Are You Ready For the Next Financial Meltdown?
When Buffett says that he has the right temperament for value investing, he isn't kidding. When it comes to value investing, not having a solid emotional temperament can literally wipe you out. This is one of the reasons I've continued to remind those who signed up for the free net net stock checklist to sharpen their temperament so they can do well in the stock market over the long term.
Trouble At Home
Back in 2009 my dad was busily pacing the halls of our house. After scanning his latest stock prices anxiety was shooting through him like spears into a wild boar. Down 25%... down 50%... all he saw on the computer screen was red.
Having stormed through a tonne of value investing books, as well as everything Buffett had ever written, I knew exactly what was going on so was coaxing him to put money into the stock market to take advantage of the current market turmoil. Prices were the lowest they had been for... decades... and we were in the midst of the greatest value investing opportunity of our lifetimes.
Instead of stuffing money into stocks, however, I nearly had to stand in between my dad and the computer to keep him from selling everything he had.
The thing is, my dad was well aware of the value investing philosophy and genuinely believed in it. When push came to shove, though, he just couldn't hold up emotionally. During the depths of 2009 I saw one of the most cool, most calm, most collected men I had ever known ...lose it.
Value Investing Gut Check Time
Money can be a very scary thing. As value investors, we see opportunity in crisis. We see the profits that can be made when big bad business blunders take place. We thrive on this, plowing money into troubled or unloved stocks, having faith that most of these situations will eventually improve.
What happens, though, when you see your holdings dive by another 40% after buying at what you already considered to be distressed levels?
What happens when every single market participant you hear is screaming about the end of the world and advising that people stock up on toilet-paper and guns?
Emotional intelligence is a little talked about phenomenon in the value investing world. We talk a lot about cognitive biases and behavioural finance but not enough about our own emotional temperament and how that impacts value investing decisions. While intelligence is definitely an asset when it comes to value investing, emotional intelligence is arguably more important.
Understanding what you're feeling, why you're feeling that way, and how to control your emotions to optimize your value investing decisions are all critical skills an investor can have outside of reading balance sheets. They're also three of the pillars that make up Emotional Intelligence.
How to Sharpen Your Emotional Intelligence
Value investing is a highly emotional sport.
Is it any wonder that the majority of individual investors earn only about half of the market return over their lifetime if they're trying to pick their own stocks? Being weak in one of the three pillars of Emotional Intelligence -- understanding what you're feeling, why you're feeling it, and how to deal with it -- can cost you big time. Just look at what nearly happened to my father.
If you already follow a great value investing strategy, though, then sharpening your Emotional Intelligence will definitely increase your long term returns. Having sharper Emotional Intelligence means making far fewer mistakes while you invest. You'll be better able to tell what you're feeling deep down while you're sitting in front of the trading section of your discount broker's website. You'd also be able to tell whether you're feeling that way because you're falling into a common psychological trap or because you spotted something worth worrying about, and you'd be able to use that knowledge to short cut any poor decision that emotion would otherwise influence you to make.
If you're looking for a place to start improving your temperament, I highly recommend looking through these exceptional investment books.
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