In a talk titled, The Quest for Alpha, delivered to clients of PWL Capital, Larry Swedroe related the amusing story of investment returns earned by the Mensa Investment Club. The June 2001 issue of SmartMoney reported that between 1986 and 2001, the club’s investments gained an average of 2.5 percent per year. Over the same time period, the S&P 500 earned 15.3 percent resulting in a stunning under performance of about 13 percent per year. In one of the biggest bull markets, the club managed to grow a $10,000 investment into $15,000. The same investment in a S&P 500 index fund would have turned into $84,500.

How did the club manage to suck so badly? Turns out that instead of buying a basket of stocks and holding it for the long-term, as most investment clubs do (and still trail the benchmarks), the Mensa club churned its portfolio at an alarming rate by following a complicated system of trading (I won’t even attempt to describe their strategy, you can read about it here) that resulted in a 40 percent loss in 2001 alone. The club may not be very good at investing but at least its members have a sense of humour. One member described their trading strategy as buy low and sell lower.

This article has 12 comments

  1. CC, thanks for saving me the 30 minutes required to take the initial Mensa IQ test. I now know based on my trading resutls I qualify for the socieity without a test. I will be booking my ticket today to the next Mensa meeting, although as a tax accountant, I may be to cool for this group, which is a very sad thing:)

  2. Hard to believe this story without supporting documentation – like the original article, in 2001? And why would a so called private club as, Mensa Investment Club (can not find they actually exist) publish such losing stats .. ?

    Bob – which best completes the series – Smith

  3. @CC. Your link to the Mensa strategy doesn’t work.

    That said, it sounds like the problem with a group like that is there may be too many cooks in the kitchen! Each participant in the challenge would have their own opinion on an algorithm and most would also bring with them a couple of spare opinions, too!

  4. @Phil S: Thanks. I’ve fixed the link. One of the academic papers that looked into returns of investment clubs is titled “Too many cooks spoil the profits”. The results confirm your suspicion: investment clubs even trail individual investor returns.

    http://faculty.haas.berkeley.edu/odean/papers/clubs/FAJ%20JF00%20Barber%20and%20Odean.pdf

    @bobsmith: I don’t find this hard to believe at all. It would have been so easy to lose 40% in 2001 if most of your portfolio were in dot-com companies. And one really bad year can turn the typical under performance into a brutal one.

    @The BBC: Sorry, I don’t think you’ll qualify. I mean, it is very very hard to under perform the market by 13% every year for 15 years!!!

  5. Of course, investing is more about character than intelligence. “Investing is simple but not easy,” as the saying goes.

  6. Reminds me of the Beardstown ladies investment group, with the difference being that at least the MENSA people were smart enough to calculate their performance correctly. ;)

  7. This story reminds me a lot of the Nobel Prize winning economists that bankrupted Long Term Capital Management.

    There is definitely such a thing as being too smart for your own good, especially when arrogance comes into play. Investing requires a lot of patience and humility.

  8. I would have fallen for this Mensa investment club.

    I mean I would not qualify to be part of it but I would have eagerly given them money to invest, after all they are highly intelligent people so they would know better than me.

  9. It is sort of ironic, that money and degrees really may not separate the men from the boys.

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