It’s Tuesday and time for a Warren Buffett quote: “The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” (Motley Fool)
What Is Temperament?
Merriam-Webster defines temperament as a “characteristic or habitual inclination or mode of emotional response.” So it is a natural emotional reaction based on a certain situation.
Temperament in this case is how you feel and act when the market goes way up or goes way down. If you buy only when the market goes up and sell only when the market goes down, you are losing money.
Who Has A Investor’s Temperament?
Almost nobody has an investor’s temperament naturally. Emotionally we are driven to “do something, anything” when the market is losing money. In the opposite situation, we feel that we “can’t lose” when the market keeps going up… we want to buy.
Developing an investor’s temperament is very unnatural. Only the most skilled investors (not me, for sure) are numb to severe market movements. A true investor will at least make an unemotional decision when times get tough.
When Do You Need An Investor’s Temerament?
When the market is stable, it is easy to make unemotional decisions about what stock to buy or sell. When the market takes a deep drop though, most investors feel sheer fear. Fear of losing large sums of money. When the market is doing nothing but going up, mania takes over. You just want to buy. Either of these cases are the times you need an investor’s temperament.
How Do You Develop An Investor’s Temperament?
Here are some ways you can develop an investor’s temperament:
- Disconnect from financial news. You really don’t need it.
- Be concerned with the fundamentals of the companies you own, especially during times of fear.
- Learn not to react – grow think skin. Take all of the emotion out of investing decisions.
- Remember to make logical decisions when dealing with FOMO – Fear of missing out.
The most important thing you can do is to ignore the market. If you lose money on your great picks today, you will make it back tomorrow.
Why Develop An Investor’s Temperament?
You’re worst decisions will be made when you are most emotional. If you sell after the market takes a significant leg down, you have probably lost money. If you buy at a high point, you could lose money in the future, especially when you question your choice at a downturn.
The way to make money investing is to buy great companies and hold them as long as they are great. They are still great even when the market price declines 20%. They may not be great any more if their cash position declines or their debt increases. Financial fundamentals is the key.