Making Money Real Quick: Check out why this emotion is a recipe for investing disaster! [Wednesdays: The Independent Investor]
Miles Everson’s Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
There are various factors that affect our investment strategy.
From internal factors (fear, greed, excitement, impatience, etc.) to external factors (news, what other investors say or do, etc.), many aspects of both our personal lives and professional lives impact how we make financial decisions.
In today’s article, we’ll focus on an internal factor that can negatively affect our investment portfolios:
Greed.
Keep reading to know in what ways greed affects our investments and why we shouldn’t let it rule our financial decision-making.
Miles Everson
CEO, MBO Partners
Chairman of the Advisory Board, The I Institute
The Independent Investor
“Greed is a bottomless pit [that] exhausts the person in an endless effort to satisfy the need without ever reaching satisfaction.”
– Erich Fromm, a German social psychologist and sociologist
There’s an old saying in Wall Street that states financial markets are driven by two powerful emotions: Fear and Greed.
In fact, in a 1986 letter to Berkshire Hathaway shareholders, Chairman and CEO Warren Buffett wrote,
“Occasional outbreaks of those two super contagious diseases, Fear and Greed, will forever occur in the investment community.”
What did Buffett mean by this?
He believes investor behaviors driven by these emotions are responsible for the dizzying highs in bull markets and subsequent crashes in bear markets!
Allow us to share with you a story on how greed affects the stock market…
Jeff Bezos, the Founder and Executive Chairman of Amazon, once asked Buffett:
“Your investment thesis is so simple. Why doesn’t everyone just copy you?”
Buffett answered:
“Because no one wants to get rich slow.”
What Buffett told Bezos drove home the point that greed significantly impacts investors’ behaviors and decisions. They want to make profits quickly and bull markets provide a great opportunity to do that.
Example:
When stock prices keep rising, more people invest more money to buy stocks. With higher demand (more money), prices rise further and profits grow. Growing profits fuel more greed and so more money gets invested, raising prices to excessive levels.
At excessively high prices, asset bubbles—a condition where assets dramatically rise in prices that are not supported by the value of products—are created.
However, like all bubbles, asset bubbles eventually burst and lead to price crashes. In this scenario, investors who bought stocks at very high prices face losses when the stock market corrects.
Avoiding Greedy Investments
Photo from The New York Times
One of the lessons you have to learn when you start investing is that greed makes you a bad investor. While it’s normal to feel excited about earning money, you have to ensure you keep that feeling at a minimum because too much excitement can lead to greed.
Remember: Investing is not just about making money in and for the short term but also about making money in and for the long term.
So… how can you overcome this emotion when making financial decisions?
One way to do that is by gaining knowledge about the stock market—we couldn’t emphasize this enough!
In financial planning and investment strategies, always keep in mind that familiarizing yourself with how the markets and the economy work is a fundamental necessity.
As Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist at Altimetry Financial Research, said, pattern recognition is still paramount to success.
Think about this: If you’re not familiar with the patterns that happen in the stock market, you’ll likely buy stocks at a high because of greed and the added factor of FOMO—fear of missing out.
However, when the market crashes, you’ll be left to deal with the repercussions of your actions and you’ll be forced to sell stocks at a low.
That is a recipe for disaster!
If you truly want to invest properly and make your money and investments work for you, you have to do the opposite—sell stocks at a high and buy stocks at a low. Although this may sound boring and slow, Professor Litman agrees this is a more effective strategy in the long run.
What else should you do to overcome greed in investing?
Establish an investment strategy and stick to it.
It’s not enough that you know what your investment goals are. You also have to choose an investment plan and stick to it. This will help you allocate your assets wisely.
Stacy Francis, President and CEO of Francis Financial in New York City, has an insight about this lesson:
“It’s great to have guidelines. But realistically, you have to do what’s right for you. When there is a market downturn, there’s a lot of fear and anxiety as you see your portfolio tank. But selling at that time and locking in losses is the worst thing you can do.”
See? That’s why it’s important to have a defined investment strategy. To do that, ask yourself these questions:
- How much can I invest?
- What can I afford to lose?
- What are my goals in my investments?
- How long should I invest to reach my goals?
Answering these questions will help you choose a portfolio or strategy that you’re comfortable with. Once you finalize your plan based on these factors, it will be easier to stick to your strategy no matter what.
—
Greed will lead you to BIG losses both in your personal life and professional life. So, if you are planning to make an investment decision but you’re not that familiar with how the market works yet, it is essential that you learn to control your emotions over money.
Additionally, you have to understand that greed is not something that easily goes away after a few days or weeks of avoiding or controlling it.
There will be times when you want to put all your money into an investment or withdraw it all of a sudden… and that’s understandable. After all, it’s a process. However, remember that you won’t achieve your financial goals if you keep holding on to greed.
We hope you find today’s investing tip insightful and helpful!
You don’t have to rush things to become a good investor of stocks, bonds, or mutual funds. Good investing is boring but it’s definitely worth your patience. So…
Learn to let go of greed.
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
LITERALLY.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
Our goal?
To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
Cheers,
Kyle Yu
Head of Marketing
Valens Dynamic Marketing Capabilities
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