Contents
In several recent posts accessible through the Archives section of this site, I present my thoughts on what it takes to be a successful investor. In this post, I share that investment success requires the right temperament.
Psychological Resilience and Emotional Stability
At its core, being a business owner (investor) is a test of temperament. Beyond market analysis and financial metrics, our success at investing largely hinges on our psychological resilience and emotional stability.
Financial markets are notoriously volatile. Many retail investors have yet to experience a MAJOR market correction that persists beyond a few weeks/months. If you are new to equity investing, I encourage you to research the following events:
- October 1987 Flash Crash
- Bursting of the ‘dot com’ bubble at the turn of the century
- Great Financial Crisis
- Onset of Cov-19 in March 2020
At the other end of the spectrum is the urge to buy in a frenzy during a bull run.
When Covid hit in 2020, some people had a lot of ‘free time’ on their hands and turned to speculative investments such as special purpose acquisition companies (SPACs). These companies typically had nothing to support their valuations and eventually imploded.
Think back to how many retail investors followed the advice from Roaring Kitty to invest in GameStop and AMC! Any investor in their right mind would have never 'invested' in these companies.
Investment success requires the right temperament. Let's look at what this entails.
Risk Tolerance
Investment success requires us to be perfectly honest when it comes to determining our risk tolerance.
Imagine trying to remain calm when the equity market is in turmoil and your employment and/or relationship situations suddenly take a turn for the worse.
Have a Long-Term Plan
A well-defined investment plan helps us focus on our long-term goals and avoid getting caught up in short-term market movements. The plan must include our investment objectives, risk tolerance, and time horizon.
Diversify the portfolio to help reduce risk and volatility. Spread investments across different asset classes, sectors, and geographies to mitigate the impact of a downturn in any one area. At the same time, be cognizant that diworsification (being far too diversified) also has negative implications.
Stay informed about market developments. Constantly checking your portfolio or following market news, however, is ill-advised and may lead to unnecessary stress.
Focus on company (or whatever asset in which you invest) fundamentals instead of being swayed by market noise. Strong fundamentals are more likely to lead to long-term success.
Practice Mindfulness and Stress Management Techniques
Practice mindfulness and stress management techniques to help maintain composure. Some people turn to drugs and alcohol but their consumption often leads to worse problems so I don’t encourage this.
Some people turn to meditation and deep breathing. I have tried these methods on a few occasions to no avail.
My preferred stress management technique is rigorous exercise 5 - 6 days a week for 2 - 3 hours a day. I am retired so my schedule permits this.
Choose what methods suit you.
Emotional Detachment
Emotions such as fear and greed can cloud judgment and drive irrational decision-making. A successful investor detaches their emotions from their investment decisions. Do not fall in love with an investment and hold it despite poor performance OR sell exposure to a great company merely because its share price plunges for no justifiable reason.
Patience
Investments, particularly in the stock market, require patience. Chasing quick profits is a dangerous game. Sometimes we have to wait years for an investment to become successful.
Not interfering with some our investments is often the best investment strategy.
Continually Learn and Adapt
The financial world is constantly evolving. New technologies, global events, and economic policies can all impact investments. To be a successful investor means we must be lifelong learners.
Stay informed about the latest developments and adapt your investment strategies accordingly.
Final Thoughts
It is critical that we give serious thought about our character, actions, and motives. Investment success requires the right temperament. Picking the right stocks or timing the market is insufficient to navigate the ups and downs of the financial world. We must properly assess our ability to stay calm, be patient, control our emotions, continuously learn, and understand our risk tolerance.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
