Stay calm and carry on
The stock market can be an unpredictable place. One day, it's soaring; the next day, on a downer – it's enough to unsettle even the calmest of minds.
And yet, there are some investors who seem to be able to rise above the noise. They don't make impulsive decisions and always learn from their mistakes.
Chances are, they're also the ones who come out on top. Maybe not every year, but in enough years that it's not a fluke.
And when everyone else is tearing their hair out because of the latest dip in the market, they don't even bother checking their portfolios.
How do they stay so calm?
It all comes down to mindset.
In this article, we'll explore the mental habits of some of the world's most legendary investors. From Warren Buffett to Charlie Munger to Peter Lynch, we'll try to identify precisely what it was about their approach to investing that made them so great.
Spoiler alert: they're habits that you can easily adopt yourself!
Patience and long-term investing
Warren Buffett is renowned as one of the world's most successful investors, regularly featuring at the pointy end of global rich lists. But he has achieved this level of wealth by following a surprisingly simple investment philosophy.
Buffett is a value investor – meaning he seeks out high-quality companies that appear underappreciated by the market. He looks for companies with a proven track record of success, low debt, and strong fundamentals. Buffett is also attracted to companies that have a strong competitive advantage – what he calls a protective moat.
But the most crucial lesson new investors should draw from Warren Buffett's investing philosophy is his long-term outlook. He believes you should be prepared to hold any stock you buy for ten years – if not longer!
This type of mindset forces you to really consider the businesses behind the stocks you buy. If you can't imagine that company still being successful in ten years, then maybe it's not the type of high-quality stock you want in your portfolio.
We believe in a long-term outlook here at the Fool – so much so that it's part of our investing philosophy. We admire Warren Buffett's mindset because it encourages new investors to look beyond short-term volatility in the stock market.
Our chief investment officer, Scott Phillips, even opined about this topic on a recent trip to the outback.
The share market delivers great long-term returns – but it can sometimes take a bumpy road to get there. The most successful investors – like Warren Buffett – are the ones who stay the course and don't panic at the first signs of a market crash. So, be patient, believe in the strength of your convictions, and keep your eyes on that long-term prize.
Emotional discipline
If you're looking for someone with emotional discipline, look no further than Charlie Munger, Warren Buffett's right-hand man. He was the vice-chair of Buffett's investment conglomerate Berkshire Hathaway Inc (NYSE: BRK.B) until his death at age 99 in November 2023.
Charlie Munger's investment philosophy was perhaps even more straightforward than Buffett's: If you see a good investment opportunity, grab it and never let it go.
He famously said, "The big money is not in the buying and the selling but in the waiting."
Munger took the buy-and-hold investment strategy to the next level. Forget what Buffett said about holding stocks for ten years – Munger believed in keeping a small portfolio of high-quality stocks essentially forever. His philosophy was to kick back and let time and compounding work their magic.
At first, this might sound easy, but having the emotional discipline to look beyond short-term fluctuations in the market can be surprisingly challenging.
I'm sure there have been a few times over recent years when investors have checked their share portfolios and wondered whether the wisest thing to do is simply to cash out now and throw in the towel. I know I have.
But Munger warns against making these sorts of rash decisions.
Remember, the stock market "is a device for transferring money from the impatient to the patient". It may have been Warren Buffett who said that, but it feels like a lesson he learned from Charlie Munger – one of the most disciplined investors in history.
Research and due diligence
Warren Buffett argued that you should "never invest in a business you cannot understand".1 In fact, Buffett held so firmly to this belief that he famously passed up early investments in tech stocks like Amazon.com Inc (NASDAQ: AMZN) and Google's parent company Alphabet Inc (NASDAQ: GOOG) because he couldn't wrap his head around their business models.
With the luxury of hindsight, we could say Buffett was too dogmatic in his investing approach. Live a little, Warren! But many of the most successful investors in history have followed a very similar mantra.
Take, for example, Peter Lynch, legendary manager of the Magellan Fund.
Lynch is another mythical figure in investing. After being appointed manager of Fidelity's Magellan Fund at the ripe old age of 33, Lynch oversaw 13 years, during which the fund earned an annualised return of almost 30%. At 46, he retired.
So, what was the secret to his immense success?
Most of it boils down to simply buying what you know. Lynch favoured investing in industries he was familiar with so that he could fully understand the risks – and potential returns – of his investments.
Like the other attributes of a successful investing mindset we've covered, this sounds easy – in theory. But think back to some of the meme stocks that have come (and gone) over the past few years.
When everyone is talking about a particular share, and you can see its price surging, it can be hard to resist buying it – I mean, if everyone else is, you'd be an idiot not to, right?
But you shouldn't invest in it (even after hours of research) if you don't fully understand what a company does or how it can outgrow its competitors. Latching onto the latest meme stock simply because you've got a bad case of FOMO only means you're contributing to a price bubble – and, unfortunately, bubbles tend to burst.
