Emotions + inactivity > intelligence with investing.
It's fairly easy to find things that are undervalued and then sit on them. The problem comes when you enter the trade and real, serious amounts of money are on the line. You know like the "thousands of hours you put into your life savings" kind of money.
I distinctly remember the first time I put on a significant trade (significant fraction of my total net worth). My heart was beating, adrenaline was pumping, and my hands were shaking.
I had the same response as people who jump out of an airplane, or experience some other type of stressful situation. I would watch that trade like a hawk for hours at a time (it was fairly concentrated), and my emotions pretty much followed the ticker. As the stock bubbled up I was elated; as it fell, I quickly became depressed. I couldn't take it, and after one day I exited my position at a loss of $250. Probably one of the most stressful periods of my life. This is even after I had paper traded for years beforehand, and had a strong conviction for both my valuation and the stock at hand.
I got myself together and told myself that the next time the stock was at valuation minus 40% I would go all in, and I wouldn't touch, look at, think about, or check on the stock, and my holdings for at least 3 months; a total news blackout.
That situation soon arose and I did just that. The second time around my response was similar, but more muted, and my resolve stronger. Once in, I kept my promise and didn't do anything for 3 months and by the end of that period I was up 30%.
I then reviewed the history of the trade and noticed that had I been watching the market day in and day out, I would've experienced periods over that time where I would've lost 20-30% in one day. After noticing that, I knew that I could steel myself against these kind of movements by simply looking at the prices once a day and basically telling myself that "This too shall pass". Over a period of one year I basically trained myself to stop caring what the market thought, and successfully experienced draw downs of 20-30% without reacting one bit. Market movements no longer effect me emotionally (at least on the same level). Losses don't hurt any more (I have full faith in my own valuation and the stock) and gains no longer made me happy. Just by experiencing the pain and elation so many times, over such a long period of time, trained me to basically become numb to any changes, and in turn my response to market movements essentially flatlined.
Since then I've been up over 700% over the last year and a half, and I know that wrestling with my emotions has been, by far and away, the greatest battle I've had to fight when investing. Not finding good companies (easy), not valuing them (excel spreadsheets), not executing the trade (although my hands still shake whenever I try a new derivatives strategy, which is good), but taking the day-to-day fluctuations of 10-20% in my total net worth day-in and day-out without giving one single shit.
And that, I can tell you, is hard to do. Very hard. Most people won't be able to take it, with the global financial crisis being the prime example. When things go to shit, they freak out (just like I did at the start), and do the most idiotic things you could possibly imagine (not their fault). They go to cash when everything is cheap. The go to stocks when everything is expensive.
All because of emotions.
Emotions rule. And I practice emotional arbitrage.