The Psychology of Money 179the stock market, but themselves. They may well have superior abilities
in mathematics, f inance, and accounting, but if they cannot master
their emotions, they are ill suited to prof it from the investment process.
Graham understood the emotional quicksand of the market as well
as any modern psychologist, maybe better. His notion that true in-
vestors can be recognized by their temperament as well as by their skills
holds as true today as when f irst expressed.
Investors have the following characteristics:
- True investors are calm.They know that stock prices, inf luenced
by all manner of forces both reasonable and unreasonable, will fall as
well as rise, and that includes stocks they own. When that happens, they
react with equanimity; they know that as long as the company retains
the qualities that attracted them as investors in the f irst place, the price
will come back up. In the meantime, they do not panic.
On this point, Buffett is blunt: Unless you can watch your stock
holdings decline by 50 percent without becoming panic-stricken, you
should not be in the stock market. In fact, he adds, as long as you feel
good about the businesses you own, you should welcome lower prices as
a way to prof itably increase your holdings.
At the opposite end of the spectrum, true investors also remain
calm in the face of what we might call the mob inf luence. When one
stock or one industry or one mutual fund suddenly lands in the spot-
light, the mob rushes in that direction. The trouble is, when everyone is
making the same choices because “everyone” knows it’s the thing to
do, then no one is in a position to prof it. In remarks reported in For-
tuneat the end of 1999, Buffett talked about the “can’t-miss-the-party”
factor that has infected so many bull-market investors.^2 His caution
seems to be this: True investors don’t worry about missing the party;
they worry about coming to the party unprepared. - True investors are patient.Instead of being swept along in the en-
thusiasm of the crowd, true investors wait for the right opportunity.
They say no more often than yes. Buffett recalls that when he worked for
Graham-Newman, analyzing stocks for possible purchase, Ben Graham
turned down his recommendations most of the time. Graham, Buffett
says, was never willing to purchase a stock unless all the facts were in his
favor. From this experience, Buffett learned that the ability to say no is a
tremendous advantage for an investor.