We humans are a strange bunch. We're never really satisfied with what we have. And generally speaking the more we have, the more we want. But there's a distinct difference between wanting to improve your quality of life - and pure greed.
Sin #3: Greed
Greed is one of the seven deadly sins of multi-asset investing and a personality trait you want to avoid at all costs, especially if you want to be a successful value investor.
Investing fuelled by greed usually ends with you following the herd and picking stocks based on trend rather than data, research and fact. Greed is disguised as a wolf in sheep’s clothing, and the rest of the herd follows without any objection. It’s the blind leading the blind to their mutual financial demise.
Jumping on the bandwagon is never a good idea. Let’s take a look at a few reasons why you shouldn’t let greed be your guiding light for investment choices.
1. You buy high and usually, sell low
The problem with buying into the flavour of the month stocks is that the window of opportunity has already passed by the time that you hear it’s trending. You end up buying stocks at a high valuations, hoping that the share price will still rise. As soon as your investment strategy relies on hope, you should see red lights flashing in your mind’s eye.
2. It’s risky business
The stock market is unpredictable. If you buy on a high, you are most likely going to be selling at a low. Because of the irregularity of the stock market, you will never know when a trending stock has reached its ceiling. Buying an equity at its peak will result in you making an indefinite loss.
It also leads you to timing the market, which is never a good strategy, especially if you don’t have data to back up your decisions. You don’t invest with a margin of safety to protect you against human error.
3. The majority is generally wrong
We trust in numbers. If the majority of investors agree that stock X is a great buy, we trust their judgement, because how can the majority possibly be wrong? To tell you the truth, the majority of investors are typically wrong.
Warren Buffett didn’t succeed by following the herd. He did the exact opposite, taking a contrarian approach to investing. If the tech sector was trending, Buffett would look for stocks in the health sector, et cetera.
4. Data? What data?
Reacting to trend shows a disregard for data and fact. Trusting opinion will get you nowhere in the world of investing. Using financial data, on the other hand, will pave your way to success. If you don’t analyse the fundamentals of a company, how do you know its worth? How would you know if you’re buying an overpriced stock or a bargain? How do you know when to sell?
If you can’t answer these questions, you can’t confidently invest with a margin of safety.
In conclusion, do you want to be a sheep that follows others blindly, or do you want to be a shepherd, making your own choices and leading by example? I prefer being the shepherd, which is why I decided to take a contrarian approach and become a successful value investor. You should too.
Catch up on all seven deadly sins of multi-asset investing by clicking here.