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Buffett: What is the right temperament for being an investor? October 21, 2008

Posted by shaferfinancial in Uncategorized.
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Contrary to the Wall Street propaganda machine, all investing takes a concerted effort at maintaining the correct temperament.  Telling someone not to act in a certain way (like sell mutual funds in a bear market) is not going to get them to act differently because we are all hot wired to avoid pain even at the cost of gains.  In other words, to override our natural inclinations we need to have a plan that takes into account what fear does to us.  Warren Buffett’s mentor Benjamin Graham points out “the investor’s chief problem, even his worst enemy, is likely to be himself.”

Warren Buffett tells people do not own any stock that would cause you to panic and dump shares if the price falls by 50%!  Here are four ideas from Mr. Buffett to help you do the right thing:

1. Do your own fundamental analysis.  In other words know the business or the real estate market you are investing in.  Having done your own analysis you have more confidence to hold on when things look bad.  In real estate investing, only invest in properties that throw off cash flow.  This allows you some amount of comfort and keeps you from having to sell into a bear market because of other financial issues.

2.  Do not be taken in by the stampeding herd.  When you own great businesses or properties, you can afford to think long term.  Avoid darting into and out of any investment.  A minimum of five years should be your shortest time period of ownership.

3. Never make an investment decision based on others telling you to, whether it is a hot stock pick or a “great buy” property.  Do your homework (fundamental analysis) and make your own decision.

4. Be patient.  Emotions often come into play for markets.  As long as the fundamentals don’t change, demonstrate patience.  It will always pay off.  Don’t dwell on the value of real estate nor the price of stocks, instead look at cash flow, earnings capacity, its future, etc.

Following these ideas will force you into the right temperament.  Be the lion not the herd!

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