And look, maybe it will mean you miss out on investing in tomorrow's Google or Amazon – but hey, at least you'd be in good company.
Adaptability and continuous learning
Warren Buffett and Charlie Munger have always emphasised the importance of research and education in successful investing. Both are lifelong learners who, as Munger put it, tried to "go to bed every night a little wiser than when they got up".2
By the time of Charlie Munger's death in 2023, he and Buffett had worked together at Berkshire Hathaway for 45 years. That's a lot of history – just think of all how the stock market (and the world!) changed during that time. And yet, Munger and Buffett somehow continued to find success.
Their secret? A lifetime of learning.
A growth mindset helps successful investors adapt to changing market conditions, foresee potential risks, and – perhaps most importantly – seize on profitable opportunities.
But, let's face it, the share market can be a daunting place. So many different numbers, metrics and terms get flung around in investing circles that it can be hard for outsiders to keep up.
But Charlie Munger wasn't saying you need to understand everything immediately. Going to bed "a little wiser" than when you woke up just means making a commitment to your ongoing financial education. Try to devote a little time each day or week to expanding your knowledge about investing – you can start with the many articles we have created in our Investing Education series here at the Fool.
Every little bit helps make you that much wiser.
Risk management
Another thing that successful investors understand is risk.
When choosing a stock to invest in, you must be honest about your risks.
For example, investing in a growth stock will be riskier than an established blue chip. That doesn't mean you shouldn't invest if you believe in the business, but you need to understand that its price is likely to be more volatile than other shares. So, be prepared for the possibility that your portfolio could spend a while in the red before it turns green.
(Although, as we've discussed, this shouldn't bother you so much if you're a long-term, patient investor!)
But if the idea of a yo-yoing portfolio still makes you a little nervous, there are steps you can take to reduce your portfolio's risk.
Most successful investors will hold a well-diversified portfolio. This means they will invest in multiple stocks from different industries or market sectors to manage their exposure to certain risks.
It's like the old saying: don't put all your eggs in one basket. If the basket breaks, you've just lost all your eggs.
For example, let's say you own stock in an exciting but highly leveraged biotech company. It's a bit of a speculative play, but you've done your research and believe in the company's long-term prospects. Nonetheless, you're worried about the effect rising interest rates might have on its debt repayments.
You could offset some of this interest rate risk by adding bank shares to your portfolio, as bank profits typically rise with interest rates. If the share price of your biotech stock falls due to investor concerns about interest rates, your bank stock price might increase as it reports higher profits.
In other words, some of your eggs might have broken, but you've still got enough left over for a half-decent omelette.
Because different stocks, sectors and industries will respond differently to macroeconomic events, you can hedge away all sorts of risks simply by diversifying your portfolio.
And it doesn't have to cost you a fortune in brokerage either – buying units of exchange-traded funds (ETFs) can be a cost-effective way to gain exposure to whole sections of the stock market in just a single trade.
Humility and learning from mistakes
Even the best investors make mistakes.
In 1993, Warren Buffett's Berkshire Hathaway bought shares in a Maine shoemaking company, Dexter Shoe.3 Buffett was so confident in Dexter's prospects that he offered 25,203 shares in Berkshire Hathaway rather than pay in cash.
Within a few years, this company – which Buffett proclaimed in his 1993 letter to shareholders to be "one of the best managed" he'd ever seen – was kaput. It simply couldn't compete with cheaper imports.
Not only that but by paying for the investment with Berkshire stock, Buffett massively compounded his losses. By 2020, those shares would have been worth a staggering US$9 billion.
Even the best investors make mistakes – Buffett is the first to acknowledge it. He has repeatedly lamented the error he made by investing in Dexter, bringing it up in his shareholder letters in 2007, 2014 and 2015. And that's just one of many lapses in judgement he's copped over the years.
Acknowledging your mistakes is crucial to your investing journey – even Warren Buffett does it. The lessons we learn from these mistakes are likely to be the ones that stay with us – like battle scars etched into our skin.
So, take the time to reflect on your mistakes and whatever caused you to make them. And, if you treat your losses as learning opportunities, they won't sting quite as badly – they're just more opportunities to become a better investor in the future!
Foolish takeaway
Mindset plays an integral role in successful investing.
A positive mindset can help you deal with the volatility and uncertainty inherent in the share market. It can help you make the right decisions just when you need to.
So, if you find yourself up late at night stressing about a slight dip in the value of your share portfolio, take a moment to think about what Warren Buffett, Charlie Munger, or Peter Lynch would do.
They'd probably tell you to do your research, pick the best shares for the long term, and don't sweat the small stuff.
It's not always easy – but adopting the right mindset can set you up for investing success.
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