higher sensitivity to the disposition effect. This effect realizes profits on winning stocks and trades against momentum, which minimizes returns.
Low-IQ investors are also affected by access to private information. They may also be affected if their superior ability to interpret public data is positively connected to cognitive ability.
People with high IQ levels tend to make better decisions when trading stocks than those with low IQ levels, especially in the short term.
Higher-cost stocks don’t cancel out the benefit. Investors with a high IQ level tend to trade their stocks at a better price and at the perfect time than those with lower IQs.
The research that concluded these claims considered the standard difference between the buying and selling of a trade (the bid-ask spread). It also felt the varied ways to trade stocks, such as market orders and limit orders.
Savvy investors have higher chances of effectively diversifying, holding mutual funds, and having more stocks. Thus, they face lower risk and gain lighter Sharpe ratios, which gauge risk-adjusted performance.
Moreover, high-IQ minds will likely hold low-beta stocks and gain more exposure to small-cap and value stocks. This leads to an elevated Sharpe ratio.
Investors with a low IQ avoid participation to avoid making investment mistakes, don’t diversify well, and choose high beta. They also have a large-cap growth stock, which has poor Sharpe ratios.
A low participation rate causes lower-profile returns. This creates a wealth gap between them and savvy investors.