Investment psychology

in

One thing about investing is the need to manage one's greed.

So many people have burnt their fingers. But is it the tumultuous markets which has hurt them or was it their greed which has consumed them?

It's easy for investors to think 'I'll sell when it reached point X.' Or 'I'll buy when the price lowers further.'

It's even easier for them to think 'Now that it has reached X, I'll just wait for it to become more favourable by just a little.' But the little change they had been waiting for would never come. Or, more accurately, it would come and leave without being acknowledged and addressed. 'What if it keeps going up? I'll keep it for a while more.'

Isn't such paradigms the reasons why people eventually regret? Greed is the substrate for regret. Greed is both the reactant and the conditions for heart-aching regret.

'I can calculate the motion of heavenly bodies, but not the madness of people.' - Sir Issac Newton, the guy who lost money investing in a South Sea Company

'The line separating investment and speculation, which is never bright and clear, becomes further blurred when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities -- that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future -- will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands.' - Warren Buffett

Greed, loosely defined, can be applicable to all facets of life. One can be greedy for more money, power, respect, love and a whole host of objects and emotions.

But it is through tangible material wealth that greed is clearly expressed (perhaps the most dramatic and dangerous fashion).

0 comments: