The 7 Deadly Sins Of Investing

Jon Market Commentary

I have often written about the emotional and psychological factors that inhibit long-term investment performance (most recently here). Despite repeated studies that suggest investors should just buy “passive index” funds and “hold on” until eternity, the reality is that it simply does not work that way.
If you were raised in a religious household, or were sent to a Catholic school, you have heard of the seven deadly sins. These transgressions — wrath, greed, sloth, pride, lust, envy and gluttony — are human tendencies that, if not overcome, can lead to other sins and a path straight to the netherworld.
In the investing world, these same seven deadly sins apply. These “behaviors,” just like in life, lead to poor investing outcomes. Therefore, to be a better investor, we must recognize these “moral transgressions” and learn how to overcome them.
The 7-Deadly Investing Sins
Wrath – never get angry; just fix the problem and move on.
Individuals tend to believe that investments that they, or their advisor, make should“always” work out. They don’t and they won’t. Getting angry about a losing bet only delays taking the appropriate actions to correct it.
“Loss aversion” is the type of thinking that can be very dangerous for investors. The best course of action is to quickly identify problems, accept that investing contains a “risk of loss,” correct the issue and move on. As the age-old axiom goes: “Cut losers short and let winners run.”
Greed – greed causes more investors to lose more money than at the point of a gun.
The human emotion of “greed” leads to “confirmation bias” where individuals become blinded to contrary evidence leading them to “overstay their welcome.”
Individuals regularly fall prey to the notion that if they “sell” a position to realize a “profit”that they may be “missing out” on further gains. This mentality has a long and depressing history of turning unrealized gains into realized losses as the investment eventually plummets back to earth.

This post was published at StreetTalkLive on 09 September 2014.