Trait No.1 is the ability to buy stocks while others are panicking and sell stocks while others are euphoric. Everyone thinks they can do this, but then when Oct. 19, 1987 comes around and the market is crashing all around you, almost no one has the stomach to buy. When the year 1999 comes around and the market is going up almost every day, you can’t bring yourself to sell because if you do, you may fall behind your peers. The vast majority of the people who manage money have MBAs and high IQs and have read a lot of books. By late 1999, all these people knew with great certainty that stocks were overvalued, and yet they couldn’t bring themselves to take money off the table because of the “institutional imperative,” as Buffett calls it.
And finally the most important, and rarest, trait of all:
The ability to live through volatility without changing your investment
thought process. This is almost impossible for most people
to do; when the chips are down they have a terrible time not selling
their stocks at a loss. They have a really hard time getting themselves
to average down or to put any money into stocks at all when the market
is going down. People don’t like short-term pain even if it would result
in better long-term results. Very few investors can handle the
volatility required for high portfolio returns. They equate short-term
volatility with risk. This is irrational; risk means that if you are
wrong about a bet you make, you lose money. A swing up or down over a
relatively short time period is not a loss and therefore not risk,
unless you are prone to panicking at the bottom and locking in the loss.
But most people just can’t see it that way; their brains won’t let
them. Their panic instinct steps in and shuts down the normal brain