Sunday, December 02, 2007

Investment Sins Part 2 - Envy

To continue the series from the introduction where I had left off, I will be introducing the first "sin" of investing and elaborating more on it, as well as giving my personal views. Envy is something which is familiar to most people, especially Singaporeans. In a rat-race society where the most kiasu (i.e. scared to die) fight for survival, comparisons are inevitable. Just look at the throngs of parents fluffing their peacock feathers while boasting about their sons' or daughters' achievements; it's enough to make one cringe. Many children have the competitive spirit ingrained in them from young, and along with it comes envy; as not everyone is blessed enough to have either good looks, money or big brains. Thus, envy should be a part of everyday life unless one is either very blur, very ignorant or simply lives in his own world (hermit).

So how does the concept of envy find its way into investing and behavioural finance ? Envy occurs when an investor looks to another's portfolio or investment decisions, and always feels that the other person is better. This envy causes resentment to build up, as well as jealousy and probably even impotent rage as to why the other investor consistently does better. The envious investor does not bother to look inward and within himself to examine his own flaws and inadequacies; instead he attributes most of his failures to his object of envy, and starts to build resentment towards the person. Being envious can severely cloud your objective thinking and judgement as it will make one so smitten with "beating" the other person that you can lose track of rationality.

To give an example, suppose Larry (all names are fictional) always sees John as a friend and they engage in friendly rivalry, whether on the soccer field or in school. Larry has always been the better one at sports as well as grades and feels proud that he does better than John in most things. However, when they grow up and go into the adult world, John's investing acumen and patience sees him scoring multi-baggers and earning him lots of money; while Larry has made significant losses by trading without basis and succumbing to bouts of emotional distress. Increasingly, Larry feels that he is "losing out" to John even though he is thinks he is supposedly smarter than John, and as a result he feels more and more resentful. Eventually, he begins mimicking John's each and every move, buying when he buys and selling when he sells. As a result, he ends up losing even more money due to his indiscriminate behaviour. Envy has caused him to follow John's investment decisions blindly and he fails to understand that each individual should have his own unique method of investing.

For myself, when I first started out, I was also wondering why others seem to be making money while I was either making less, or losing money. There was a tinge of envy present as I was always wondering what the rest had that I did not. Fortunately for me, I managed to analyze my mistakes and realize that I should not go down the path of envy as it is self-destructive and serves no good purpose. Nowadays, if I hear someone doing better than me or having a higher % gain, I just shrug it off as I am satisfied with my own investment philosophy and pleased with my own personal progress. Letting envy take control would unravel my carefully prepared plans for building wealth slowly but steadily, and I did not wish to let that happen.


la papillion said...

Hi MW,

Wanted to ask you a basic question. How do you calculate your portfolio returns?

I'm a bit confused, here's my questions:

1. Portfolio returns (%) = (unrealised capital gains or losses + total dividend received + realised gains or losses)/(current total cost of investments) ?

Is that how it is calculated?

2. What happens if I sell off a stock and made a profit? This is the confusing bit. Do I reduce my unrealised gains and increase my realised gains, then reduce my total cost of investments?

Thks in advance for answering. I'm really confused cos I only noe how to calculate my individual stock returns.

musicwhiz said...

Hi la papillion,

It will depend on whether you are talking about unrealized gains/losses as a % of your current portofolio cost or if you are looking at realized gains.

For me, I treat realized gains as a separate component and disclose it as a dollar value. For my current portfolio (of which I am still vested in), I use unrealized capital gains or losses divided by current total cost of investments. Dividends and realized gains/losses are a separate figure for easy referencing.

If you sell a stock and make a profit, then it increases your realized gains. I will take the TOTAL cost of ALL investments made to date and compute my realized + unrealized gain or loss to date as a total % of my invested capital since Day One of my investing journey. This is around 35% to date or about 11+% per annum (since I have been investing for 3 years). I do not disclose this figure in my portfolio review though.

Some people like to use dividends to reduce their cost of investment, but I think it is not too accurate for me as I would always like to compare my capital gains against the base purchase price, irrespective of dividends received over a period of time.

Regards, Musicwhiz

la papillion said...

thks MW, for your prompt reply. I'll digest what you said and get back to you if I still have doubts :)

HH said...

Musicwhiz, Good write-up & reminder for me.

I lost SO MUCH money by buying and HOLDING junk stocks (held since 2000). eg. Creative, popular.. you name it at 2000 -- all time high. :)

Its a heavy price to pay when one does not know the difference between speculation and investment.