Investment icon Warren Buffett once said, "Success in investing doesn't correlate with IQ ... what you need is the temperament to control the urges that get other people into trouble in investing." In other words, it's not about being smart, it's about how you think. Warren Buffett actually learned that from value investing legend Benjamin Graham, who was extolling the importance of emotion in investing before Buffett bought his first stock. In fact, there's now a whole branch of finance that looks at this issue, called behavioral finance. It's basically a blend of psychology and finance that examines all of our all-too-frequent mental mistakes. You make them -- but we all do.

If you want to be a successful investor, you need to understand these misconceptions. Here's a primer on why your mind is the most important factor in investing. 

1. You're not as smart as you think you are

If you ask a room full of people if they are above-average drivers, almost everyone will raise their hand. That's statistically impossible, since roughly half have to be worse than average. This is anecdotal, but it gets to the heart of the matter. We all think we are better than we really are. And in investing that's a big blind spot, and one that will often lead you astray. 

A woman pointing to a lit chalk lightbulb above her head

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This isn't to suggest that you (yes, you specifically) aren't smart and capable. It's just that you are likely to overestimate just how smart and capable you are. That will lead you to believe that what you are doing is right without question. In other words, although terribly cliche, the first thing you need to do is admit you have a problem. And once you do that, you can start to look at ways that you might be wrong about your investment decisions.

This, however, never ends, because you will be human all of your life. So you'll need to be on guard forever. Getting "you" right is a lifetime effort.

2. Pressure is a terrible thing

The human mind has two broad ways of thinking. One is slow and calculated, the other quick and emotional. By nature we tend to use the quick way most often. It makes sense -- if there's a car bearing down on us as we cross the street, we can't sit around and contemplate what to do. Investing, however, requires us to move past quick decisions and use the vast processing power of our minds. Sounds easy, but when we're under stress we usually revert to quick, emotional thinking. Investing is stressful even on a good day. (Today, with COVID-19 pushing us into a bear market and likely into a recession, it's even more stressful than usual.)

You need to make changes to your process so you limit the stress and give your calculating mind time to work. For example, you might stop placing trades during market hours, and instead set up your trades before or after the market closes using limit orders. That way you don't feel pressure to act. Or instead of watching the market every second looking for a stock to buy, look at companies and create a list of names you'd like to own. After you have that list, figure out the prices you'd be willing to pay, and only buy them at those prices. You get the idea -- pull yourself out of high-stress situations and you'll give yourself the space to make better choices.

3. Question everything!

You make mistakes, we all do. It's actually a good thing, because it's the way human beings learn. That, however, doesn't mean you should accept mistakes, especially since we're prone to making the same ones over and over again. 

If you like big dividend yields, for example, you'll probably find yourself attracted to companies where the dividends are at severe risk of being cut. Kinder Morgan (KMI 2.11%), for example, had a yield in the double digits before it cut its payout in 2016 because its aggressive use of leverage limited its access to capital in a difficult energy market. The midstream giant is still trying to rebuild trust with investors. 

If you find value stocks attractive, you'll probably find yourself looking at stocks that are cheap for a reason. Sears Holdings had iconic retail names and owned a huge collection of physical properties, but none of that allowed it to avoid the fact that the retailer was increasingly falling behind peers. It ended up in bankruptcy court, effectively wiping out equity investors. 

And if you think growth is the best way to go, you'll likely have to stop yourself from buying wildly overpriced shares driven by nothing more than a wish and prayer. There are any number of manias that can be used to illustrate this one, but one of the best is internet stocks in the late 1990s. Booking Holdings (BKNG 1.09%) is a good example. It went public under the Priceline name in 1999 at the peak of the hype, rocketed higher, and then lost 99% of its value over the next two years. It was a real business, and still is, but it took roughly a decade for the stock to get back to its IPO price after that decline. Obviously, there was too much hope and hype in the price when the stock came public. 

If you know your investment style, then you need to figure out what can go wrong with that style. For example, Bruce Berkowitz, the manager of Fairholme Fund, has a list of things that companies often do that lead to disaster. He is, essentially, trying to kill a company before he buys it. The list includes things like taking on too much debt and spending more cash then a business can generate. 

There are three big takeaways from this list. One, Berkowitz examined his process and figured out where he often goes wrong -- recognizing that he isn't infallible. Two, he created a list to test his decisions -- questioning himself before he acts. And three, the list forces him to slow down and work outside of the pressure cooker that is Wall Street -- removing the intensity of time constraints.

Lots more to think about

These are just three points to consider, but they cover a lot of ground. And they get to the heart of the matter. You are your own worst enemy when it comes to investing. In fact, you will dramatically improve your investment performance simply by limiting the mistakes you make. It isn't an easy journey, but it's one that good long-term investors have to go on at some point. If you don't, you'll continue to make the same mistakes over and over again, and your investment results will suffer for it.

But you have the power to do something about. First admit that, when it comes to investing, you have a problem -- and it's you.