“To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information,” said Buffett in a foreword to Benjamin Graham’s The Intelligent Investor.
“What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework.”
According to uncle Warren, factors like habits, character and temperament are what matter most. “What you do need is emotional stability — You have to be able to think independently.”
It’s difficult to argue with the sentiment, but how, exactly, does one think and act unemotionally and independently? Especially at times of extreme uncertainty where you’re watching your net worth drop by the day.
One approach we like to preach here at Strawman is the process of journaling. Writing really is refined thinking, as Stephen King likes to put it, and you’ll find the very act of putting your thoughts down on paper — everything from your overarching strategy, right down to the nitty gritty of specific businesses — to be extremely clarifying.
It’s also something against which you can hold yourself to account.
It doesn’t need to be a daunting task. A simple one page outline of the key insights, risks and investment thesis can go a long way (Strawman member jcmleng offers a great example with their recent post on XRF Scientific).
It’s also important to realistically frame your expectations. Once you really internalise the inevitability that you are — right now — likely holding a few stocks that will eventually prove to be duds, you’ll be more sanguine when something eventually goes south.
While newer investors take each mistake to heart, and compound losses by acting emotionally, the experienced capital allocator merely shrugs it off as all part of the probabilistic nature of investing, and moves onto the next opportunity.
The frustrating truth in this game is that you can be punished even if you have good reasoning, and rewarded for poor thinking (at least for a time). Nevertheless, process matters far more than any individual outcome; it’s about having a framework, as Buffett puts it, that tilts the odds in your favour and delivers a better result on average.
Consider also this logic: for a stock to be cheap the consensus MUST be wrong. Otherwise any upside would already be factored into the price. The very act of stock picking demands you to go against the prevailing view.
Of course, it may prove that, after all, the market was right and you were wrong, but without the capacity to think independently and reach your own conclusions, without any variant perception, you’re relying on luck alone.
Building good habits, refining your process and steeling yourself against emotional pitfalls isn’t easy. But, unlike IQ, they can all be improved. And that’ll give you a tremendous edge on those that don’t — even if they are the smartest guys in the room.
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