Temperament as a source of alpha

Morningstar.com - Dig a Moat for Your Investments: "Envy, not greed, makes the world go round. And it's a serious problem. When we weigh its financial ill effects, it seems to us that envy may actually be the deadliest temperament-driven investment sin. We're frequently astounded that investors furiously scramble into the market's hottest sector, seemingly unable to miss out on the 'easy' profits others are making. But rushing into a popular investment category strikes us as odd. Why buy when prices are highest and margins of safety lowest? Yet the lure of the 1990s dot-com bubble, today's real estate boom, or any of history's famous bubbles amply demonstrate envy's powerful siren song. But if someone else gets rich a little faster than you, so what? Some investor, somewhere, will always have earned a higher return over any recent period. In our view, the demons of envy can be thwarted with a combination of awareness and a disciplined strategy of limiting investments to those that can be purchased with a margin of safety. Sure, there will always be a 'hot' market sector, but investing is a business in which the tortoise always wins in the end.

Temperament is merely a subset of the broader academic research into behavioral finance, and we've barely scratched the surface here. We urge serious investors to explore this field in much more depth than our space constraints permit. We'd recommend the final 'talk' in Poor Charlie's Almanack for those seeking an experienced practitioner's overview, and the works of academic heavyweights Danny Kahneman, the late Amos Tversky and Richard Thaler for those desirous of a more rigorous presentation."