Continuing on from the previous article on lust being a deadly investment sin, let’s now look at a few situations in which an investor may be most vulnerable to lustful investing.
Buying stock in your own company
It’s not an unusual practice for employees to invest their life savings into the stock of the company they’re working for. In fact, many companies have a policy in place whereby employees are allowed to buy shares at discounted prices (i.e., a discount to the last traded market price) in order to boost their holdings. Though it may feel disloyal to refrain from putting increasing amounts of money into your own company’s stock, you should always be wary of becoming too “smitten” with your company and putting too large a chunk of your net worth in.
There have been several high-profile cases of companies that went bust in the U.S., and employees who not only purchased stock in such companies, but had the bulk of their retirement funds in them also suffered significant financial hardship as a result.
Hot sector takes off, you end up being a fervent follower
You’ve probably witnessed this before: The media announces the dawn of a hot new industry, and everyone from the taxi driver to your neighbour piles their money into it without thinking. Lustful investors may end up being fervent followers of the latest trends, but this is a case of the blind leading the blind, and it may all end badly someday if the research was not robust enough to begin with.
Worshipping fund gurus
Some managers of famous funds have become elevated to “guru” status over the years as a result of the funds’ stellar performances and the fact that they can seem to do no wrong. Investors may begin to worship such gurus and inadvertently end up mindlessly copying their strategies and stock picks. Remember that it’s dangerous to mimic any single investor since each of us has our own unique financial circumstances to consider, and even gurus are not infallible.
The frenzy trap
Certain stocks have an aura of invincibility, as though they could do no wrong as the business does better over the years and the share price soars. Investors may lust after such stocks as “sure-win” investments, but the reality is that once everyone agrees the company can do no wrong, that very sentiment may imply that valuations have incorporated excessive optimism, and the stock may be poised for a fall.
Investing in the CEO
Finally, to top off the list, a lustful investor may go all out to invest in a charismatic or “celebrity” CEO. Such CEOs may regularly hog the headlines or appear frequently on business talk-shows touting the merits of investing in their company. While such CEOs may undoubtedly have strong qualities that benefit their companies, investors need to be wary of leadership over-promising, but under-delivering.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.