How is your stomach?
Warren Buffett over the years has said that investing is a game where you don’t need an IQ of 160 for successful results. While having a high IQ will assist in analytical proficiency, it is not enough in and of itself to be a successful investor. The other requirement is a strong stomach.
In a PBS interview with legendary investor Peter Lynch, he noted the not infrequent gyrations of the stock market:
The market itself is very volatile. We’ve had 95 years completed this century. We’re in the middle of 1996 and we’re close to a 10 percent decline. In the 95 years so far, we’ve had 53 declines in the market of 10 percent or more. Not 53 down years. The market might have been up 26 finished the year up four, and had a 10 percent correction. So we’ve had 53 declines in 95 years. That’s once every two years. Of the 53, 15 of the 53 have been 25 percent or more.
While sensible investing requires analysis, this is usurped in importance by having the ability to bear the sometimes brutal volatility of the stock market. Put another way, you can perform incredible analysis but it will amount to nothing if you are unable to stomach the capriciousness of the market as you await for your investment thesis to unfold. Lynch emphasised the importance of temperament over intellect in the stock market: “I mean, stomach is the key organ here. It’s not the brain. Do you have the stomach for these kind of declines?”
When making your next stock purchase, ask yourself whether you could stand to see your investment halve in value during a market downturn.While sensible investing requires analysis, this is usurped in importance by having the ability to bear the sometimes brutal volatility of the stock market. Click To Tweet