7 Sins of Investing
Top 5 of the Week of March 21
Value Edge’s Tee Leng Goh has been working on his ‘7 Sins of Investing’ since January this year. With the Seventh now posted, we thought we’d open this week’s Top 5 by looking at the complete works. And after you hold a mirror up to your investing sins, check out Rashmi Aich and Sunita Abraham’s article from Live Mint, which will have you doing the same to your portfolio; what red flags are hiding in yours?
With the market in an uncertain state and concerns for the future still high, Value Walk takes us back to the basics to view investing with common sense again. David Merkel, of The Aleph Blog, advises us not to buy what someone is intent on selling you. And Michael Batnick, CFA and Director of Research at Ritholtz Wealth Management, shows us why returns don’t conform to any ‘Law of Averages’ in the stock market.
7 Sins of Investing
- Lust: Or ‘recency bias’; we confuse our evaluation of a stock’s future performance based on its recent one
- Pride: When share performance leads to arrogance in valuing our own assets; the endowment effect, and we hold onto stocks for longer than we should
- Sloth: There is no easy path to travel when investing, don’t overlook potentially crucial details when investigating an investment worthy company in an effort to find shortcuts
- Envy: Comparing your stock performance to that of other investors = fruitless competition, be patient and have faith in your abilities, and the long-term outcome
- Wrath: Keep calm and carry on investing; don’t let anger result in knee-jerk decisions you’ll wish you hadn’t made
- Gluttony: Don’t bet all on one horse; piling onto a company in a ‘winning streak’, and convincing ourselves we’re onto a sure thing can have disastrous outcomes
- Greed: If Gluttony is overindulging when you shouldn’t, Greed is selfish quick profit-seeking without due diligence and over-hoarding without consideration
Have you been sinful? Share your investing sins in the comments section below. Confess all and start afresh
Discover Which Red Flags Are Lurking in Your Portfolio
- Find the balance between over and under-diversifying your portfolio; juggling too many assets or putting all your eggs in one basket can both lead to underperformance
- Don’t let your money stagnate, play the long-term equity investments to make the most of your savings
- Be strict with your portfolio’s assets, spring clean and remove those that don’t actually fit with your own return and risk expectations—don’t just include them on ‘friendly’ recommendation
Look at the Stock Market Anew
- Adopt a contrarian view to investing and understand behavioral economics to combat concerns over the impact of various global economic and political factors on financial markets
- Short-term events and volatility should not induce decisions made from panic and fear—the market will always recover in the long-run
- Whatever your style as an investor, smartly examine all influencing elements on your investments, and approach today’s market “in a ‘courageous and cautious’ manner”
Make Your Own Investment Choices
- Avoid real estate pushers, while “flipping and speculating” have made some a profit, don’t be taken in—a REIT could be just the ticket
- Don’t be hustled to move on investments just to ‘do something’, as most of the times patience is a virtue in the long run
- Courses/sessions/dinners offering ‘free information’ will play on your fears, make you believe you don’t know anything, and lead you a dance—listen to trusted advisors and avoid these hawkers
Long-term Averages Aren’t for Short-Term Expectations
- “Statistician, a person who lays with his head in a oven and his feet in a deep freeze stating, on the average, I feel comfortable”—Bruce Grossman
- Annual returns chart for the S&P 500 shows the return has only been close to the ‘average’ three times in 90 years, so don’t base short-term expectations on long-term past averages
- According to a normal distribution the annual stock market return should only be 3 standard deviations from the average 0.3% of the time, however, history shows the probability to be more than 4x higher
- The global economy has so many impacting physical variables adding to the “psychological component in risk assets”, it is understandable why the average is rarely struck
Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form – and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.
Anything you would like to discuss about this week’s top 5? Do you have another favorite that isn’t mentioned here? Feel free to add it below. Let’s start a discussion in the comments section!
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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article. The Babinow Team doesn’t necessarily endorse any stocks or shares mentioned in the articles or the author of such articles linked to and summarized in Top 5 of the Week and cannot guarantee the accuracy of its information.