You may have noticed that a great deal of investing advice focuses on our emotions as investors rather than the mechanics of investing.  Here are some example articles:

• We buy at the top and sell at the bottom because we can’t control our emotions.
• Volatility equals risk because we can’t stop ourselves from selling during market crashes.
• We should dollar-cost average to avoid feeling terrible when the market plunges right after we’ve invested a lump sum.
• We need a financial adviser to help us control our emotional reactions.
• We should diversify our investments to moderate our emotional reactions during market ups and downs.
• Buying bonds will help us sleep at night and avoid panic selling when stocks crash.

Articles like these often include quotes from Warren Buffett.  Two of the most common are:

• “The most important quality for an investor is temperament, not intellect.”
• “The key to [investing] success is emotional stability.”

Because Uncle Warren is such a legendary investor, it’s assumed he must have been born with the ideal investor’s temperament, while every investor who’s not a multi-billionaire must have been born an emotional moron.  So, we’re advised not to invest like Warren Buffett because we don’t share his innate temperament.  This sort of advice seems to assume that our emotional instabilities are genetically determined and immutable, which prevents us from ever becoming a great investor like Buffett.

However, if you look closely, this conventional advice is contradictory at its heart.  We’re being told that we should make rational decisions today (like buying bonds and dollar-cost averaging) to guard against our inevitable emotional recklessness tomorrow.  But if we can be rational today, don’t we have at least a trace of the character needed to be rational tomorrow?

If you’ve read any of my articles, you know that Mindfully Investing is about taking concrete steps to moderate the role of emotions in our investing decisions.  So, I certainly disagree with the conventional suggestion that, because of our emotions, the most direct avenue to prudent investing is full of self-imposed traffic barriers and speed limits.  Guarding against unproductive emotional states that may arise further down the road clearly has some value.  However, I see no good reason to completely abandon more straight-forward options like deciding to drive prudently in the first place and then driving prudently in actual practice.

Great Investors Live Among Us

Warren Buffett was apparently born with the ideal temperament of a great investor, but how common is that?  Here are a few examples of ordinary people who saved and invested consistently in the stock market and retired as multi-millionaires.

Grace Groner – One of the most famous of the ordinary, but great, investors was covered by a Wall Street Journal article, which starts this way:

 

• “She lived in a tiny one-bedroom cottage in Lake Forest, Illinois.  She bought her clothes at rummage sales, didn’t own a car and worked most of her life as a secretary for a pharmaceutical company.  Yet after her death at age 100, Grace Groner left Lake Forest College a gift of $7 million to be used for scholarships.”

What was Grace’s investing magic?  In 1935, she bought three $60 shares of Abbott Laboratories stock and never sold them.  She reinvested all the dividends in more of the same stock.

The Wall Street Journal article treats her accomplishment as either a mistake, saying she shouldn’t have “concentrated her wealth” in one company, or as luck, because she could have just as easily picked a company that eventually went bankrupt.  But I think the article glosses over the most important points about Grace Groner, which are:

• Her initial outlay of $180 was not a huge gamble.  Adjusted for inflation, it’s equal to investing about $3,300 today.
• She held the shares through thick and thin.  I’m sure there were many times when Abbott Labs looked like a dog stock, and if she had sought advice, plenty of “experts” would have told her to sell.
• She relentlessly reinvested the dividends regardless of market ups and downs.
• She didn’t prematurely spend the growing investment, even though that was surely tempting.

Grace Groner is an excellent model of good investing practices described here at Mindfully Investing, except for the fact that she invested in a single company instead of index funds, which weren’t even an option in 1935.

Anne Scheiber – Another example is Anne Scheiber, who started investing in her 40s and turned a $5000 investment starting in 1944 into $22 million by the time of her death 56 years later at 101.  She worked for the IRS for 24 years and never earned more than $3,200 a year.  Unlike Grace, Anne held stocks from over 100 companies, which is about as close to index investing you could get in those days.  Just like Grace, Anne consistently reinvested dividends and rarely sold anything, even through the tumultuous bear markets of the 1970s and 80s.

