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Saturday, August 12, 2017
SOS The 7 Sins of Investing?
For hundreds of years the Seven Deadly Sins have fascinated human beings. Today, let us throw Investing into the fray and take a look at what Seven Deadly Sins investors commit all the time. Just like how the Seven Deadly Sins will cause the downfall of mankind, engaging in these Seven Investing Sins will eventually lead to an investor’s downfall.
Sloth – the avoidance of physical or spiritual work.
Sloth needs no further introduction. Sloth is the reason why many non-investors put off investing. Growing money is not difficult, but for someone who has never done so in his or her life, it can be especially daunting initially. It is much easier to avoid the physical work of learning about investing and the spiritual work of deciding what to invest in.
Sloth is also the reason why many investors do badly. Investing is a sport. Like any sport, it requires practice and hard work. Roger Federer hits more back hand shots in a day for practice than most recreational tennis players do in a month. Is there any wonder why he is the holder of 17 Grand Slam titles and we are not? And if we do not expect to challenge and beat Federer at the game of tennis, what makes us think we could beat the professionals at their money game?
Never stop learning. Learn and apply. Read, read, and read.
Wrath – uncontrolled feelings of rage and anger.
For a real life demonstration of investor wrath, look no further than the Annual General Meeting of some listed companies in Singapore.
At a recently concluded session a couple of weeks ago, investors directed their anger, no holds barred, at the board of an investment holding company. They were angry at the board for not paying out good dividends. They were angry at the board for declaring a substantial amount of directors fees. They were angry with the board for allowing the share price to languish below what they had paid for.
It was a gathering of the angriest people in Singapore. The wrath on display was raw and real. It was almost as though shareholders have been dormant for an entire year and have been just waiting patiently for this opportunity to explode. If it hadn’t been so sad, it would have been almost comical.
Wrath is an emotion. Emotions cause us to make irrational decisions. If investors in this particular company have been bottling up their emotions the entire time it worries me to think about what unsound decisions they have made during the course of the year.
Of course some would say that at AGMs, Gluttony is often on display as well
Investing is a test of our emotion. So, we must learn to control our emotions, then, we can invest rationally instead of emotionally. Investing emotionally is not a good idea.
Gluttony – the desire to consume more than one desires.
Commonly used to describe the act of buffet goers piling their plates and stuffing their faces, but in today’s context I will use it to describe the overconsumption of information.
We are absolutely overwhelmed by the information available in the marketplace today. In my inbox at the end of the day sits numerous research reports by a variety of banks and brokerage houses. On TV the talking heads continue to regale us with ‘news’ and commentary. On social media platforms facebook and twitter I am bombarded constantly by breaking news and trivial twenty four seven.
And guess what, we happily lap it all up! Just like the punter at the buffet line who pays scant regard to his calorie and cholesterol count, we too hardly spend a moment to think about the damage all this information is doing to our system. After all, just like the boh boh cha cha at the dessert bar, it is free, so why waste it?
An obese person needs less food to help him live a healthier life, what we need is less information to help us make better investing decisions. Don't over diversify into something beyond your circle of competence. Lust – the cravings for the pleasures of the body.
Investors lust! A sexy member of the opposite sex stirs emotions and causes one to make irrational decisions. A sexy money story has the same effect and more.
Imagine hearing about an impending takeover bid whispered in confidence, or a chance to own a gazetted conservation heritage building in a far flung land, or the promise of a biotech company on the verge of a major drug development break through. Imagine returns up to 2% per month, 30% per annum, Guaranteed. These are the stuff investors lust after every day.
We yearn for these returns. We yearn for a piece of these deals. These are the stuff investing porn is made up of. Insider information in the long run will make you broke.
Envy – Desire for others’ traits, status abilities or situation.
As human beings, envy is an unavoidable emotion. We envy the neighbour with the newer house and the flashier car. We envy our classmates with the better grades. We envy the colleague with the longer title and the bigger paycheck. Envy is the basis for the entire cosmetic surgery industry. Envy in the right doses and directed towards the right goals beings about progress and improvement. Envy helps us to set targets and achieve greater things. Yet, when envy is misdirected it often ends in disaster.
Guru envy is when an investor looks towards a ‘Guru’ and sets out to be like him or her. After all, who does not want to invest like Warren Buffett, who does not want to buy into emerging markets all over the world like Jim Rogers, who does not want to be able to call the right market tops and bottoms like George Soros?
The truth is, we cannot be Buffett or Rogers or Soros. We are ourselves. Some of us can take on more risk, others are unable to. Some of us are inherently more patient, others tend to be less so. We know different things, like to do different things, we have different personalities.
Envying a guru and force fitting your own circumstances to the guru’s will not work. It will lead to ruin instead. Many treat investments or rather speculating in stocks like a competition. How great or bad another person perform has nothing got to do with your own investment. As long as you met what you set out to achieve, say 20% p.a. for a long term horizon, be happy with it.
Pride – Excessive belief in one’s abilities. Sin from which all others arise.
This sin is so prevalent that it has even got a name to call its own. Many names in fact, including the illusory superiority effect, leniency error, superiority bias, Dunning-Kruger effect, and the above average effect.
Over the years and in many different settings, researchers have asked participants to rank themselves on academic abilities, professional abilities, relationships, happiness, health, IQ, popularity and driving abilities. One indisputable theme emerged – results shows that most people rank themselves as being above average in every imaginable situation.
Don’t believe me? Take a moment to try this out. On a scale of one to ten, with one being the lowest and ten being the highest, rank yourselves. Write down how good do you think you are as a driver on the roads, as a parent to your kids, as an employee at work, as a friend to your closest and finally as an investor responsible for managing your own money.
What is your score? Are you a better than average person in all ways? Hang on a second. Can we all be better than average?
Pride makes us think we are better than what we really are. It causes us to be overconfident. This is extremely dangerous when it comes to investing. Haven't we heard about story of "Pride before the fall?"
Greed – desire for material wealth or gain
Greed causes us to covert more and more. Greed is the reason why money is never enough. Greed is the reason why we like to pick stocks and time the market when 90% of us are better off investing in an index fund using the dollar cost averaging principle. Greed is the reason for the irrational exuberance in the stock markets. Greed is the reason why bubbles form. Greed is the reason why we invest beyond our means. Greed is the reason why we sell a stock, watch it go up, and then load up again at its peak just in time to see it all crashing down.
Greed is the reason why stock markets even exists. Enough said.
Greed is when we invest beyond our means. And load up again at its peak just in time to see it all crashing down.
So there we have it. the Seven Sins of Investing. Are you guilty of one or more of them? Leave a comment below to tell us more!
You can see for a fact, not many unit trusts in Malaysia with 20 years history attain >20% p.a. CAGR, in fact, I cannot name you one. So, set your financial objective realistically or you are planning to fail. I am referring to 10 years, 20 years and 30 years, NOT 6 months to 4 years. However, if you are here for short term, i.e. less than 5 years, then you financial goals may be different.