Today we look at why the right mindset matters more than a high IQ and what some of history’s best investors have said on this matter.

"How I got here is pretty simple in my case. It is not IQ; I'm sure you will be glad to hear. The big thing is rationality." Warren Buffet told a group of students.

Buffet went on to analogise IQ and talent as representing the horsepower of a motor, but that the efficiency with which the vehicle outputs is limited by rationality. He makes the point that intelligence is not the same as intelligence quotient, but the ability to adapt to change.

Rationality means using logic and objective reasoning to reach our decisions. In an equity investing context, this might involve analysing company data alongside market trends and consumer behaviour; in a property lending context, investors may review the property’s valuation report, market data, information about the potential borrower, and other relevant information relating to the property and the borrower.

Investing can be a complex endeavour that requires a blend of knowledge, skill, and, critically, emotional control. While emotions are valuable in many contexts and a part of us being humans, they can lead to costly mistakes for investors, when they act on emotions instead of rational facts.

Investors must be very conscious of their own temperament and emotions and attempt to develop a rational mindset towards investing. Efforts should be made to understand one's own behavioural biases and develop the ability to think and act independently.

Identify specific emotions to be wary of, such as fear and greed, which could lead you to make rash decisions. Also, be conscious of how others will sometimes be acting in reaction to emotions such as these.

Avoid herding. Following the crowd without independent analysis can lead to significant losses, especially in market downturns.

It’s important to have a clear plan, with a long term perspective. To that effect, Warren Buffett once said “An idiot with a plan can beat a genius without a plan”. Have realistic expectations and understand the risks of your decisions, both on the up and the downside. Don’t allow short term volatility or irrelevant noise to lead to emotional overreactions.

Of course, this doesn’t mean that one can just make investments and then place their head in the sand. A good investor will have a curious mind, be open to new information, and be willing to revisit previous conclusions. Indeed, the ability to understand how new information could affect the initial investment thesis is crucial - but it must be done rationally and not impulsively.

Risk is an inherent part of investing and the investor must accept that. But to avoid impulsive action in the future, they should consider and decide in advance what their tolerance for risk is given the relative rewards and plan accordingly.

Continue to educate yourself from quality sources (LandlordInvest recently published a reading list for investors). It is of course necessary to keep up to date with news and current events, but ingest information critically and be aware that so much of what is referred to as “news” is simply noise to fill column inches or TV/streaming minutes.

Whilst several authors quoted in this article are known for their comments on equities markets, they are just as relevant in other situations, including peer-to-peer markets like LandlordInvest’s property-backed loan marketplace.

Read more here and see how your diversified investment portfolio could benefit from the inclusion of P2P property loans.

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