“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.”– Warren Buffett
A year ago this week US stock markets hit their nadir after dropping over 30% more rapidly than any period in history, taking a mere 22 days to plunge deep into bear market territory. Of course, what followed was one of the fastest recoveries from a bear market in history. So how you behaved during that brief period – what actions you took or didn’t take – had a huge impact on what your investment portfolio looked like on the other side.
During the tumultuous period of 2020 (and in fact for over a decade) I have dedicated a lot of time writing about qualitative issues, namely investor behaviors and how to manage them for optimal investment outcomes. Indeed, the ‘math’ – the financial analysis part of investing (especially if you focus on well-established blue-chip companies versus obscure micro-caps which require a different level of due diligence) - is the ‘easy’ part of investing. Investors rarely have bad outcomes due to miscalculating financial ratios. Instead, they let their inherent behaviors – their temperament – drive their investment actions, often to their long-term financial detriment. This is why I encourage people to spend as much if not more time on analyzing themselves as they do researching a given stock. If you go back and look at what lead to sub-par performance in the past, the root cause will invariably be choices made based on short-term emotions and not long-term needs and facts.
The problem is (as with health and nutrition) there is often a large gap between knowing intellectually what to do (eating a salad instead of a pizza) and actually executing. That is because emotions, especially those in a moment of turmoil and chaos (or sadness, anxiety, and/or depression), are very strong and will temporarily take over the rational part of the brain at the most basic level for (perceived) survival. We feel the need to ‘do something’ to maintain control, so we take action we soon thereafter regret.
Remember, true progress tends to be a slow, steady process achieved far from the stadium lights or blaring financial headlines. Shouting from the rooftops about impending doom is easy. It certainly grabs attention and sells lots of advertising. However, it also tends to drown out what ultimately matters, which is the slow and steady progress that blue chip companies tend to make over time; near-term economic situations notwithstanding.
None of this is to take away from the true human health and economic toll that the world has had to endure in the last 12 months. But when considering your long-term investment portfolio, it is very important to think with discipline and rationality – to have the right temperament (the common trait for all great investors – not math skills or financial wizardry). As Aristotle said, “knowing yourself is the beginning of all wisdom” so if you are realistic with yourself and know you tend to zig when you should be zagging, then work with a disciplined professional who can keep you on course. He or she will be worth their weight in gold if they can articulate a clear plan for you and keep you on it during the inevitable market disruptions along the way.
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