Wednesday, August 09, 2006

7 Deadly Sins of Investing (1/7)

SFC is always talking about investor education. But is it effective? Yes or not. In terms of knowledge, HK investors are getting more acquainted with various investment products. But in terms of self-understanding of their bad investment habits, they are still lagging behind.

In recent decades the research on behavioral finance has released many findings on so-called "irrational behaviors". For example, HK investors viewed the stock split of Manulife (945) as a "positive" signal and made a buy.

But what is the "mindset" behind these irrational behaviors? Investor psychology is the relevant topic of study. I recently read a book titled "The 7 Seven Sins of Investing", which identified 7 kinds of "blind spot" of investors, namely, envy, pride, lust, greed, anger, gluttony and sloth.

Based on my observations of others and personal experiences, I find these 7 sins are quite influential and prevailing. In this series of blogs, I would like to introduce them one by one.

Sin #1 - Envy

You focus on successes of others. Think about if you have such experience - when you heard from your good friend he made a small fortune by picking up a small-cap, how do you feel? A bit down, right? If yes, this is envy. If yes, then what would you do? You are tempted by yourself to replicate his success by buying the same stock. But at that time your purchase price must be much higher than your friend's, and most likely you will buy at the "historical high".

Could you eliminate your envy? I think it's difficult, if not impossible. Envy is a deep-rooted human nature. What you can do is keeping aware of it and try to minimize its influence on your investment decisions.

My suggestions for you to balance your envy are:
  • Don't just focus on others' successful outcomes, but also their processes (e.g. homework done for stock picking)
  • Pay attention also to others' unsuccessful experiences

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