Ronald Read – One more example is Ronald Read, who was a janitor and gas station attendant that accumulated $8 million dollars by age 92 through classic dividend stock investing.  He started investing somewhere around the late 1950s, which means he was investing for at least 55 years.  Like Anne, Ronald held stocks in over 90 different companies, and like both Grace and Anne, he rarely sold stock and reinvested all the dividends.

The other obvious advantage for wealth accumulation that all these folks share is living a long life, which is something we can’t control completely.  But just remember that a long life span alone is no guarantee of anything.  If you don’t apply prudent investing methods along the way, you can still easily die in debt, even if you live to 120.

A Rare Flower?

It’s assumed that people with a good investing temperament are rare flowers; only a few of us have the emotional stability to be great investors.  But the above examples show that the Ghost Orchids* of investing are more common than normally supposed.  They live and invest quietly among us discreetly disguised as common daisies.

I’d suggest that the vast majority of great investors live, invest, and die quietly and are never written up in a newspaper article or make it on to the evening news, exactly because people like this are almost invisible.  They don’t consume conspicuously or trumpet their investing successes, and they live frugally on modest salaries.  Most of their neighbors and friends probably think these folks are barely making ends meet.

My father was one of these great, but ordinary investors.  So, it makes me wonder how many other fathers, uncles, aunts and sisters are out there quietly and slowing building substantial fortunes.  My father worked as an engineer for about 45 years and consistently saved and invested in large well-known companies.  He retired without much effort at the age of 65.**

My father liked to say, “I buy the stocks of widows and orphans.”, meaning stocks that consistently pay dividends and are relatively safe.  When the value of some Bank of America shares I was holding dropped by more than 80% in 2008, all he said was, “Well, you’ve taken the hit now, you might as well ride it out.”  Both these statements reflect the tenants of great investing, which should be starting to sound familiar: buy valuable stocks, consistently reinvest the dividends, and almost never sell.  My father bought stocks in mostly humdrum but valuable companies like AT&T, Proctor and Gamble, and Wells Fargo and held them pretty much forever.

And you might assume that my father was born preternaturally rational.  He was calm and patient most of the time, particularly with people.  But he was also one of those guys who would scream and cuss like a sailor when trying to make simple home repairs.  We all knew that if my father had gone to fix the toilet upstairs, we would soon be hearing shouts of frustration and the sounds of random toilet parts being thrown around the bathroom.  A great investor doesn’t have to be an emotionless robot.

As Warren Buffett likes to say, methods of the great investor are simple to describe but hard to execute.  Except somehow, all these ordinary investors were able to successfully execute these simple methods, which gives me faith that you can too.

Nature versus Nurture

You can interpret these stories about ordinary investors one of two ways.  You can take the conventional view that these were all rare flowers who were born with the ideal temperament for investing.  Or you can take the view that most people are able to learn a few relatively simple investing methods and cultivate the emotional stability needed to execute them correctly.

What’s your answer when you turn this nature versus nurture question on yourself?  You can either decide that you weren’t born with the “right stuff” and stop trying to invest prudently, or you can decide you have the raw material to become a great investor.  Use this question as an opportunity to start nurturing the emotional changes in yourself that will allow you to become a great investor.  As the Mindfully Investing website makes abundantly clear, I believe that almost everyone was born with at least a shred of the ideal investor’s temperament, and that almost everyone is able to cultivate and strengthen their emotional stability.

To be realistic, no one should expect to become the next Warren Buffet, if for no other reason than most of us aren’t in the finance industry.  Most of us have jobs and lives more like Grace Goner, Anne Scheiber or Ronald Read.  But turning a routine job into $22 million is certainly a realistic goal.

In my next post, I’ll detail some specific ways we can cultivate the necessary emotional changes in ourselves and join the not so elite club of great but unknown investors.

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* A nearly extinct flower found in just a few places in the Caribbean Islands and Florida.

**In case you’re wondering, I inherited exactly zero when my father died.  So, my investing success is not directly a result of his investing success, other than I’ve tried to consistently imitate his investing behaviors and methods.