Begin this as early as you can.
You can pick this quest up from notice boards in Beauclair, and it is best begun as soon as you arrive in Toussaint, because it unfolds slowly over the course of your visit. You have multiple opportunities to fulfil its five objectives, but you can miss them easily if you're not paying attention. Hand it in whenever you like, but progress it at least as far as the heading below as soon as you can.
After obtaining the quest, head over to the lake indicated by the waypoint and swim out to the large island. Make for the middle of the area and walk out into the pond to speak to the hermit. After the cutscene ends, read all five stones for a little bonus XP.
Manifesting the five virtues
There are many opportunities to fulfil each of the virtues. You seem to be able to clear Generosity just by agreeing to any job without using the haggle option to get a higher fee, or by taking any of the opportunities to tip or otherwise reward someone with money.
Compassion and Honor are very easily fulfilled during the Big Game Hunter Witcher Contract; see that quest page for details. Otherwise, you can generally meet these by offering to help people in trouble, exploring optional dialogue and expressing sympathy, turning up to do things when you’ve said you would, and refusing temptation to take bribes or break with your original contract. Just be a good guy, in other words, and take an interest in people.
Valor can be obtained on the Feet as Cold as Ice Witcher Contract, regardless of what you say to Jacquette and Francois, by defeating the boss. In general, volunteering to face tough enemies will demonstrate this virtue.
One way to achieve the Wisdom part is to follow the Father Knows Worst secondary quest. If you return the filter to Hugo and encourage him to talk to his brothers rather than attack immediately, you’ll get two rewards and complete this objective. Finding peaceful resolutions is a great way to manage this one.
Return to the hermit for Aerondight
When you have managed all five virtues, return to the Hermit. You’ll have to fight the Hermit for the sword, and he’s quite tough; he uses water magic as well as melee attacks, and you can’t escape the arena once things kick off.
For your pains, you’ll receive Aerondight – a sword Geralt had previously won, but later misplaced. It has no bonuses or upgrade slots but charges with each blow dealing bonus damage by 10% and deals critical damage when fully charged. Charges are lost over time or when taking damage, like adrenaline points.
Each foe you kill with a fully charged blow from Aerondight resets its charge but increases the sword’s base damage; you can do this up to ten times, and the damage bonus scales with your level so the sword is always on par with the latest equipment.
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