Tuesday, October 5, 1999

Managing Greed


From the time we are very young, our parents and teachers warn us not to be greedy. Organized religion teaches that greed is a sin. Beginning in the mid-1980s and continuing today, a handful of authors and pundits have tried to sell the opposite idea: that greed is actually good.

Both sides are wrong.

Greed is nothing more than a human emotion. Like the rest of our emotions, it is neither good nor bad. We're all at least a little bit greedy, especially you and I. You probably wouldn't be reading this website, and I certainly wouldn't be writing in it, if we weren't. The problem with the greed emotion is one that all experienced investors and traders have learned. The more emotion becomes involved in a decision whose goal is profit, the more likely that decision is to be a bad one.

Fortunately, the key to controlling your greed is something you also learned from a young age: discipline. Specifically, once you've settled on your strategy for choosing what to buy and sell and what not to (regardless of your time horizon), you must have the discipline to stick to your strategy. Unless it's become obvious over a significant amount of time that your strategy doesn't work, or doesn't work as well as you want it to, don't think about changing it.

As an example, suppose some major news breaks regarding a high-profile stock, and the price starts skyrocketing. Your greed will start telling you to jump in and buy. Sometimes that's actually a good idea. Then again, you might find yourself just getting caught up in the hype. Short of a crystal ball, the best way to make sure that you're doing the right thing is to apply your trusty old strategy. If you're a long-term buy-and-hold investor, and the company has rock-solid fundamentals with projected earnings that actually justify the current price, go ahead: buy some shares. Similarly, if you have a shorter time horizon, and the stochastics and MACD oscillators look favorable, you might be looking at a great opportunity for a quick trade.

On the other hand, if your strategy suggests the stock is overpriced right now, just sit back, watch, and wait for the pullback. Be patient: it will happen. Then you can still load up on cheap shares later -- IF your strategy suggests the stock is still a bargain.

So if you haven't already done so, plan your strategy. If you're able to exercise the discipline to stick with it, you will do well.
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