The Hindu Business Line : Infernal chasms of bad investing

Markets can turn even the otherwise virtuous to slip. "It is astonishing that many investors who are highly ethical and controlled in other areas of their lives lose all inhibitions when they become investors," writes Maury Fertig in The 7 Deadly Sins of Investing, from Amacom (www.amacombooks.org).

The book begins by asking you to `assess your vulnerability to sin.' Because, `awareness of how your impulses are likely to influence your investing judgment is half the battle.' For instance, check if this statement describes you: "When my neighbour gets a fancy new car or a friend receives a big promotion, I feel good for them, but I also find myself in a down mood and wonder, `Why not me; what did they do to deserve it?'"

Envy

If the answer is, the sin you suffer from is `envy', diagnoses Fertig. "Envy eats at us and stokes our competitive fires," he describes in a chapter devoted to this emotion. Turning green with envy can make you red with losses, cautions the author. "It's natural to be envious of other people's success, but when envy starts influencing your judgment, you make investing mistakes." Watch out, therefore, for this `sneaky emotion,' which can make the stock look `always greener in someone else's portfolio.'

Vanity

Next sin to stay away from is vanity or pride that `goeth before a fall.' Being proud of your investing acumen is fine, says the author. "To a certain extent, all good investors possess confidence in their ability to read the market and make the right decisions at the right time." What can destroy them, however, is `excessive pride,' or hubris, as the Greeks would say. This can be the nemesis not only for amateurs but also professionals. Wrapped up in their own egos, `overly proud investors wouldn't know a good tip if it were shouted in their ears.'

More alarmingly, they would refuse to sell a bad investment because they can't admit they made a mistake! "If anyone questions you about why you're not getting rid of a poorly performing stock, you would respond with an angry justification, insisting that you're certain that your initial logic was sound. You might also be so defensive about it that you refuse to discuss the subject." Does that sound like you?

Lust

Lust is sin #3. A holdall word, this is, to mean `obsessiveness, possessiveness and desire.' All of which happen when `people fall head-over-heels in love with stocks that perform well.' Fertig explains: "They become infatuated with strategies that they believe are foolproof. They lose their logic and operate strictly on emotion." The problem with lust, `in both love and investing' is that `it feels like the real thing'! It can prevent us from taking `that crucial step backwards' and observing `our investing self with any degree of objectivity.'

Be warned that `lust can hit you when you least expect it'. And it can happen in many forms. Such as, buying stock in your own company, taking off with a sector that takes off, worshipping fund gurus or investing in the CEO. Antidote to lust is diversification. "When selecting individual stocks, keep your positions between two and three per cent."

Greed

The fourth sin is avarice or greed. "Greedy investors are unrealistic in their expectations... They operate under the same delusions as Las Vegas gamblers," says Fertig. "Greed also causes people to chase performance. They focus on finding the hot money manager or mutual fund, as if this discovery might be the magic they need to find their pot of gold." The greedy go for the hot tip, irrespective of the source. "If their barber, best friend, or bartender gives them some `inside information' about a stock, they often take it as gospel because their greed makes them want it to be true."

Anger

Anger is sin #5. "Professional investors learn to wall off their anger and other strong emotions from their decision-making." In contrast, the angry investor wants to prove he is not stupid or naïve, by acting out, more as a reflex.

"Angry investors need to feel angry at someone, and if they lack a particular person to blame, they attribute human characteristics to the market." Sage wisdom is `to be vigilant for signs of anger in all forms when you are contemplating investments.'

Gluttony

Gluttony appears next, and it is about `how not to consume the market before it consumes you.' The gluttonous believe `more is better,' and so keep buying and selling more. "While people who eat a lot may grow large, people who invest a lot often see their portfolios shrink."

Fertig explains how those guilty of this sin are never satisfied with their portfolio and always feel compelled to change it in some way.

"This type of investor sells bad stocks in the hope of finding good ones and sells good performers in the hope of finding better ones."

Sloth

Last comes `the most pervasive and dangerous sin of all': Sloth. "A sin of omission rather than of commission," which is why "it is more difficult to identify, categorise and prevent." Sloth can show in many forms, such as `laziness, forgetfulness, procrastination, and rationalisation.' As rescue, Fertig recommends a new routine for the slothful.

And the first step may as well be a thorough read of the book, to escape from the infernal chasms that bad investing can lead you to.

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