Why are 15% successful (temperament)

[3/25/06] What every great investor must have

[3/26/05] Robert Hagstrom writes in the 2004 Legg Mason Growth Trust annual report.

A few weeks ago I attended a meeting with a consultant group in New York. As we were settling into our seats in the conference room one of the consultants immediately launched into a sermon, explaining to me that most portfolio managers not only have a college degree but most have attended graduate school. A large number have earned their Chartered Financial Analysts designate. Practically all institutional-level portfolio managers have several years of investment experience. He then said, ‘‘this is a business where 100% of the people are smart, but only 15% are successful.’’ He turned, looked at me and asked, ‘‘The question, Mr. Hagstrom, is why?’’

There are several reasons why most portfolio managers are not successful at beating the stock market over the long-term. Stock selection process is one. Portfolio management approach is another. Time horizon is a third. But the one reason that stuck in my mind was what Warren Buffett said at the 2004 Berkshire Hathaway annual meeting. When asked whether being smart is all one needs to be successful, he too thought for a moment and then replied, ‘‘Investing does not require extraordinary intelligence, but it does require an extraordinary temperament.’’

I turned back to the consultant and said, ‘‘Temperament.’’ When investing gets tough, and it does get tough from time to time, most portfolio managers do not have the right temperament: the combination of mental and emotional traits that allows an investor to be successful. When investing is easy, temperament may not be so important. But when investing gets difficult, temperament is what separates those who beat the market from those that do not.

[6/22/05] "Success in investing doesn't correlate with IQ -- once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing." - Warren Buffett

[7/20/05] Along the same lines, here's another Buffett quote (or maybe it's the same one?): "The most important quality for an investor is temperament, not intellect".

[9/15/05] Profiting From Temperament: An Illustration