The Critical Component to Investing Performance

Most people believe IQ and cutting edge tactics account for superior investing performance. I think it’s the ability to control one’s emotions, especially in times of high stress and pressure.

Sometimes this pressure is exogenous. Markets get crazy. Your biggest position reports very poor earnings. Your best trader leaves for another firm.

More often than not, pressure is self-inflicted. You don’t like looking stupid. You seek perfection. You spend too much money. You seek glory and adoration from other people.

Tactics matter, but nowhere near as much as maintaining emotional skills like temperament, patience and discipline.

For as good an investor as Warren Buffett is, he has gone through long stretches of underperforming equity benchmarks for years. But when he underperforms, he doesn’t go to the drawing board to change his entire approach. No. He understands that underperforming at times is normal. It’s annoying and frustrating, but it’s not a reason to dismantle foundation of his approach.

A 2022 Marketwatch article highlights a few important factors that contribute to his sustained success.

“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

“Buffett’s great returns have been earned by having conviction in his investment principles and having the discipline to stay the course. The great tragedy is that while so many investors idolize him, they fail to take his advice and invest just like him.” 

https://www.marketwatch.com/story/as-warren-buffett-turns-92-fans-are-tweeting-his-most-timeless-investing-advice-11661890572

How long can you underperform before throwing in the towel? How much money would you have to lose?

How long before frustration and impatience make you question your entire investing approach? When would you rage-quit on your positions because they’re not giving you the profits you want, need or expected to have?

These are just some of the questions to think about before putting a dollar at risk. They can help you reflect on your own risk tolerance and emotional makeup so once you get into the game, you can stick with your approach and maximize your results.

Everyone must do to this work. Including Buffett. And you. And me.

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