The fourth investment sin I will be discussing from Maury Fertig’s excellent book “The Seven Deadly Sins of Investing” is probably one of the better-known ones to most investors, and that’s avarice, or greed. Greed is tricky to pin down; investing is, after all, about making money, so some level of desire (to get richer) should be considered normal. However, when this desire becomes obsessive and all-consuming, that’s when it becomes a major problem.
Greedy investors have unrealistic expectations of their investments, and they are also over-confident in their own abilities. There is a fine line between a greedy investor and a realistic one, but investors should reflect on both their behaviour and their motivations to assess if they are too greedy for their own good. The goal is to temper any greedy instincts with realism and avoid being over-optimistic or expecting too much.
Here are five ways to keep greed under control.
1. Invest slowly, knowledgeably, and logically
Speed, ignorance, and reflexive action are the greedy investor’s enemy. In most cases, delaying a decision by a few days, or even weeks, would not make a significant difference to performance, as great companies often stay great for the long term. Knowledge means doing your homework and due diligence toward understanding an investment’s merits and risks. Being logical means an investor does not act rashly, but instead calmly and rationally evaluates the situation.
2. Be careful about trying to duplicate past successes
A highly successful investment can turn out to be a very bad thing for a greedy investor, as he automatically assumes that he will easily be able to replicate the success. It’s important to assess each investment on its own terms, rather than assuming that a process can simply be replicated. As business conditions can change quickly, and random events may also take place, past successes may not always be an indication of future success.
3. Train yourself to spot “fool’s gold” investments
Greedy investors are naturally drawn to stocks that look like pure gold without considering if there may be too much hype, or if the stock is trading at unsustainably high valuations. To prevent this from happening, investors should employ a healthy dose of skepticism when faced with the illusion that an investment “can do no wrong.”
4. Satisfy your greed through a 5% limit
If investors really need to satisfy their greedy tendencies, my suggestion is to impose a cap of 5% of total funds to be set aside as “play money,” with which the investor can allow himself to indulge in risky, speculative plays without damaging the rest of his portfolio.
5. Remind yourself daily that the market punishes the greedy and rewards patient, long-term investors
History is replete with examples of how greedy investors crash and burn, while patient, disciplined investors are able to deal with adversities and difficulties and still emerge relatively unscathed. If more people kept this in mind, it would prevent them from making rash and impetuous decisions.
The next part of this discussion on greed will outline some effective ways to instill discipline.
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