I’ve always been fascinated by the seven deadly sins. The capital vices.
The 1995 psychological crime thriller Seven, starring Brad Pitt and Morgan Freeman, brought these to grisly life.
Source: IMDB
A serial killer murders seven victims based on their commission of each of these sins.
A model, for her pride, is given the choice to live or die after her face is mutilated.
An obese man, for his gluttony, is forced to eat spaghetti until his stomach bursts.
I will spare you any further gruesome detail.
The seven deadly sins are found within Christian teachings, but are not mentioned explicitly in the Bible itself.
By themselves, they do not appear especially deadly.
Pride, greed, wrath, envy, lust, gluttony, and sloth are commonplace.
Yet what is indelible is the destructive path these vices may put a person on.
Legendary investor Charlie Munger once quipped that envy is the most pointless of these sins to commit. It brings ongoing pain but gives you no fun.
Over the years, I’ve noticed there are also ‘deadly sins’ that apply to investors in financial markets. Again, they are not initially deadly as of themselves. But they can send an investor down paths that are destructive to wealth.
Deadly sins for investors
1) Fear of market movements
Markets go up and down. It is irrational to let that get to you.
The market is amoral. It responds to incentives. When interest rates are high and going up — as we see these days — investors may reduce their exposure to stocks.
In fact, the market seems far less worried about a war in Europe — and it is much more responsive to the downstream effects of inflation and rates.
A long-run investor should thus care about one main thing: buying great businesses at very good prices.
The only real thing to fear is one or more of the companies you have invested in going bust. And for publicly listed securities, this is rare.
2) Short-term thinking / lack of foresight
Markets at the extremes also operate like a roller coaster track.
The longer and steeper the downward descent, the more power that builds for the upward burst.
So you may see the cycle of increasing interest rates setting this up. Higher interest rates are used to snuff out inflation. When that is done — often overdone — those interest rates can be brought back down. Quite quickly. That process creates enormous positive economic impetus.
We’ve seen this happen many times.
When Reagan took power in the US and kick-started the economy, achieving superior rates of growth, it’s wise to remember that he arrived at a time of high interest rates. Part of the success came from simply seeing those rates reduce.
Remember: the longer a downward cycle persists, the more chance investors get to discover and buy good, resilient businesses at sharp prices.
3) Greed and pride from times of success
A few years back, in the midst of a bull market, we ran an educational evening for investors. We discussed our value strategy.
One couple boasted that they had a formula to produce greater returns.
They’d made money in Australian BNPL (Buy Now Pay Later) stocks such as Afterpay.
When that Company existed on the ASX, it rose to a high of around $158 in June 2021.
Apparently, based on early signs of success, they’d ploughed hundreds of thousands of dollars into their strategy.
They asked us, ‘Why would we be interested in your value strategy when we can make loads of money with our picks?’
There is a place for speculation in larger portfolios. But I suspect, if they stuck with their proudly declared strategy, it might not have gone too well.
Afterpay fell from $158 to $66 in January 2022. It was later delisted after being acquired, with shareholders receiving stock in the US payments giant Block Inc [NYSE:SQ].
But Block had problems of its own. Its share price has plunged by over 70% since its height in February 2021.
Other BNPL and speculative stocks in this couple’s sphere of activity have fared as badly or worse.
Further, even some star-fund managers who have done spectacularly well — then suffered ‘strategy creep’ due to their own sense of invincibility — have seen their careers head south.
Avoid greed and pride in investing. Stick to a rational strategy.
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(This article is general in nature and should not be construed as any financial or investment advice.)
Simon is the Chief Executive Officer and Publisher at Wealth Morning. He has been investing in the markets since he was 17. He recently spent a couple of years working in the hedge-fund industry in Europe. Before this, he owned an award-winning professional-services business and online-learning company in Auckland for 20 years. He has completed the Certificate in Discretionary Investment Management from the Personal Finance Society (UK), has written a bestselling book, and manages global share portfolios.