Temperament edge and time horizon edge are mostly commonly cited moats in the value investing world. I agree both are advantageous, but it becomes more and more clear to me they are not very advantageous, maybe just a little bit advantageous.
I am not saying temperament is not important. In fact, I think it is a prerequisite to be a great value investor. But temperament is genetic and we know that somewhere between 1% to 3% of the population is wired to have that genetic temperament advantage. It is genetic, but also at the same time generic – everybody born with the temperament edge have similar temperaments and most genuine value investors have it. If you have the right temperament, you can outperform the market by 1% to 2% a year just like if you buy a basket of low price-earnings (P/E), low price-book (P/B) stocks you can outperform the market by 1% to 2% a year statistically speaking, but no more than 2%. I do not think outsized returns can be generated just because one has this temperament edge, except in extreme cases.
Temperament edge has a few dimensions:
Most people with the temperament edge can check two or three boxes out of the five, but very few check all of them. For instance, many value investors recognized that Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC) were undervalued a few years back, but only a few acted on it and very few concentrated their investments on them like Munger did.