Have you ever been on a diet? Can you remember being tempted to eat a certain something? Resisting the impulse and then allowing yourself to take just “one bite”?
What happened? If you’re like me (and most people), that one bite simply stimulated your appetite and led to other bites . . . which led to a virtual food fest. You begin with discipline, make one compromise, and before you know it you are stuffing your face while telling yourself that tomorrow you’ll start your diet anew.
The same pattern holds true with investors. In a rational moment, they commit to a sensible strategy for buying and selling stocks. It and do whatever everyone else is doing.
This is why most individual stock investors lose money. It’s not about luck or intelligence. It’s about fear and greed.
Fear and greed are the investor’s worst enemies. Fear will prevent you from buying good companies, simply because they are cheap. Greed will make you buy bad companies, simply because you are convinced that their share prices will go up. Even though they are already too high.
Fear and greed. Cardinal sins. But there are other moral failings a stock investor must watch out for.
Insecurity is one. Insecurity — a sin of the ego — makes it difficult for an investor to admit that he was wrong about one of the stocks he put his money into. Not admitting you were wrong means not selling a bad stock when it’s going down. Many investors never sell their stocks, even when they are left with pennies on the dollar. A healthy attitude about investing is one that says, “Although I invested in this stock in good faith, I’ll never know enough about the stock or the market generally to be 100% right all of the time. When the market causes a particular stock price to come down, that is just its way of telling me that I didn’t have all the facts.”
Besides greed and insecurity, laziness prevents people from doing the right thing. Or anything at all. Much easier to sit back and let your stocks play out. Stock prices moving up is not exactly a clarion call to action. Moving down? Also not a time to panic. The worm will turn. Such people think they are being patient. Patience is a virtue in investing in stocks. Especially when applied to big established companies whose stock you want to hold onto for 5-10 years. But patience should not be confused with running on empty out of sheer laziness.
If you want to be successful as a stock investor, you must be virtuous in three ways:
You don’t need to be the best and most successful investor in the world. Set modest objectives — 10% to 15% — and you will have a good chance of hitting them.
You don’t know enough to predict the future. Admit it by setting stop-loss points and sticking to them.
Umpteen studies have shown that the most important factor in stock market success is the consistent application of a rational system. Which system you follow is not as important as your consistency in adhering to it.
A 10% to 15% ROI may not get you wealthy overnight. And I don’t think the market will do that well in the near future, because it’s overvalued today. But if you stick to these three virtues — and don’t abandon them when you hear an irresistible story — chances are you will do much better than your friends and colleagues.