The Best Investors Have Nerves of Steel

'IQ' gets most of the credit... but 'EQ' is what really drives success...

In investing, people love to talk about intelligence – being smart, making the right calls, or spotting the next big thing.

But legendary investor Warren Buffett has always been clear. The most important quality for an investor isn't intellect...

It's temperament.

His longtime friend and colleague, Charlie Munger, took it a step further. Munger pointed out that overestimating your own intelligence is a recipe for disaster.

He said it's far better to have a lower IQ and recognize your limits than think you're the smartest person in the room.

This is where EQ comes in. Emotional intelligence – the ability to stay calm, balanced, and in control of your decisions – matters more than any IQ score. That goes double for investors.

Today, we'll dig into why EQ is so essential for your portfolio... how it keeps you from making emotional mistakes... and why it's especially critical in today's market.

Emotions can make or break your portfolio...

Investing is emotional. It's easy to say you'll stick to your plan when everything is going smoothly.

But when the market turns, it's a different story...

Fear kicks in when stocks start to fall. Nobody wants to watch their portfolio lose money, no matter how prepared they think they are. Many investors rush to sell.

They do the opposite when stocks soar. Greed and the fear of missing out ("FOMO") take over. And those same investors pile in at the top.

This cycle of panic and overexuberance is the quickest way to destroy your returns.

But EQ can help you break that cycle. It keeps you grounded during the highs and the lows.

You can't view the market based on short-term moves. Instead, focus on the long-term data... and let it be a mental reminder of the importance of sticking to your entry and exit strategies.

Right now, everyone loves the U.S. stock market...

And that means investor exuberance is everywhere.

U.S. equity ownership is near all-time highs across households... financial institutions... and foreign investors. Valuations have reached unprecedented levels.

The cyclically adjusted price-to-earnings ("CAPE") ratio for the S&P 500 is hovering around 39 – higher than almost any time in history, except the tech bubble of 1999 and briefly in 2021.

Metrics like price to book, price to sales, and market cap to GDP are in the top 1% to 3% of their historical readings. The overall average of these valuation percentiles is 96%, an all-time high.

It's not just that retail investors are overly optimistic. The latest Bank of America Global Fund Manager Survey reveals that fund managers' overweight positions in U.S. equities are at an 11-year high.

And the Conference Board's U.S. Consumer Confidence survey shows a record-high percentage of respondents expect stock prices to rise and interest rates to fall over the next year... a rare combination.

This collective enthusiasm suggests emotions are driving the market more than fundamentals. When ownership and valuations get this high, forward returns tend to be disappointing.

This isn't a reason to sell everything – it's a reminder to stay grounded and disciplined...

Trying to time markets is a fool's errand.

Asset allocation is far more important. If you can identify how much money should be in stocks, bonds, and cash, you'll set yourself up for success... whether the market goes up, down, or sideways from here.

Right now, we recommend dollar-cost averaging new money into the market over the next 12 months – a middle ground between the short term (3 months) and long term (24 months).

This approach helps you navigate the risks that come with the current wave of optimism while staying positioned for potential opportunities.

The market rarely moves in a straight line. Success comes from managing the ups and downs with clarity and discipline, not following the crowd's short-term impulses.

Emotional intelligence helps you stay steady, avoid emotional decisions, and focus on the bigger picture. Your EQ is your greatest ally in this environment.

Regards,

Rob Spivey
December 13, 2024

P.S. There's still time to catch our can't-be-missed live Master Class series...

Over the course of six sessions, Altimetry founder Joel Litman dives into building a "foolproof" passive investing portfolio... navigating major bull and bear markets... and uncovering our best strategies for finding winning stocks.

These sessions are designed to help you sharpen your investing EQ and gain clarity on market movements. Around 400 subscribers tuned in live to our first two classes – where Joel shared fantastic insights on navigating today's macro market signals. 

The Master Class series is free for Altimeter Pro subscribers (and a recording of each lesson will be available on our website). Our next session is tonight at 6 p.m. Eastern time. Click here for more details... and learn how to start your free 30-day trial of the Altimeter Pro.