The Seven Deadly Sins of Investing You Should Avoid
In Christianity there are seven deadly sins, each of which is an extension of the emotions we feel in everyday life. When we over indulge in these emotions, it can lead to problems. Investing means managing your emotions and having the right temperament to succeed. There are also seven deadly sins to avoid when it comes to personal finances. They are as follows:
Lust: Lust is the sin which corresponds to an excessive love of something. When we think about our investments, sometimes we can fall too much in love with certain stocks. This also applies to other assets. Unfortunately, no script or asset is the magic answer to a successful investment. This is why it is very important to take things in moderation and understand the counter-argument for not investing in a security.
Desire: Envy is wishing you had something that someone else enjoys. In the markets, this happens all the time. You go to a party and a friend tells you that he had invested in this unknown business and has now made multi-bagger returns. Instantly you wish you had invested in the same. This emotion is dangerous because it can cause you to take unnecessary risks with your money and hurt your finances.
Greed: Greed is wanting more than what you need or can use. Have you ever invested in something and seen it grow a lot more than you expected? Let’s say you invested in a stock and it doubled in a few months. It has probably increased a lot more than you originally expected. Do you still want it to go higher even if it is not justified? It is greed that speaks.
Pride: Pride is a classic sign of overconfidence. It is dangerous to think that you are invulnerable or that you know more than everyone else. You might have invested in something to see it go down. The logical thing to do would be to assess whether your original thesis was correct. But if you still don’t want to change your mind because it would mean admitting that you were wrong, then often the market will come back with an answer that puts that pride back in place.
Gluttony: Gluttony is the overconsumption of anything. In personal finance, excessive consumption of news and financial media can be detrimental to your wealth. While it’s essential to understand what’s going on in the market, often what you see in the news is just noise. The market goes up or down simply because there is a mismatch between buyers and sellers. But news channels and social media will try to convince you that there is some logic behind the latest market move. What is deadly about consuming too much of this noise is that it can cause investors to think very short term and trade investments rather than longer term investments.
The laziness: Laziness is another word for laziness or to avoid doing something. Have you postponed investing for retirement or for your future financial goals? Have you deferred rebalancing your portfolio to your asset allocation? You may think this is something you can take care of on another day, but postponing it too long can prove costly in the long run.
Anger: The dictionary defines anger as a fit of anger or a quest for revenge. Have you had that experience where you spend a lot of time doing your research and buying an asset, only to see its price drop? If your instinct has been to get angry and double your investment because the market is not doing well, then anger is driving you.
When investing, it’s always a good idea to take a step back and assess whether you’ve made a mistake. The market has no interest in whether you are right or wrong. Making sure you can make your decisions when cold heads prevail is crucial in making sure you can make better decisions. I cannot say better than Warren Buffett who said that temperament is more important than IQ when it comes to successful investing.
Rishad Manekia is Founder and Managing Director of Kairos Capital Pvt. Ltd.
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