When your neighbor, friend, relative, or colleague makes a bundle through investing, remind yourself to manage the envy you naturally feel. If you don’t manage this envy, you’re likely to copy his strategy or type of investment. It’s possible (though unlikely) that copying it may be effective in the short-term, but it is no way to meet long-term objectives.
Viewed without any context or history, a buddy’s great investment is not always what it appears. He may have been investing in food-related companies for years without much success, but he happened to be holding one food company stock that shot skyward because of some hugely successful product introduction. You are not privy to the years of futility as he pursued this approach; all you see is that a food company investment paid off handsomely. If you try and duplicate his “strategy,” you’re doing so without seeing the whole picture. If you possessed this broader perspective, you would never attempt to use his flawed approach.
Diminish your fervor to copy other successful tactics and techniques by asking your neighbor or colleague the following questions: How long have you had this particular investment? How has it done over the last three years? Have you ever had a similarly spectacular success in the past ten years? Have you been disappointed by your investing approach over the last five years? How were you disappointed? The answers are likely to make you less covetous.
To help you manage the three secondary sins just mentioned as well as the seven major ones, I’ve put together a list of ten things you should and should not do. They compliment the sins, in that they are action items as opposed to “warnings.” Just as the ten commandments of biblical fame suggest ways to avoid the seven sins, these commandments function in a similar manner. Keeping a list of these commandments handy next to a list of the sins should provide you with the model you need to maintain your virtuous investment path.
Let’s look at each commandment and how to obey it:
- Thou shall not convert thy neighbor’s investment
- Thou shall not make a killing
- Know thy investments better than thou know thyself
- Thou shall not make unto thee a graven image of profits
- Thou shall not take the name of the Lord in vain or issue nay foul-tempered oaths while investing
- Thou shall not commit adultery chasing some thy little stock of the moment
- Honor they mother, thy father, and the market in good times and bad
- Thou shall not steal from thyself by forgetting about taxes
- Thou shall not worship false idols or deceitful financial advisors
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:
- 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:
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As you read through the descriptions of the sins and the accompanying monologues, it’s likely that you had an inkling of the ones to which you are most vulnerable. You may have found one or more than one, seeing your own investing behaviors in the descriptions. While it’s important to be aware of all seven sins—most of us fall victim to all of them during the course of an investing lifetime—pinpointing the sins that are most likely to hurt your investing performance is key. To help in doing this, I keep a journal of my trading activity. In the journal, I note where and when I first heard of a particular company, what research I did into it, the reasons behind my decision to buy it (or not buy it), why I sold it, and so on.
To help you pinpoint your vulnerabilities, I’m going to list some common investing mistakes and the specific sins that catalyze these mistakes. As you’ll see, more than one sin can cause some mistakes, so you won’t always find a one-on-one relationship between mistake and sin. Still, this exercise will help you hone in on your vulnerabilities, narrowing the list down from seven to one, two, or three. Read the rest of this entry »
Certain types of investing seem to trigger anger in certain investors, and if you’re vulnerable to this sin, you should do everything possible to avoid these types. Specifically, don’t:
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