Investing Is More About Temperament Than Intellect
Investing Is More About Temperament Than Intellect. Warren Buffett has been quoted as saying that “The most important quality for an investor is temperament, not intellect… You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” Is this true? I think so, there is certainly a strong element of patience and discipline in successful investing, especially if you are trying to pattern yourself after Buffett or pursuing dividend growth investing.
What is Temperament and Intellect Anyway?
If we are saying that investing is more about temperament than intellect it is good to define the terms. Temperament is really about your emotional response and behavior. You can have a nervous temperament, which means that you are sensitive or excitable. In context of investing, it is about the ability to remain rational and following your process. This is important even in the face severe market volatility and fluctuations. Markets go down and markets go up but over time they tend to trend up if history is any indication.
Intellect is all about how smart you are. Buffett has said, “You need reasonable intelligence, but you absolutely have to have the right temperament.” So, it is not necessary to have way above average intelligence. Why is that? Well, there are a lot of really smart people trying to beat the market and they probably have faster computers and better software tools than most small investors. They are trying to ferret out the best way to make money in the market. You and I are probably not going to beat them. That said, even the smartest people make mistakes. Do you remember the hedge fund Long-Term Capital Management? There were quite a few smart people with that fund including Nobel Prize winners. The fund was very successful for three years but then lost $4.6 billion in less than four months due to financial crises in 1997 – 1998 due to high leverage and not sufficiently accounting for risk. Eventually, the fund was liquidated.
Be Patient Investing Is More About Temperament Than Intellect
That said, there are long periods of time that the market may not be doing what you want. Some investors trade in response to this but excessive trading tends to lead to lower returns. The ability to do nothing most of the time and be patient is learned. Dividend growth investors may do their research on an investment but sometimes pass and other times take an initial position or add to a position if the margin of safety is sufficient, and the business is performing well. That is more temperament than intellect.
Final Thoughts on Investing Is More About Temperament Than Intellect
So, what can you do as a small investor if investing is more about temperament than intellect? Well, I think that the foundation is to earn, save, and invest. But for investing you need to stick with a method and process that works for you. My readers know that I am a believer in dividend growth investing. To date it has worked for me. If I pick good companies and they perform well the dividends will grow with some capital appreciation as well. Yes, there are times that my investment strategy and method fall behind the market. But, like in sports, I try to be patient and have discipline amongst the noise knowing that good business will grow revenue and earnings that in turn translates to a rising dividend and capital appreciation.
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Chart or Table of the Week
Today I highlight Brown-Forman (BF.B). The company owns many brands, but it is primarily known for Jack Daniel’s whiskey. The stock is down -13.2% year-to-date putting it in correction territory. Granted, it is not a deal since the forward price-to-earnings ratio is about 40X. But some of that is due to the defensive nature of alcohol stocks and the fact that the founding family controlling over two-thirds of the voting shares. The company has 37 years of dividend growth making it a Dividend Champion and a Dividend Aristocrat. The forward yield is 1% but the company periodically pays a special dividend. The screenshot below is from Stock Rover* and shows worst performing Dividend Aristocrats on year-to-date basis. It is probably a good stock to keep on your watch list for now.
Dividend Increases and Reinstatements
William-Sonoma (WSM) hiked the dividend 11.3% to $0.59 from $0.53 per share quarterly. The forward yield is 1.7%. This is the 16th consecutive annual increase. Williams-Sonoma is a Dividend Contender.
Realty Income (O) raised the dividend 0.2% to $0.235 from $0.2345 per share quarterly. The forward yield is 4.4%. This is the 24th straight annual increase in a row. Realty Income is a Dividend Contender.
Equity Lifestyle Properties (ELS) raised the dividend 5.8% to $0.3625 from $0.3425 quarterly. The forward yield is 2.3%. This is the 16th consecutive annual increase. Equity Lifestyle is a Dividend Contender.
Wheaton Precious Metals (WPM) increased the dividend 8.3% to $0.13 from $0.12 per share quarterly. This is the 6thyearly increase in a row. Wheaton is a Dividend Challenger.
L Brands (LB) reinstated the dividend at $0.60 per share annually.
