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Two Deadly Sins in Investing

In the 1995 movie Seven, a serial killer fashioned his murders using the tenets of the seven deadly sins. Among the seven were the sins of greed and envy. Unfortunately, this story did not have a happy ending.

Speaking of sins, Foolish investor would do well to avoid the same sins when it comes to investing. In this regard, investing maestro Charlie Munger happened to speak about these two sins during the 2014 Annual General Meeting for the Daily Journal Corporation. Besides being the illustrious sidekick to Warren Buffett, Mr. Munger is also the Chairman of the board for Daily Journal. Ever the person to go straight to the point, Mr. Munger had quotable anecdotes which were captured here.

So, without further ado, let’s get on with what Mr. Munger had say about the sins.

Greed

Investors come from all walks of life. Some may be starting out on their first job. Others may have amassed a sufficient amount of money during their life, and could be looking forward to a long retirement. It follows that it is possible that not everyone needs to beat the Straits Times Index (SGX:^STI).

In one instance, a retired individual investor may do just fine beating the inflation rate rather than the STI if he or she already has enough money to last their lifetime. Being greedy in wanting to beat the STI may well involve putting the retiree’s nest egg to unnecessary risk.

Or, said another way, Charlie Munger gave this reasoning:

“What difference does it make if somebody else in some year goes up 10% and you go down 5%, when you’ve got 1000 times more than you need anyway?”

Envy

Investing can be – at best – a suboptimal process. As my fellow Fool Ser Jing shared here, it is possible that there are times where even the best investors suffer periods of underperformance compared to their peers. The key here is to focus on your own needs, and your own circle of competence. It might not help to attempt to do one better than your peers for the sake of envy. What is important is that your investing goals are ultimately achieved, and not that you beat your peers. Perhaps, Mr. Munger put it succinctly when he talked about the same envy when it comes to executive salary:

“It’s a pernicious thing. I see in professional firms, where everybody is overpaid by 150%, and some guy gets $10,000 more than somebody else in one year, and the guy who doesn’t get it goes berserk.”

Bottom line, reach for your own goals, not someone else’s goals.

Foolish Take away

While it is important to for individual investors to pick good companies, Foolish investors would do well to avoid the sins mentioned above. If there is one more anecdote which pulls this all together, it would be this: Mr. Munger once said that one reason for his success was that he probably did not create his statistical share of the usual misjudgements which are made in investing.

So, if one of the most successful investors thinks of investing success as avoiding as much misjudgement as he can,  then Foolish investors might want to consider doing the same. With it, we may just find our own happy outcome in the long term journey of investing.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.