While some investors may believe that the ability to spot good opportunities and conduct precise valuation calculations are the most important skills they need, that’s not necessarily the case.
At least, not according to legendary investor Warren Buffett.
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In fact, the Oracle of Omaha argues that having the right temperament is actually a more valuable trait for investment success.
“The proper attitude toward investing is much more important than any technical skills,” he told Andy Serwer, during an interview with Yahoo Finance.
Here’s why Buffett believes investment psychology and having the right perspective are so critical.
Attitude determines success
The right perspective for an investor, according to Buffett, is that of a business owner — as opposed to a trader.
In other words, it’s important to remember that, when you buy a stock, you’re buying a piece of a business.
Therefore, the underlying operation of said business is the most foremost factor — not the price someone else is willing to pay to buy or sell that piece.
“In my view, what you do when you’re buying a business is [assume] that you’re not going to get a quote on it for five years,” he said in the Yahoo Finance interview. “They’re going to close the stock market for five years and you’ll be happy owning it as a business.”
He added, “If you owned Coca-Cola in 1920, it didn’t make a difference whether it went public. The important thing is what it was doing with customers. And you probably would have been better off if there wasn’t a market… for 30 or 40 years because you wouldn’t have been tempted to sell it then.”
This focus on the underlying fundamentals is a key aspect of Buffett’s approach and has been echoed by other successful investors, such as Peter Lynch.
“The key organ in your body in the stock market is the stomach, not the brain,” he quipped during a speech at the National Press Club in 1994.
So, how can this key insight help make you rich?
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Gaining an edge
Investors can gain an advantage over others with a few adjustments to their attitude toward the market.
For instance, avoid panic-selling during market downturns. This could help you benefit from the recovery — and cheaper valuations — that emerge in these situations.
Some of the most profitable days on the stock market have followed sharp downturns, according to an analysis by Lazard Asset Management. Investors who have the stomach to sit through these sharp downturns may experience better performance overall.
Expanding your time horizon could be another way to gain an edge. According to eToro’s Ben Laidler, the average stock holding period has dropped from five years in the 1970s to just 10 months in the 2020s.
In other words, holding for longer than a year is above average now.
Laidler’s analysis also revealed that a longer holding period reduced the probability of a loss.
Holding a stock for just one year had a 25.2% probability of loss, according to Wealthfront’s data.
However, the probability of loss dropped to 4.9% if the stock was held for 10 years. If it was held for 20 years, it drops entirely down to 0% probaility of loss.
Buffett encourages investors to ignore daily stock price fluctuations and think of stocks as more like illiquid assets — such as farms and real estate — in order to resist the temptation of buying or selling based on short-term sentiments.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
Source Agencies
