Thursday, 19 January 2012

Seven Most Deadly Sins of Investing

Motivation and Destruction: Greed it's a interesting one. Where it's hard to know how greedy to go, or how much should I really want. You've got something that you want to make into something more. No problem with that. But too much greed will ensure your failure. Stop chasing that fast cash, this one is a ringer, this one is it thoughts and investing. Make sure you are not getting greedy, but still investing wisely and not out of greed, motivation. Generations of stock market losers have proved that there's no such thing as a fast buck. But there are bucks to be made for those who can overcome their urges and avoid this sin, and the rest of the seven sins.

Gluttony, Envy, and Lust
When lusting about anything it's very unhealthy. Lust can leave you in the alley street with literally nothing. Especially in our commercial culture, fiscal gluttony is easily sparked by its sister sins, Envy and Lust. If you need to have the shiniest car on the block or the biggest granite countertops in all of Poshbottome Pointe, your absolute investment returns are sure to suffer.

Take this example, say Average Joe could invest and have a annual returns of 15% a year. (That would make you a very good investor -- so you shouldn't count on those kinds of returns.) For the example Average Joe is dreaming big. It still won't make you wealthy if you're earning that 15% on nothing. Remember: Buffett didn't get rich just by making great investments. He got rich by not wasting money that could be added to the kitty. Don't believe me? Do the math. No, wait, let us do it for you.

If you start with $1,000 and earn that 15% a year in a tax-free account, your money will be worth $87,500 after 30 years. Not too shabby. By contrast, if you can skip the gas station stops in the morning and bag a lunch a couple of times, you can scrape together a lousy $1,000 a year to add to your nest egg. The final result? $625,000. Drive an old clunker and ignore all those tempting incentive offers from keeping up with the jones, and then save the $500 a month you would have spent on coffee and cars, and you'll be looking at $3.3 million -- though perhaps not if you invest in GM, while it battles slowing sales and an expected earnings decline.

Yes, Averag Joe is now looking more like Donald Trump (okay we will not get carried away). But do the same at a more reasonable 8% rate of return, and you'll still end up with $730,000. The point is this: Unless you're already sitting on a pretty big pile of dough, your stuff-envy and financial gluttony will be a much bigger factor in your future financial independence than any magic you can conjure for your portfolio's performance. Control your urges accordingly.

If you don't know Anger around the stock market, then you have been to yahoo's message board before have you? Seriously, that at times can be the anger in and of itself just reading through those message boards or other stock forums. Anger is a natural reaction to adversity, but it's one that rational investors need to overcome if they hope to have consistent success.

Investing is an inherently risky activity that demands a hard look at the facts, good and bad. But a huge number of stock buyers view it like some kind of Sunday-afternoon competition. It's like a intense sports match, cheering on there team, but giving heck to the others! And the anger makes them blind to the negatives. Woe unto the drunk fan who points out the lack of steady revenues and complete absence of profits at a company like Lakers. Plenty of angry members of the Stinger crowd try to blame the others for any downtick, even though they can see for themselves the firm has minute sales; no profits; mystifying, short-lived management; and a CEO with long history of failures.

Mr. Crazy Fan, criticism of a company you own does not constitute an affront to your personal honor. Mr. I am right fan, my positive comments about your company's competitor in no way constitute an agreement to meet with pistols at dawn. That throbbing vein in your forehead is a good indication that you're fixated on the wrong things. Embrace the stuff that angries up your blood. You might learn something important.

I'm right, and everyone else is wrong. We all feel that way, so I'm not going to deliver a blanket condemnation of self-assurance. After all, acting on your convictions is part of the arrogance of investing. If everyone shares the same, correct opinion of a stock, then it must already be fairly priced. We are convinced we can find sweet bargains or future world-beaters ahead of the rest of the crowd. But not every time. If you believe that, you're in trouble.

That's the kind of pride that will kill investors over the long run. The problem is that, in individual cases, the market rewards the ignorant and the informed without pointing out which is which. It's nice to see the long-suffering shareholders finally catch a break, but it doesn't change the fact that plenty of people brought the suffering on themselves by ignoring the firm's consistently deteriorating financials to purchase a pig in a poke.

When a stock goes up, those who bought it purely because they like the product, or hate a competitor, will swear up and down that they are finally being rewarded for their smarts, but the truth is, they're just being rewarded. The trouble with being otherwise deluded is that such irrational pride and (in the long run) the odds, catch up with you. Investing is about maximizing returns, but you can't do that without minimizing risks. There is a difference between being right and being lucky. I've been lucky before in getting out at the right time, but the danger is taking particular pride in it. It scared me into being even more careful with my future decisions. You need to live and learn and plan for the future, ackowledge your winnings but most importantly your losing to grow and learn from them.

Let's think a little more about being a sloth, and when it comes down to it sloth is being lazy. There's no room in investing for good, old-fashioned sloth aka laziness. If you are too lazy to look research your stock company, the stock companies nubmers and and proxy statements, you're setting yourself up for some major failures. Yet every day, we are treated to amazing examples of extreme investor laziness. There are countless times you hear about a stock, but then if you get caught into the one of the seven deadly sins of stock picking and decide to be to lazy to do your homework and research then your asking for trouble. Going strictly on hear say information, one person's picks, etc. We see them all the time...but don't get caught being lazy and not doing your homework!

The road to righteousness

Some of history's most successful investors have said it time and time again: The journey to stock market wealth doesn't require superior instincts, faster reflexes, or better information. What it does require is patience, perseverance, and the willingness to do some work and avoid the mistakes that others are too quick to make. If you can steer clear of the seven sins of stock picking, you'll already be one up on Wall Street. Always remember there is room for bears and bulls, but never any room for pigs on "The Street"!

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