We know what you're thinking. Given our reputation as value-seeking investors and longtime adherents of the Buffett and Graham school of investing, we must be using this article as another opportunity to say that Berkshire Hathaway
But we won't -- at least not today. Sure, an investment in Warren Buffett's lifelong masterpiece offers investors exposure to a wide catalog of businesses ranging from insurance to underwear to candy. And, at least for the near term, you've got the finest investing craftsman running the show.
But Berkshire is not the one. Nor is it the mighty Coca-Cola
In fact, the stock I am referring to will put you to sleep.
Investing in the stock market is guaranteed to take you on an emotional ride. Before an IQ of 130 or an MBA, any successful investor must have a strong temperament. A high IQ doesn't help you when your investment is down 50%, but a strong temperament gives you the ability to hang on rather than selling out at the worst time -- or even to back up the truck. An Ivy League MBA doesn't help you when the "smart money" on Wall Street is betting against you, but a strong temperament helps you ignore the noise.
If your investments keep you guessing all night long, you really don't understand the investment, in which case you need to cut your losses and move on. At some point, every business will have its upswings and downswings. How you behave during the tougher times is what counts. For some companies, the downswing is a natural part of the business cycle.
For example, consider refiner Frontier Oil
Yet Frontier stands out from its competitors in its ability to refine heavier sour oils, which have historically sold for much less than higher-quality oil. And over the long term, the need for fuel isn't going away. So, with lower input costs -- and a solid balance sheet with more cash than long-term debt -- Frontier looks better suited than competitors like Valero Energy
Know your investment
If you're trying to jump over seven-foot hurdles and invest in a subprime lender -- or any of the other financial companies with balance sheets harder to decipher than a chemistry experiment -- you'd better really understand it. If you don't, I guarantee you the volatile stock price will keep you second-guessing yourself way past midnight.
So, to keep your emotions in check, the only investment you should make is the one you can understand -- because that allows you to sleep well.
Emotions are hazardous to your investing health
Investing should improve your life over the long term, not wreck it in the short term. Avoid investing in companies that you can't understand, as the slightest hint of trouble will likely keep you guessing around the clock. Having your emotions dictate your investing decisions is a recipe for disastrous returns. Any investment that promotes emotional thinking over rational thinking should be ignored or sold.
It's far better for you to take your losses, sleep well at night, and start over with those businesses that let you keep your emotions in check -- those you understand. Your profits and your dreams will be a lot sweeter.
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This article, written by Sham Gad, was originally published on Apr. 9, 2008. It has been updated by Dan Caplinger, who owns shares of Berkshire Hathaway. Coca-Cola and Petroleo Brasileiro are Motley Fool Income Investor picks. Berkshire Hathaway and Coca-Cola are Motley Fool Inside Value recommendations. Berkshire Hathaway is a Motley Fool Stock Advisor pick. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.