Greed is one of the most difficult sins to manage because it is always there. We invest to make money, and every promising investment raises the possibility of making a significant amount of money. We wouldn’t be human if part of us didn’t dream a bit about what might be. Good investors, though, keep that part of themselves in a controlled, isolated environment. If you are particularly vulnerable to the sin of greed, you’ll do likewise. Specifically, you’ll do some or all of the following:

  1. Invest slowly, knowledgably, and logically. Speed, ignorance, and reflex are the greedy investor’s enemies. Force yourself to move relatively slowly before making an investing decision, even when you’re certain that even a moment’s delay could cost you thousands. In the vast majority of cases, delaying your decision for a short period of time won’t hurt. In most instances, it helps because it gives you a bigger window of time in which you can think, reflect, learn, and talk about an investment. Greed preys on people who just react. When I say invest knowledgably, I mean do your homework. Learn about the fund’s or stock’s performance historically. Compare the fund or stock to the appropriate index or benchmark. Read as many reports as you can related to the investment. Don’t worry that your delay makes you spend an extra 50 cents a share because in the long run it won’t make a difference. Finally, logical investing means reasoning out your investment decision. When you hear a great tip or read something that makes you believe you’ve found a great fund that will make you millions, step back and write down the logical steps that have led you to this conclusion. Specifically:
  2. Analyze the source. Is the individual credible? What do you know about this individual? Is he a professional investment advisor? If so, what is his track record—do you know anything about how well his recommendations have panned out in the past?
  3. Assess your information depth. How much information have you gathered about the investment? A little? A moderate amount? A lot? Is the information from credible sources, and are their multiple pieces of information that support your conclusions?
  4. Figure out why you feel so compelled to make this investment. Try and take a step back and look at your motivations honestly. Does this seem like a once-in-a-lifetime chance to make millions? Is the possibility of a “quick score” driving your decision-making?
  5. Be careful about trying to duplicate past successes. One of the worst things that can happen to a greedy investor is to have a highly successful investment: Your brother-in-law’s second cousin’s tip turns out to be right on the money, and you triple your initial investment in two months. As a greedy investor, you are absolutely convinced that you can make history repeat itself. Perhaps you act on another tip from this cousin. Perhaps you invest the same amount in a similar type of stock and expect to triple your money in two months. You may also have followed a system you read about in a book and when the system actually worked, you believe you have outsmarted the market and keep trying to make the system work again.

Whatever it is that worked, don’t automatically assume it will work again. In fact, it probably won’t. Things change so quickly that the conditions that helped a given investment work in June probably won’t exist in July. Therefore, don’t let your greed lock you into an unthinking investing pattern. Before using it again, use hindsight to get a clear view of why your initial investment paid off so handsomely. Did you happen to get lucky and put your money in a stock right before rumors of an acquisition circulated? Did your system of investing only in utility stocks work because an unusually hot summer nationwide created huge demands for electricity? Then ask yourself how likely it is that these conditions will repeat themselves.

Funds

  1. 3 Train yourself to spot “fool’s gold” investments. Greedy investors are drawn to stocks that look like pure gold. Typically, the companies are selling products or services for which there seems to be a great need, and these companies have a lock on the market. As their stock price shoots up, they seem too good to be true. Most of the time, they are. Some companies are in the right place at the right time, and they have their fifteen minutes of fame. If you’re greedy, though, you may convince yourself that those fifteen minutes will last fifteen years.

Taser International, the maker of stun guns, is an example of this type of company. When they announced a new contract to sell $1 million worth of stun guns to a local police department, the stock’s market value rose $50 million in one day. In late 2004, the company’s market value rose to over $2 billion, and they ended up making $19 million on revenue of $67 million for the year. While the stock did rise 360 percent in 2004, by 2006, Taser had given up most of that gain and dropped 80 percent. Many greedy investors bought Taser without considering that the valuations could never support the stock over time. They were blinded by Taser’s spectacular take-off and could not see that it would soon come down to earth.

To avoid being similarly blinded, employ a certain amount of healthy skepticism when you encounter a skyrocketing stock. Force yourself to count to ten (figuratively speaking) and use that waiting time to do your homework. Remind yourself that most of the time, these incredibly, money-making stocks are not what they seem.

  1. Satisfy your greed through a 5 percent limit. Limit the amount of money you put in “speculative” stocks and funds to 5 percent of your total investments. This limit will minimize the damage you do to your portfolio and perhaps satisfy the greed demons that drive you. Make sure, though, that this 5 percent limit isn’t just in your mind. Greed has a funny way of ruining good intentions. Therefore, segregate this 5 percent fund into a separate brokerage account, preventing yourself from dipping into this account when a “can’t miss” investment comes along and you want to invest more than you should.

In addition, do not use margin in this 5 percent account. As you are probably aware, margin is a line of credit within a brokerage account that allows you to purchase 50 percent more stock than the funds you have in the account. If you receive a margin call requiring you to put up more funds to cover losses, you may be tempted to take money from other sources, thereby violating your 5 percent limit.

  1. Remind yourself daily that the market punishes the greedy and rewards the patient, long-term investor. Let us say that in 2000, you decided that you could make a bundle in the tech sector. One fund, Red Oak Select Technologies (ROGSX), appealed to you because they had recorded an amazing return of 126 percent in the previous year. You invested $10,000 in 2000, fully expecting to earn over 20 percent that first year and more than double your investment within a few years. Red Oak, however, returned minus 28.9 percent annually from 2000 to 2005. Your $10,000 investment would be down to $1,800.

Greedy investors are attracted to high-risk, high-reward investments, and more often than not, they receive the risk without the reward. Remind yourself of this fact. Despite all the stories you may have heard or read about people becoming phenomenally wealthy through their high-risk investing strategies, the individuals are anomalies. At best, they are playing a zero-sum game in which they win a lot and then lose a lot.

Remind yourself too, of these numbers: Long-term equity returns are around 11 percent and the very best equity managers can return 16 percent consistently. This is the top 1 percent over the long-term. While there are a few investors such as Warren Buffett who have returned far more, they make up just one in a thousand money managers. Over the short-term, returns can be much lower. If you find yourself investing with expectations that exceed these numbers, stop! Your desire for that 30 percent return will skew your investing strategy and in most cases cause you to lose money.

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