After working with investors for more than 50 years, I have learned many things about human nature. Especially when it comes to people’s money. Value Investing Requires Intelligent Patience. Perhaps the most vivid lesson I have learned is that most people lack the ability to apply intelligent patience to their investment portfolios. In other words, they tend to react very strongly to short-term fluctuations in the prices of their stocks. They tend to get overconfident when their stocks are rising strongly, and they tend to wildly panic when prices fall.
In the parlance of the industry, these emotional responses that people have regarding their investment portfolios are categorized as either fear or greed. Both emotional responses can be strong; however, I have learned that fear is the strongest of the two. Nevertheless, greed can also be a powerful influence – especially when popular stocks are rising. Consider Apple or Tesla as two current examples of greed overshadowing reason. All the facts and mathematical realities simply did not deter people from believing that these are great investments going forward. They both have been great investments historically, but much of their performance can be attributed to current excessive valuations.
One of my favorite Warren Buffett quotes is: “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” I do not believe there is any more effective way to keep emotions from corroding your intellectual framework than ignoring short-term price volatility.
Trust fundamentals and recognize that they take time to manifest. Once you understand that, you also realize it takes time for the companies you invest in to create value for you the shareholder. This is precisely why investing for the long-term is such an important foundational principle of investing.