You might think that successful investing takes immense knowledge of the markets, decades of experience, or even a pile of cash to get started. But one of today's most famed investors points to none of the above. Warren Buffett, chairman of Berkshire Hathaway, has beaten the market for 59 years, generating a compounded annual gain of nearly 20% compared to the 10% increase for the S&P 500. And one of the big elements that got him there was mental toughness.
"The most important quality for an investor is temperament, not intellect," Buffett once said. Another famous quote from the billionaire: "We don't have to be smarter than the rest. We have to be more disciplined than the rest."
What does this mean exactly? An investor, by keeping calm through any market environment, is more likely to make smart decisions. And this is particularly important at moments like right now, with uncertainty roiling the stock market. President Donald Trump's recently announced tariffs on imports have prompted concerns about the impact on earnings and the overall economy. And this has driven declines in the Nasdaq, the S&P 500, and the Dow Jones Industrial Average in recent weeks.
So now is the perfect time to, with Buffett's words in mind, consider three tips for investing logically, not emotionally.
Image source: The Motley Fool.
1. Don't define a stock by its short-term movements
When we see a stock soar or plummet, it's very easy to immediately start labeling. "That one is a winner," in the case of the gainer, or "that one's a loser," in the case of the declining stock. But this is a mistake. I won't use this as an opportunity to bash companies that have soared in the past but have remained in the doldrums, though plenty of examples exist.
Instead, let's look at more of a positive example: a quality stock that tumbled in the past but has gone on to win big. Top artificial intelligence (AI) chip designer Nvidia is one. The stock had a bad year as recently as 2022 when it lost 50%. But it went on to climb more than 200% in the following year. So, investors who panicked during that period of declines and sold or refused to get in on Nvidia missed out on a promising story that followed.
All of this means that you shouldn't focus too much on current stock performance when you consider whether to buy or sell a stock as that generally has nothing to do with the quality of the company. And that brings me to my next point.
2. Look at long-term prospects, not short-term news
Buffett is known for his long-term investing philosophy, even saying his ideal holding period is "forever." While "forever" may be an exaggeration, it's important to note that the billionaire has gained considerably through share performance and dividend payments by hanging onto stocks like Coca-Cola (KO -0.49%) and American Express (AXP -1.25%) for decades. The chart below shows the total return of these stocks during most of their time in Buffett's portfolio.
KO Total Return Price data by YCharts.
To follow Buffett's lead, it's key to put your focus on a company's long-term prospects and not get too distracted, or panicked, by short-term news. If a particular company has what it takes to succeed over the coming five or 10 years, for example, don't worry if the stock is suffering right now because of economic headwinds. As long as that company has the financial strength to manage the situation and go on to recover and grow, it deserves its spot in your portfolio.
3. Dare to go against the crowd
In Buffett's 1986 letter to shareholders, he said that he and his team strive to be "fearful when others are greedy and to be greedy only when others are fearful."
The billionaire doesn't pile into current market trends or go along with the crowd, so you won't find him buying the trendiest of stocks during a bull market. But as stocks fall and many investors flee, you may see Buffett scooping up shares of solid companies that aren't on everybody's radar screen -- and for a reasonable price.
This doesn't mean you shouldn't buy the latest hot stock -- it might be an excellent choice -- or invest during a bull market -- Buffett invests in every market environment. Instead, it means you should forget about the "noise" around you and think independently.
The stock you choose to buy doesn't have to be one everyone is talking about. Today's little known player or company with a solid but not necessarily exciting business could deliver big over time. To discover these stories, it's important to forget about what the crowd is doing and focus on that particular company's business and prospects.
By keeping these three Buffett-inspired points in mind, you can ensure that you're investing logically. This mental toughness could make investing more enjoyable, less stressful, and a winning experience for you over the long run.
