Nothing mixes like money and morals, right? They're like oil and water. Cat people and dog people. 50 Cent and The Game. Apple and Microsoft. You get the point. Here at the Church of the Fool, we try not to moralize too often, but there are times when the guy in the jester cap needs to take the pulpit and speak about ye olde dangers. As the market bounces back and forth between heaven and heck, and fortunes are wagered on a wing and a prayer, it's a good time to check out the seven sins of stock picking, behaviors that can put a serious crimp in your upcoming earthly reward.
Motivation and ruination: Greed is on both sides of the investing coin. You need the greed -- at least some -- to want to invest at all. You've got something that you want to make into something more. No problem with that. But too much greed will ensure your failure. Chasing after a quick buck in some round-trip rocket like Travelzoo
Gluttony, Envy, and Lust
To judge America's abysmal savings rate next to the fantastic results at luxury purveyors such as Coach
Imagine you can get compounded annual returns of 15% a year. (That would make you a very good investor -- so you shouldn't count on those kinds of returns.) But let's dream big and say you could earn that. It still won't make you wealthy if you're earning that 15% on nothing. Remember: Buffett didn't get rich just by making great investments. He got rich by not wasting money that could be added to the kitty. Don't believe me? Do the math. No, wait, let us do it for you.
If you start with $1,000 and earn that 15% a year in a tax-free account, your money will be worth $87,500 after 30 years. Not too shabby. By contrast, if you can skip the five fancy lattes each week and bag a lunch a couple of times, you can scrape together a lousy $1,000 a year to add to your nest egg. The final result? $625,000. Drive an old clunker and ignore all those tempting incentive offers from GM
Yes, the totals look great with juiced returns. But do the same at a more reasonable 8% rate of return, and you'll still end up with $730,000. The point is this: Unless you're already sitting on a pretty big pile of dough, your stuff-envy and financial gluttony will be a much bigger factor in your future financial independence than any magic you can conjure for your portfolio's performance. Control your urges accordingly.
Believe me, most of us Fool writers know angry. We see it when we check our email accounts or browse the vulgar romper-room that is the message boards at Yahoo! Don't believe me? Search on my name at the Ipix
Investing is an inherently risky activity that demands a hard look at the facts, good and bad. But a huge number of stock buyers view it like some kind of Sunday-afternoon competition. They root for their team and vilify anyone who doesn't share their sunny outlook. And the anger makes them blind to the negatives. Woe unto the chuckleheaded Fool who points out the lack of steady revenues and complete absence of profits at a company like Ipix. Plenty of angry members of the Stinger crowd try to blame the others for any downtick, even though they can see for themselves the firm has minute sales; no profits; mystifying, short-lived management; and a CEO with long history of failures.
Mr. Hatfield, criticism of a company you own does not constitute an affront to your personal honor. Mr. McCoy, my positive comments about your company's competitor in no way constitute an agreement to meet with pistols at dawn. That throbbing vein in your forehead is a good indication that you're fixated on the wrong things. Embrace the stuff that angries up your blood. You might learn something important.
I'm right, and everyone else is wrong. We all feel that way, so I'm not going to deliver a blanket condemnation of self-assurance. After all, acting on your convictions is part of the arrogance of investing. If everyone shares the same, correct opinion of a stock, then it must already be fairly priced. Obviously, any Fool who invests his dough in individual stocks believes this isn't so. We are convinced we can find sweet bargains or future world-beaters ahead of the rest of the crowd. But not every time. If you believe that, you're in trouble.
That's the kind of pride that will kill investors over the long run. My colleague Bill Mann has written eloquently about this issue a couple of times. The problem is that, in individual cases, the market rewards the ignorant and the informed without pointing out which is which. Today's Lexar
When a stock goes up, those who bought it purely because they like the product, or hate a competitor, will swear up and down that they are finally being rewarded for their smarts, but the truth is, they're just being rewarded. The trouble with being otherwise deluded is that such irrational pride and (in the long run) the odds, catch up with you. Investing is about maximizing returns, but you can't do that without minimizing risks. There is a difference between being right and being lucky. I've been lucky in the past and made money on stocks that were clearly not worth the price I got when I closed the position, but I didn't take any particular pride in it. It scared me into being even more careful with my future decisions. You need to figure out when you've made money on No. 2 so that you'll have a better chance of being rewarded for No. 1, on a consistent basis, in the future.
How can a guy who wrote about the virtue of sloth count this among the seven deadly sins? Remember, I was talking about a specific kind of laziness. There's no room in investing for good, old-fashioned sloth. If you are too lazy to look at your company's numbers and proxy statements, you're setting yourself up for some major failures. Yet every day, we are treated to amazing examples of extreme investor laziness. For months, those of us Fools who aren't so hot on Sirius Satellite Radio
Not a single one of these people took two minutes to hop on over to the Securities and Exchange Commission website to read the proxy and check it out. How many of them do you think bother to read the 10-K? This kind of thing happens with every stock, especially the hot ones. I routinely get email from people who've already purchased a stock and who want me to tell them something they could learn just by heading over to sec.gov. How do you judge their odds of success against the institutions and hedge funds and other data-crunching sharks that are swimming in the same lagoon?
The road to righteousness
Some of history's most successful investors have said it time and time again: The journey to stock market wealth doesn't require superior instincts, faster reflexes, or better information. What it does require is patience, perseverance, and the willingness to do some work and avoid the mistakes that others are too quick to make. If you can steer clear of the seven sins of stock picking, you'll already be one up on Wall Street.
For related Foolishness:
- Are you right or just lucky? Does it make any difference?
- Is GM crumbling?
- See how bling beats the bargain bin.
- Folks, others aren't to blame.
- Lessons from laziness.
Seth Jayson was never much good at preaching hellfire and brimstone. At the time of publication, he had positions in no company mentioned. View his stock holdings and Fool profile here. Fool rules are here.