One of my early pieces
What is the temperament of a successful investor?
To be a successful investor, one does not need a high IQ. You need not be a wizard at mathematics or finance. One of the most important attributes of a successful investor is ‘temperament’. I understand that the word is being loosely used and can mean a range of things, given its origin from Latin, where it simply means ‘correct mixture’.
What is meant by temperament here is the uncommon attribute of ‘common sense’. A proper temperament for investment would mean that you are not excited simply because you are with the herd or against it. You know you are right not because of what someone else says or thinks, but because you have made sufficient efforts to understand the facts and you have reasoned right.
Sounds simple, does it not? Alas, each one of us has weak moments where we let reason take a walk and our actions get dictated by the latest expert we hear and the price movements that create emotions of euphoria or panic, greed or fear. I am sure, most of us can narrate stories of the stocks we bought when our faculties were suspended or some great stocks we sold out early because some ‘expert’ talked us out of it. Our temperament just weakened.
Investment in stocks is not rocket science. You do not have to be an expert in financial analysis. You can use a disciplined SIP (systematic investment planning) approach or, if you CAN, time your investments to a price which you feel is right. There are some things which are contra-indicators of a fit temperament. I will try and list a few of the common temptations, or mistakes, we make (experts included) that result in not getting proper mileage from our investment vehicles.
i) Never think that ‘this’ year is going to be different from any other year. What it means is that bullishness is the natural attribute of media and stock-brokers, analysts, etc. Do not listen to them; stick to your discipline or philosophy. If you are into your SIP, unless any fact, on which you based your judgement, is wrong OR things have changed permanently for the company you picked, there is no reason to head for the door. It is very difficult to sell a stock that has shot up and hit a new peak and then to buy it back at a lower price. You could get lucky; but, most likely, what will happen is that you would miss out on the total returns from the stock.
ii) Do not worry about whether the markets are likely to go up or down. No one gets it right; each one of us has a 50% probability of being wrong. Sticking to our convictions and attitude helps us here. Markets will fluctuate. Leave day-trading and short-term-trading to those who have time to watch the market without blinking their eyelids and who have made it a hobby, or habit, to trade. They are traders in prices and not investors in stocks.
iii) TIMING the market is tough, even for experts. For instance, our Indian markets are predominantly driven by FII investments. In addition, liquidity in stocks is poor. And government policies are capricious, leading to overnight changes in moods and sentiments. So, even if we have our company analysis right, we do not know whether the market has peaked or bottomed. Ignoring timing can make us much better investors. For instance, if I like HUL as a company and am happy buying it at, say, Rs700 to Rs750 per share, my focus should be on that on not on the index. If my conviction on HUL is right, it does not bother me too much if the stock price falls below this level. Timing becomes difficult, because history does not repeat itself. At each moment, the environment keeps changing; new sets of investors keep coming in; and government policies, world economy, etc, are but few factors that are never precisely in line with the past. Markets do not stay for many moments in a ‘perfect’ equilibrium where everything is fairly priced. Over-pricing and under-pricing can last for very long periods and tend to change your mindset to a bull or a bear!
iv) Knowing what to buy is 90% of the problem solved. I am sure, most of us spend some time in deciding which shoe to buy or even which belt to buy. And you do some homework, or use your knowledge bank to make your choices. We would rarely buy something new without knowing what it is. The same is the case with stocks. If you are the kind of investor who buys simply because someone told you to, then you do not have the temperament to be an investor. You must know what the company does and some understanding of why it makes money. Even if your financial advisor, or your best friend, tells you to buy a stock, please understand this. Peter Lynch, one of the investment gurus, says, “Never buy something you can’t illustrate with a crayon”!
v) Short-term and long-term: Warren Buffett likes to invest ‘forever’. To me, it means that the money I choose for investing in stocks is that ‘pocket’ of money which I am not going to ‘ever’ need in the next 10 years or so. I am afraid to invest any money in stocks if I know that the money is needed for sure within a given time. To me, this aspect of the ‘temperament’ is perhaps the most important one. There are very strong reasons for this approach. If we put our money into stocks, that money is at the mercy of factors that are outside our control. We may have chosen the ‘best’ possible investment, but we have no control over market prices or market sentiment. For instance, when we definitely need the money, if a global crisis, or a scam, hits the market, no investment will be guaranteed to survive. Any investment should be such that we are able to enter and exit at OUR choice of timing and not compelled by time to pay more or realise less. That is why I get worried when people start equating ‘long’ term with precise terms like one year, three years or five years, and so on.
So, investing in stocks needs your time as well as temperament. Analyses can be best done by you. Remember, most of the so-called professional ‘advisors’ and ‘analysts’ have been in the business, or industry, for less than two decades. Similarly, at least half of today’s investors would not have spent more than 10 years or so in the markets. So, in a sense, it is a congregation of the ‘blind’, where the pulpit is being pounded by the blind to an audience that cannot see too well either.
The other key attribute to a good temperament is to be NOT INFLUENCED BY MEDIA OR ANALYSTS. They have a vested interest in always being ‘bullish’. Given their nexus with business and industry, it hurts them to write, or speak, negatively or about selling down their stocks. They are what Peter Lynch refers to as the ‘DON’T WORRY, BE HAPPY” crowd. Honest views are rare and they are not found alongside lots of advertising. Many in the media are simply ignorant too.
Choose well, pause before investing, and pay some attention to what you are buying. Once you tick your checklist, stay invested.