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I’ve been investing in the stock market now for almost 15 years, and have made mistakes along the way. Still do. I’m only human after all.
Because investing is essentially the act of trying to forecast the future and placing respective bets, there’s always some element of luck involved. With luck also comes misfortune. It’s an ebb and flow, where investors are really only meaningfully rewarded in the long run. If investing in stocks wasn’t arduous, more people would be doing it for much longer.
Amidst the day-to-day action of the market, and flurry of emotion that it can conjure up, it’s easy to commit the seven deadly sins (applied to investing) below; sometimes without even being mindful. We can’t control everything in this game, but we can control our own actions, and reactions. Let’s discuss..
Pride. The stock market is the great humbler. It doesn’t know whether we’re white, black, or purple. It will take our money just as quickly as it makes us money. Unless we use privileged information (insider trading), everyone in the stock market starts out on the same level. It’s easy to feel like a genius after we ride a stock all the way up, so we need to be careful not to ride it all the way back down, or think that we now have the golden touch and then go on to invest in a series of speculative, questionable companies. We’re only as good as our next trade, so let’s choose wisely. I’m always reminding myself, “past performance is no guarantee of future results”.
Envy. Sometimes we can feel inferior and jealous towards other investors, especially during a poorly performing year in the market. Maybe our portfolio is down -12%, while other investors’ portfolios and even the index is up 20%. It’s those feelings of resentment deep down inside that hurt, and can cloud future actions. But I like to remember this lyric from one of Bob Dylan’s songs whenever I’m feeling down; “for the loser now will be later to win”. Not everyone is right, and doing well all of the time. That’s impossible. Investing is about the long game. We’re doing this to build wealth, and achieve financial freedom; not to feel like the smartest guy or gal in the room.
Gluttony. Good investing comes down to focus; applying knowledge to a select group of stocks that we come to know very well after careful research, and due diligence. It’s easy to get bored, adding too many stocks to one’s portfolio. But that’s when performance suffers. We can also go astray consuming too much information about things that don’t matter in the long run. We might hear about famous investors who “read 100s of pages everyday”, but that’s probably just a result of too much time on their hands, sheer boredom, or for whatever other reason. Read what you need to know, and don’t muddy your thinking.
Lust. Let’s fend off our primal instincts, and stop chasing hot stocks that everyone wants in the moment, especially if they’re outside of our circle of competence. Buying a stock just because it’s going up will lead to a broken heart, and regret. We need to get to know companies better before we commit, because beauty (fundamentals) are skin deep. Equally disconcerting is when we find ourselves sulking over ‘the one that got away’. Just because a stock on our watchlist went up 50%, doesn’t mean it’s too late to buy now. But remember; good companies keep on growing until they don’t. That’s life.
Anger. We’ve all had losers. Those stocks that crater, falling out of favour seemingly after we finally decide to buy, and then let languish at the bottom of our portfolios. This anger we let harbor in ourselves is unhealthy. It doesn’t mean that we’re incompetent. As I’ve said before, there’s an element of chance in the investing game. Even the conventionally ‘smartest’ people make poor investment choices in their careers. It’s easy to give up, but never forget; compounding takes time, and a small bump in the path doesn’t stop the snowball from rolling down that mountain, and getting bigger over time.
Greed. Money is a means to an end. It’s to build the life that we want, freeing ourselves from a system that rents our valuable time… time that we’ll never get back. However, along the way we can get blinded by our pursuit of money. Investing in and effectively supporting companies that build war machines to kill people isn’t what good people do. Who are they kidding with names such as the “Defense Industry”. Sounds noble, but it’s really masking true intent. The beautiful thing about the stock market is that we can invest in companies changing the world, and doing good things. There’s so many positive growth companies out there. We don’t have to sacrifice performance for virtue, and we certainly don’t have to invest in morally corrupt companies to generate returns.
Sloth. Gaining confidence, and achieving success in the stock market takes time. This isn’t something like sports where some people are simply more physically well endowed, and naturally gifted in the athletics department than others. Whereas a trust fund kid who won the family lottery won’t generate higher returns in the market just because he starts out with more money. Investing success is a mixture of intelligence, skill and daring. We must put in the research, be willing to make mistakes, and take calculated bets along the way. The market is constantly evolving. Businesses come and go, and so we must be aware of all of the changes taking place right in front of our eyes.
I think that investing in the stock market is such a positive, and empowering thing, and I’m always encouraging more people to become DIY investors. We’re building wealth, which leads to financial independence (i.e. more options) but it also means that we must take responsibility for our actions, and learn from our mistakes to be the best investors that we can be.
On this topic, as part of my giving pledge, I’m going to donate an additional $1k to the SickKids Foundation once we pass the 200 member mark. Learn more.