For Buffett, investing is less a contest of intellect than of character. His recurring lesson, borrowed from Ben Graham, is that the market is a moody business partner whose emotional swings create the very mispricings a disciplined investor exploits. The edge belongs not to the smartest person in the room but to the one who can stay rational when fear and greed sweep everyone else away.
Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success. I've seen a lot of very smart people who have lacked these virtues.
Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.
Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
The true investor welcomes volatility. Ben Graham explained why in Chapter 8 of The Intelligent Investor. There he introduced "Mr. Market," an obliging fellow who shows up every day to either buy from you or sell to you, whichever you wish. The more manic-depressive this chap is, the greater the opportunities available to the investor.
An investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace.
If the holders of a company's stock and/or the prospective buyers attracted to it are prone to make irrational or emotion-based decisions, some pretty silly stock prices are going to appear periodically. Manic-depressive personalities produce manic-depressive valuations.
Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.
Buffett in his own words on camera. Transcribed from the interview; click through to watch the moment.
Some people are not actually emotionally or psychologically fit to own stocks, but I think they're more of them would be if you get educated on what you're really buying, which is part of a business.