The Most Important Quality of an Investor - Warren Buffett
It's not about how intelligent you are.
Adam Smith once asked Warren Buffett what the most important quality of an investor is. Buffett replied, “it’s a temperamental quality not an intellectual quality. You don’t need tons of IQ in this business. I mean you have to have enough IQ to get from here to downtown Omaha. But, you do not have to be able to play three-dimensional Chess or be in the top leagues in terms of bridge playing or something of a sort. You need a stable personality. A temperament that neither derives great pleasure from being with the crowd or against the crowd. Because this is not a business where you take polls it’s a business where you think. Ben Graham would say that you’re not right or wrong because a thousand people agree with you and you’re not right or wrong because a thousand people disagree with you. You’re right because your facts and your reasoning are right.”
Almost 50 years later, Buffett’s statement still holds true. You don’t need a strong IQ to get exceptional results on the stock market. You only need to have right temperament. A temperament that neither derives great pleasure from being with the crowd or against the crowd. You must be able to keep your cool when the stock market is down 40% and everyone is selling or the stock market is on a rally and every Tom, Dick and Harry are making millions. You don’t make decisions based on popular or unpopular opinion but on facts and right reasoning. An investor’s ability to think independently and base their decisions on facts and reason — rather than fads — is what separates exceptional investors from mediocre ones.
Warren Buffett further said, “I tell people if they’re going into the investment business, if you got 160 1Q, sell 30 points to somebody else because you won’t need it. I figured out very early you don’t have to be that smart in this business, which is fortunate, but you do have to have the right temperament. And you have to be able to ignore what other people are saying and simply look at the facts and decide”
Isaac Newton is an intelligent man. There’s no doubt about that. Despite his intelligence, he was a failed investor because he did not have the right temperament. In 1720, there was a speculative mania on the South Sea company. The stock went off the chart, rising from £128 in January to £1,050 in June. Sir Isaac Newton invested, but realising the speculative nature of the rapid rise, he sold his £7,000 worth of stock. As the Master of the Royal Mint, when asked about the direction of the market, he reportedly replied “I can calculate the motions of the heavenly bodies, but not the madness of the people.”
By September 1720, the bubble punctured and the stock price fell below £200 – 80% from its high three months earlier. It turned out, however, that despite having seen through the bubble earlier, Sir Isaac, like so many investors over the years, couldn’t stand the pressure of seeing others people around him make vast profits. He bought back the stock at its high and ended up losing £20,000. He made the common human mistake of following the crowd. Not even one of the world’s smartest men was immune to FOMO!1
I believe Warren Buffett is not as intelligent as Sir Isaac Newton, but he has the right temperament. He never follows the crowd. For example, during the go-go years of 1960s,2 many investors made millions by speculating on the stock market. Instead of joining the speculation, Warren told members of the Buffet partnership in his June 1967 letter that:
In my opinion what is resulting is speculation on an increasing scale. This is hardly a new phenomenon; however, a dimension has been added by the growing ranks of professional (in many cases formerly quite docile) investors who feel they must “get aboard”. The game is dignified, of course, by appropriate ceremonies, personages and lexicon. To date it has been highly profitable. It may also be that this is going to be the standard nature of the market in the future. Nevertheless, it is an activity at which I am sure I would not do particularly well. As I said on page five of my last annual letter,
“Furthermore, we will not follow the frequently prevalent approach of investing in securities where an attempt to anticipate market action overrides business valuations. Such so-called ‘fashion’ investing has frequently produced very substantial and quick profits in recent years (and currently as I write this in January). It represents an investment technique whose soundness I can neither affirm nor deny. It does not completely satisfy my intellect (or perhaps my prejudices), and most definitely does not fit my temperament. I will not invest my own money based upon such an approach – hence, I will most certainly not do so with your money.”
Any form of hyper-activity with large amounts of money in securities markets can create problems for all participants. I make no attempt to guess the action of the stock market and haven’t the foggiest notion as to whether the Dow will be at 600, 900 or 1200 a year from now. Even if there are serious consequences resulting from present and future speculative activity, experience suggests estimates of timing are meaningless. However, I do believe certain conditions that now exist are likely to make activity in markets more difficult for us for the intermediate future.
The above may simply be “old-fogeyism” (after all, I am 37). When the game is no longer being played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, etc. I have been scornful of such behavior by others in the past. I have also seen the penalties incurred by those who evaluate conditions as they were – not as they are. Essentially I am out of step with present conditions. On one point, however, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean foregoing large and apparently easy, profits to embrace an approach which I don’t fully understand, have not practiced successfully and which, possibly, could lead to substantial permanent loss of capital.
56 years after, it is clear that Warren Buffett is right and they are wrong. I hope you don’t join the bandwagon but stick to the principles of Warren Buffett, Charlie Munger and Peter Lynch. If you do join the bandwagon, I tell you most truly, you’ll lose money in the long run.
Thanks for reading. Don’t forget to like and share to other investors.
https://www.oaktreecapital.com/docs/default-source/memos/2000-01-02-bubble.pdf
To learn more about the go go years, check out “The Money Game” by Adam Smith. You can also check this great post - https://periscopeglobal.substack.com/p/investing-lessons-from-the-go-go