Dividend Cuts and Suspensions List
I updated my dividend cuts and suspensions list at end of February. The number of companies on the list has risen to 518. We are well over 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic.
The following companies were added to the list this past month (February 2020): JD Bancshares (JDVB), Pzena Investment Management (PZN), DHT Holdings (DHT), Healthpeak Properties (PEAK), Corby Spirit and Wine (CBYDF), Antero Midstream (AM), and Danone S.A. ADR (DANOY).
Dow Jones Industrial Averages (DJIA): 32,628 (-0.46%)
NASDAQ: 13,215 (-0.79%)
S&P 500: 3,913 (-0.77%)
The S&P 500 is trading at a price-to-earnings ratio of 39.8X and the Schiller P/E Ratio is at about 35.2X. These two metrics down in the past week. Note that the long-term means of these two ratios are 15.9X and 16.8X, respectively.
I continue to believe that the market is overvalued at this point. I personally view anything over 30X as overvalued based on historical data. Note that we are near 40X and valuation levels near the top of the dot-com era.
S&P 500 PE Ratio
Shiller PE Ratio
Stock Market Volatility – CBOE VIX
The CBOE VIX measuring volatility was flat this past week 20.95. The long-term average is approximately 19 to 20.
Fear & Greed Index
Investing Is More About Temperament Than Intellect!
I also track the Fear & Greed Index. The index is now in Neutral at a value of 53. This is up 2 points this past week.
There are seven indicators in the index. They are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.
Junk Bond Demand is indicating Extreme Greed. Investors are accepting 2.07% yield over investment grade corporate bonds. The spread is down further from recent levels indicating that investors are taking on more risk.
Stock Price Breadth is indicating Neutral as advancing volume is 9.67% more than declining volume on the NYSE. This is upper end of its range over the past two years and the indicator is rising.
Stock Price Strength is signaling Greed. The number of stocks hitting 52-week highs compared to those hitting 52-week lows is at the upper end of its range.
Market Volatility is set at Neutral. The CBOE VIX reading of 20.95 is a neutral reading.
Market Momentum is indicating Neutral. The S&P 500 is 6.75% over its 125-day average. This is above the average over the past 2-years.
Safe Haven Demand is in Fear. Stocks have outperformed bonds by 3.13% over the past 20 trading days. This is close to the weakest performance over the past 2-years.
Put and Call Options are signaling Extreme Fear. In the last five trading days, put option volume has lagged call option volume by 51.87%. This is amongst the highest level of put buying in the past two years.
The Census Bureau’s Advance Retail Sales Report for February came in at $561.7 billion, down 3.0% from January, this is the biggest contraction since April 2020’s 16.4% drop. The 3% decrease follows an upwardly revised (from 5.3% to 7.6%) January figure, which was the strongest advance in seven months. Total sales for December 2020 through February 2021 were up 6.0% year-over-year. Retail trade sales were down 3.1% from January 2021, and up 9.5% over last year. Non-store retailers were up 25.9% from February 2020, while food services and drinking places were down 17.0% from last year.
The Commerce Department reported housing starts fell in February to a seasonally adjusted annual rate of 1.421M which is 10.3% below January’s revised 1.54M, and 9.3% below February 2020’s 1.567M. Housing starts are at their lowest level since August 2020. Housing starts declined in the Northeast (-39.5%), Midwest (-34.9%) and South (-9.7%) but increased (+17.6%) in the West. Building Permits also fell in February to a seasonally adjusted annual rate of 1.682M which is 10.8% below January’s revised 1.886M, but still 17% ahead of February 2020’s 1.438M.
The Department of Labor reported initial jobless claims increased to 770,000 for the week ending March 13, an increase of 45,000 from the previous week’s revised 725,000. The 4-week moving average dropped to 746,250, a decrease from the previous week’s revised average of 762,250. The advance seasonally adjusted insured unemployment rate which tracks claims not being filed for the first time for the prior week (March 6th) was little changed at 3.0% with an 18,000 decrease to 4.124M. The 4-week moving average dropped to 4,255,500, a decrease of 99,000 from the previous week’s revised average. The number of those claiming benefits in all unemployment programs continued in a downward trajectory, as the week ending February 27 figures came in at 18.26M, a decrease of 1.9M over the previous week.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.