We humans are emotional creatures. Our emotions often make us do the exact opposite of what would be good for us long term. A falling stock market may cause us to panic and sell at a time when it would be actually better to buy. We may greedily buy into the latest fad trying to make our riches only to realise that we have only bought nothing but hot air. Our brains are not wired to be good investors. We have evolved over thousands of years and our ancient brains lead us to do things that don’t benefit us in our modern world. Here are the seven deadly sins of investing that we humans can often suffer from (me probably more than others).
‘Be fearful when others are greedy and greedy when others are fearful’
Warren Buffet
Pride
Pride is deadly. Pride is thinking you know everything. It’s going to stop you asking a silly question or asking for help. We humans are proud creatures and we often don’t like to ask for advice or admit when we are wrong. Pride is an excessive belief in one’s own ability.
In all markets there is no perfect information meaning that no-body can predict what other humans choose to do. There are too many random events happening around the world that is impossible for someone to know all the available information in each market. Think back to June 2016 and the odds of the three events of Brexit, Trump getting voted in and Leicester city winning the English Premiership football title. Herbert Simon called this bounded rationality (winning a noble prize in 1978) meaning basically we don’t know what we don’t know. Understanding that we can’t know everything is a good step towards understanding how to invest. This is why Financial Education is so important and can stop you from becoming over confident. Pride often comes before a fall by trying to take too many risks or even worse not understand the risk you are taking and causing financial pain for yourself and your family.
Lesson 1: Education is key. Knowing both yourself and the principles of investing help you reduce your risk.
Envy
Today it’s become normal to view other people on our social media feeds showing us their new possessions like cars, TVs or swimming pools. Trying to impress others they don’t really like by buying stuff they don’t really need. It’s only after that we realise that most of these ‘influencers’ have bought their stuff on credit cards. Envy is the desire for other traits, status, ability or situation.
I have been guilty of envy myself. I missed the boom in the London housing market. I was attempting to time the market and getting it spectacularly wrong. Average house prices in London have risen 518% since 1994 from £79k for an average house up to a price of £488k today (according the office of national statistics). As a Millennial it’s hard not to feel envious of previous generations who take for granted that people having a home they can afford. Most of the increase to house prices has been due to government policies of quantities easing (money printing), interests being kept low and the help to buy scheme which increased the supply of credit fuelling the house rises. I have felt envious especially at dinner parties where the topic of conversation would often be how much each person’s house has risen since they bought it. It’s important to follow your own path and understand that there is opportunity in every business cycle. Remembering Newton’s third law of motion for every action there is an equal and opposite reaction meaning that every market rising by 500% is often not sustainable and every market goes up and also comes back down again (just look back to the housing rise and crash in UK in early 1990s or Japan in 1980s).
Having a life plan (which is step 3 in my 5 step method to get money mindset online course and is now available to pre order) for the long term helps you understand where you are heading for the future and how best to reach your goals so you can focus on how far you have come yourself and not others.
Lesson 2. Have a lifeplan and know where you want to get to in both your life and your finances.
Sloth
Sloth is the avoidance of work and comes from not doing your research or not taking the time to learn to invest. Investing is a life skill and gets better by practise and from learning from others. It’s much easier to buy sometime on someone else’s tip or because they are buying it than understanding the fundamentals. Investing is more about understanding yourself than understanding different companies or the market. What are your aims and objectives? What do you want from the market? Having good daily habits with money, putting in the work and setting up correct investing systems can save you more work in the long term.
Lesson 3: The hard road turns easy and the easy road turns hard. Putting the work in today will pay off tomorrow.
Greed
Greed is the desire for material gain. Everyone is a little bit greedy; we are only human after all. Lifestyle is different for everyone. We can choose to have a big lifestyle or a small lifestyle. When we think about it after health and family lifestyle is all anyone wants in life. We need to understand our number, which means how much money we need to live on for the rest of our lives. If we want a big lifestyle then we will need a big number and if we choose a small lifestyle we only need a small number. Once we understand this number this helps us accumulate it, manage it protect it and most of all spend it. This is proper financial planning. If we choose to spend more than we earn rather than focusing on what is meaningful in life then this is where we get greedy. Greed can often come from wanting these things quickly. Investing is a long term process and patience is important. Greed can mean a lack of patience increasing the amount of risk we take. Greed makes you overstretch yourself. Greed is wanted to have the golden eggs before the hen has had a chance to lay them (from the popular children’s story).
Lesson 4: Patience and time is your friend in investment. Trying to rush the process is like rushing the oak tree out of the acorn. Anything of value takes time.
Gluttony
Gluttony is a desire to consume more than one requires. Investing is a long term process. Buying assets (like businesses, property or by lending money) that will result in an income being paid to you. Speculating is short term process trying to buy (or sell) something in the hope that someone else will pay more for it. Where it gets dangerous is buying things that you don’t have on credit or even worse is buying (or betting) on a leveraged position (also called buying on margin). This means you take a position of £1000 of exposure only having to put down £100 of your money. This leads to gluttony as this can lead you to spending more money than you have. Buying on margin can leverage your winning as you are using borrowed money however if the position goes against you, you have to not only pay back your losses but also the losses that you have borrowed (usually from the broker). Things can spiral out of control quickly as you’ll have to pay the borrowed money back with high amount of interest and could encourage you to try to bet back your previous position. These leveraged or margins positions are what caused the 1930s crash (or was partly to blame at least).
Lesson 5: If you don’t have the money don’t trade or bet with someone else’s money, then don’t
Wrath
Wrath is extreme anger and there is a danger with this deadly sin. Wrath is an emotion and emotions can be dangerous when investing. There is a difference between getting emotional about what you can control and what you have no control over. We all have an individual sphere of influence and getting angry of what we can’t control is futile. If you lose your job due to redundancy or because your industry no longer has the demand it once has then there is no point fighting these changes as there is little chance that you can affect the outcome. Once you understand that you can’t control external forces you can only control your reaction to it and you can only choose your reaction to the stimulus. Having this choice is powerful.
Lesson 6: Knowing that there are opportunities in any market and you can focus your energy to discovering these opportunities.
Lust
Everyone loves a story and it appeals to the human part of our brain. There is a danger of falling in love with the story of an investment. This may be Steve Jobs coming back to Apple and saving the company or the potential of block chain technology and Bitcoin. It’s easy to get swept up in the emotion and we like to tell our friends about it. However from an investing point of view this can be dangerous. We humans have evolved to be wired to be terrible investors. We often buy things that actually don’t show any long term value or that everyone else has bought the same story and this has pushed the price of the shares up. Like always falling in love with the wrong person this can have negative effects on us. Being unemotional and unattached to our investments is important although it’s much easier said than done. Putting money into investment funds where your money is pooled with other investors is a good way or stopping yourself falling in love with one share (and more importantly reducing company risk too).
Lesson 7. Invest in investment funds to stop yourself falling in love with one company (as well as reducing company risk)
Which of these deadly sins have you been guilty of?
Please like, share and comment. My online course ‘Football Formation Asset Allocation’ is now on the learning platform Udemy to teach the 5 step process to gain Money Mindset is now available. It aims to take away the worry and pain around money. Money worries has topped a poll of the biggest worries for people today. My course aims to solve this issue and teach you how to invest for yours and your families future.
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