Wednesday, November 07, 2007

Investment Sins Part 1 – Introduction and Overview

This is a new series which I am introducing as part of a discussion on behavioural finance, and it is also predicated upon the writings and intelligent insights gained from a book written by Maury Fertig called “The 7 Deadly Sins of Investing”. In subsequent posts, I will write more about the new area of behavioural finance, as this is a new field which has only recently become very popular with academics and there is now a body of research under-way to find out more about the emotional aspects of investing and personal financial decision-making.

This overview will introduce the 7 sins specifically talked about in the book, and each subsequent post will discuss and elaborate on one of the sins. I will not be delving into any of the examples featured in the book (as that would be a violation of copyright, so go read the book yourself hehe); my aim is to focus on the sin itself and discuss my own personal experience with that emotion, and how it has affected my investment decision-making. Consequently, I will give suggestions on how to combat and avoid the sin and ways to learn from our past behaviour so that the sin is not repeated again in future.

The sins are as follows (in no particular order of how nasty they are!):-

1) Envy – One of the more pervasive sins around, this causes a person to envy another’s success or portfolio and in turn creates a lot of negative emotions.

2) Vanity/Pride – The failure to admit a mistake can distort objective thoughts and cause one’s ultimate ruin as a company spirals into the red.

3) Lust – Lusting for more riches is an effect of greed and when one chases markets to higher highs, one is playing the Greater Fool game.

4) Avarice – Knowing that not everyone can do well all the time and that mistakes are inevitable.

5) Anger/Wrath – A pretty common investing sin in forums when I see people railing about the losses they made and blaming the market instead of themselves. The desire to “take revenge” always clouds judgement and causes further mistakes to be made.

6) Gluttony – Do not let the market consume you, as it will cause burnout very quickly !

7) Sloth – The ultimate sin of being lazy and just letting your portfolio rot towards the core.

I will expand on each of these sins in future posts and how they have affected me, and in turn welcome comments on how we can all avoid such sins in our investing life.


fishman said...

Hi Musicwhiz,

Wah I like this post a lot man! To read, think and subsequently argue/apply the thoughts that you've read with experience of your own. You certainly surpass most readers, and worthy of learning from!

I think you have already demonstrated your skill in overcoming the sin of "Vanity/Pride" by sharing with us your investing mistakes so often. Something I don't read often in other blogs that I visit...I'm also trying to learn from my own mistakes, by thinking and writing about it in my own blog (P.S. thanks for dropping by! =P)

Btw, just an observation I notice; do you notice some similarities with Buddhism? As in the idea of controlling your emotions and admitting to the types of mistakes people make, somehow I feel the connection to Buddhism. I don't know why?!!

P.S.Sorry if I offended anyone for mentioning religion here. Just the feeling/thought that came to my mind!

musicwhiz said...

Hi fishman,

Thanks for the compliment; but I think what I seek to do all the time is simply to improve myself and strive to learn from mistakes. I think it's a journey which will last us a lifetime, and I believe we can learn something new everyday.

Yes, I started an investment mistakes series because of what I read in one of the books on value investing, saying that we should always strive to learn from our mistakes and not repeat them. The write even suggested penning down each mistake, why it was made and how you would avoid it; which is what I have done on this blog.

I have no comments about religion as I am a free-thinker.

Regards, Musicwhiz

novice said...

Tks musicwhiz.. you have included alot of learning materials and sharing your research unselfishly in your blog. Thank you !!

musicwhiz said...

Hi novice,

You are most welcome !

Regards, Musicwhiz