Warren Buffett famously claimed that the most important quality for investors is temperament, not intellect. You need to stay calm and rational during the inevitable boom and bust cycles markets will go through.
One way to do that is to know what kind of investor you are. My colleague Matt Argersinger put together an "Investor Policy Statement," a one-pager detailing your investing goals, risk tolerance, and preferences. Articulating these things will keep you focused -- and, hopefully, calm.
To get going, just answer these questions:
Investor Policy Statement
1. Imagine your portfolio is down 50% over the past year. On a scale of 1 to 10 (1 is "whatever, dude," 10 is "50%?! I'm completely nauseous"), how concerned are you?
2. Imagine you wake up tomorrow morning and your largest holding has lost 50% of its value. What is your initial reaction?
- Sell
- Buy more
- Evaluate the situation
3. Imagine you wake up tomorrow morning and your largest holding has increased in value by 50%. What is your initial reaction?
- Sell
- Buy more
- Evaluate the situation
4. Would you rather own a fairly valued wide-moat business or a 30% undervalued no-moat business?
5. What is your ideal holding period for a new stock?
6. How many stocks would you hold in your ideal portfolio?
7. How large would you allow your largest holding to grow (as a percentage of your portfolio)?
8. Rank the following attributes in order of importance:
_____ Economic moat
_____ Strong management team
_____ Understandable (for you) business model
_____ Growth catalysts
_____ Predictable cash flow
_____ Compelling valuation
Done? Put it in writing and keep it handy. It may change the way you think about your current portfolio and your future stock purchases. Keep in mind, though, that this is a living document meant to change over time -- as you age, as your needs change, as your experience grows.
