Seven Deadly Sins of Investing

To help you pinpoint your vulnerabilities, I’m going to list some common investing mistakes and the specific sins that catalyze these mistakes. More than one sin can cause some mistakes, so you won’t always find a one-on-one relationship between mistake and sin. Still, this exercise will help you hone in on your vulnerabilities, narrowing the list down from seven to one, two, or three.

Invest After a Rally Has Woken Up

Some people revisit their investments only when the market rallies 10 percent. They end up catching the market at a near-term high and only put their money in after the price has gone up. It is akin to buying a suit only after the sale ends.

Envy, sloth, and greed drive this mistake. When a rally occurs, you see others benefiting, envy their success, and want to get in on it. You’re guilty of sloth because you’ve ignored your investments only until the rally has roused you of your torpor. The slothful investor is one who doesn’t pay attention to investing until Newsweek’s cover declares a bull market.

Greed also prompts this mistake because you see the Newsweek cover and are convinced that you can find a way to make a fortune.

Sell After the Market Makes a Significant Correction

Typically, anger is the cause of this mistake. When investors give up on a losing market and the downside volatility and sell, they usually do so out of anger. It is as if the market has let them down, and they’re furious with it for doing so. Their anger clouds their thinking and one part of them believes that the market will never recover or it will take years for it to rebound. As a result, they often sell prematurely and lose out when the market rallies.

Believe You Are Privy to a “Secret”

Typically, people receive a tip from the proverbial “friend of a friend” who knows that some little-known company is about to introduce a revolutionary new product, and they have a chance to get in on the ground floor. Some people receive tips from even more unlikely sources — cabbies, plumbers, bartenders — and take them as gospel.

Greed is the culprit here. Generally, individuals who act on what they hear from these sources are greedy. They want so badly to make huge amounts of money that they convince themselves a dubious tip is valid; that an unsubstantiated rumor will cause a moribund stock to experience a dramatic price increase.

Sell Too Quickly

Gluttony feeds this mistake. Gluttons need the action that selling provides, and as a result, they sell too quickly and miss out on potential capital appreciation and dividends, and pay a lot in taxes and commissions. Premature selling often causes people to desert a winner too quickly.

Double Down on Bad Investment

This mistake also might be called, “Throwing good money after bad,” and though a multitude of sins can catalyze it, pride and lust are usually the main culprits. Hubris prevents investors from admitting they made a mistake; they double and even triple up a bad stock to avoid facing their initial, flawed reasoning.

People also increase their investment in losers when they are obsessed about a stock. For reasons deeper than I’m qualified to go into, some individuals become fixated on a given investment, absolutely certain that it’s going to pay off in a big way, even when all the evidence suggests otherwise. Their lust overcomes reason, and they make the doubling mistake.

Buy Stock (Fund) You Know Little or Nothing About

Who would make such a mistake? A slothful investor, that’s who. Astonishingly, some people are just plain lazy when it comes to investing or they convince themselves that knowing a little is just as good as knowing a lot.When they avoid the facts — when they buy based on the skimpiest of trends or because of a system that is more voodoo than knowledge-based — they are likely to take a flyer.

Duplicate Someone Else’s Investment

This mistake perhaps makes sense to envious investors. They know or hear about someone who struck it rich with a particular stock, type of fund, or investing strategy, and they decide to copy it. They assume that if it worked for one person, it will work for another.

Of course, the fallacy inherent in this reasoning is rooted in timing: If it worked yesterday, it doesn’t mean it will work today. Still, if you’re sufficiently envious, you can easily overlook this truism, preferring the illogic spawned by an intense desire to have what someone else possesses.