Having the smarts helps in being a fund manager but the ability to keep a level head in a crisis is what sets the great ones apart.

Patrick Cairns filed this report for MoneyWeb:

Many asset managers want you to believe that they are uniquely smart – that investing is such a difficult thing to get right that it should be left to only the brightest among us. In reality, however, successful investing is really quite simple.

“Intelligence is probably the most overrated quality required to be a fund manager,” says Kevin Murphy, co-head of the global value team at Schroders.

Napoleon had a good definition of what a military genius is: someone who can do the average thing when everybody else is losing their minds and doing some really stupid things,” he adds. “And to be a fund manager, that’s all you need. You don’t need to be super-intelligent and able to do really clever derivative things, or be a super-duper quant-type mathematical genius. You just need to be able to do the average thing when everyone else is losing their minds.”

A good example of this, Murphy points out, is what happened during the tech bubble in the late 1990s. “Everyone got carried away with technology stocks and were happy to buy them at any price because the future was guaranteed,” he says. “That didn’t work out too well.”

We look in totally the opposite direction,” Murphy says. “We look for companies that are going through tough times; companies that have some challenge in their marketplaces; companies where the stock market may think that the management is just bad. We look at that and try to understand all of the risks facing that company; we try to make sure that they are priced in; that we understand them; and, most importantly, that we are compensated for those risks.”

Essentially, this means buying companies for less than they are worth. As long as analysis shows that there is little further downside risk, this is the most proven way to make money in the stock market. It doesn’t, however, necessarily happen without going through long periods of discomfort. It may take a long time before the market prices these businesses at what they are worth. “Those are the hard things – trying to do something different to everybody else, and then waiting,” says Murphy.