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The Seven Deadly Sins of Investing

November 03, 2011 | About:
John Emerson

John Emerson

148 followers
"As somebody once said, we're not punished for our sins, we're punished by them."

— Hugh Leonard

In Dante Alighieri's 14th century allegorical poem, the hero journeys through the various circles of hell witnessing the eternal damnation of individuals who fell prey to deadly sins. Investing has its own set of deadly sins which can condemn an investor to a retirement of discount buffets, nickel seating at sporting events, and vacation lodging at the Motel 6.

Take heart investors, you need not spend your golden years rummaging through the clothing rack at the local Salvation Army. If you follow my advice you will not need to buy your bread at the "Day-Old" store, nor will you have to subsist on baloney sandwiches and private-label cans of tomato soup. All you need to do is pay attention and avoid the Seven Deadly Sins of Investing, which I am about to divulge.

Greed

Most investors have held a stock well above its intrinsic value merely because they felt it would continue to move upward. Typically, the investor who continues to hold their entire position in a high-flier ends up losing a substantial portion of their gains.

I once purchased a large position in Camtek (CAMT) a tiny Israeli technology company, at an average cost well under a dollar per share. The company shot up to over $8 a share in the late spring of 2006. I never sold a share, at least not until several years later. I ended up recording only a minuscule gain. It seems that Sir Isaac Newton's law of gravity applies to stocks a well as apples, or maybe the apple bumped me on the head.

Envy

If you spend a fair amount of time worrying about your neighbor's stock portfolio and cringe every time he tells you about one of his winners, you are probably going to underperform the market. Competition is a wonderful asset in most professions; however, when it comes to investing, people frequently take excessive risks in an attempt to best their neighbor or another rival investor. After all, who among us doesn't have a neighbor of superior intelligence — maybe Warren Buffett?

Arrogance

In Nebraska, football fans used to don a bumper sticker which proclaimed, "It’s hard to be humble when you are a Cornhusker." Nowadays it is considerably easier to be humble. Humility is extremely important in successful investing. Remember to heed the warning at the top of the prospectus: "Past performance may not be indicative of future results." Unfortunately, when an investor has picked a series of winners he commonly loses sight of that fact.

Sloth

If you are not willing to spend at least a few hours a week reading the filings of your holdings, educating yourself about investment theory and performing legitimate stock research, then you will probably be better served to buy index funds.

During a bull market in stocks, investors frequently get the idea that they have mastered the game of stock-picking and become negligent about doing their home work. Reading the filings of a publicly traded company and understanding its business model is frequently the difference between knowing when to buy, sell or hold the stock.

Fear

Most investors are familiar with Warren Buffett's famous edict; be fearful when others are greedy and greedy when others are fearful. So what does the average investor do? The typical investor sells when the market panics and buys back in when the market is overly optimistic. By merely eliminating that counterproductive process, investors could exponentially increase their long-term results.

Overconfidence

Famous turf writer Andrew Beyer colorfully described the tendency of bettors to become overconfident following a string of winners as "The Messiah Complex." Wall Street has a history of investors who have suffered from that affliction. Once upon a time, such a group worked for a firm known as Long-Term Capital Management. As it turns out they should have been named Short-Term Capital Management.

Impatience

Impatience is the investor's most heinous sin. It is the sin which can turn an investor’s best idea into a money loser if the stock is sold long before it approaches its fair value. It is the sin which encourages haste in the purchase of an ascending equity. It is the voice which whispers in ones ear, imploring one to buy or sell before performing due diligence.

Now that I finished pointing out the seven deadly sins, all I have to do is follow my own advice. To quote a fairly well-known poet named Shakespeare from the 16th century; "Ay, there's the rub."

About the author:

John Emerson
I have been of student of value investing since the mid 1990s. I have continued to read and study value theory on an ongoing basis. My investment philosophy most closely resembles Walter Schloss although I employ considerably less diversification. I also pattern my style after Buffett's early investment career when he was able to purchase shares of tiny companies.

Rating: 3.7/5 (25 votes)

Comments

LwC
LwC - 3 years ago
"Ay, there's the rub."

Hmmm…I thought that was Long John Silver. I guess while you were reading the Bard, I was reading Classic Comics.

John Emerson
John Emerson - 3 years ago


Fortunately for me that quote turned up in Cliff's Notes plot summary of Hamlet.

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