In order to be successful at the game of investing, an investor needs the right mix of patience, humility, confidence and caution.  In other words, an investor needs the right temperament to succeed.

I can’t emphasize enough how important temperament is.  Temperament may be the sole distinguishing factor between an investor who has wild success and one who substantially underperforms the market.

An investor with the right temperament is one who can observe a situation logically and dispassionately.  It’s a person who is not swept up in the emotions of the market, and neither takes comfort in being part of the crowd or against the crowd.  This type of person is able to take advantage of unfounded market exuberance and optimism (by selling), as well as undue market fear and pessimism (by buying).

An investor with the right temperament is also someone who is good at exercising patience.  A successful investor needs to have the ability to wait, wait, wait, and then wait some more for the right opportunity. Patience is key. You make your money when you buy at the right price, and so waiting for the right opportunity is possibly one of the most important aspects of successful investment.

While waiting for that perfect investment opportunity (or fat pitch, as some people like to call it), an investor needs to be cautious and humble. An investor who wants to succeed needs to realize his limitations and be extremely aware of what he does and does not know. A purchase made at the wrong price can hurt investment results substantially; an investor’s goal should be to never lose money.

At this point, I’d like to add a few words about being a contrarian (a person who buys an investment simply because it appears cheap or because the market doesn’t like it).  Being a contrarian does not necessarily lead to investment success.  It’s not enough just to buy something that others don’t like or don’t want at that moment.  You have to buy something that is out of favor, and also be correct that the security is undervalued.  In other words, the price of the security needs to be cheap, and your facts and reasoning for purchasing the security need to be correct.  That is night-and-day different than simply being a contrarian.

When that perfect investment opportunity comes along, an investor needs to be able to act decisively and invest a good chunk of resources into that opportunity. Great investments don’t come along every day, and so when they do, you have to seize them with vigor and boldness.  Meaning, you have to put a good portion of your portfolio into those investments situations. This is a lot harder than it sounds, because the time when you should be investing is the time when everyone is extremely negative about a particular company or situation. The news media is probably emphasizing the negatives surrounding the company or particular situation, your friends are telling you how bad thing are, and even your own brain starts making up reasons for why you shouldn’t invest or why this may be a bad decision. It’s an uncomfortable situation to invest against the crowd and general consensus. However, if your analysis is correct, this is exactly the right time to invest.

As Warren Buffett has stated in the past:

Be fearful when others are greedy and greedy when others are fearful.
Warren Buffett

He probably also should have stated that to be greedy, you also need to be right.  In other words, you need to have the ability to accurately assess and value businesses and securities — which is a prerequisite to investment success.

As you can see, it takes the right mix of emotions and temperament to be a successful investor. This mix of patience, humility, confidence, and caution is rare when it comes to investing; and the right temperament may be one of the most important competitive advantages that individual investors have.  It literally pays to be aware of what you’re thinking and feeling while you’re making important investment decisions.

By exhibiting an even temperament, and becoming aware of your thought processes and emotions, it is possible to make better investment choices on a consistent basis; this should lead to better investment results and a faster compounding of wealth.

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