Monday, October 6, 2008

Seven Deadly Sins of Investing – Part II


Lust


Have you ever felt an overpowering desire to possess something or someone at any cost, without any regard for morals or ethics? An obsession bordering on irrationality? An unsatiated hunger that burns to the very core of your being? If you have, then you have experienced Lust.

Application
What has Lust to do with Investing? Indeed, it appears that Lust is more synonymous with a desire for beautiful women, rather than towards shares. Yet, we can easily develop Lust towards any desirable object. Lust can lead towards our downfall in many ways, even in the world of investing. Let us explore how this may occur:

1. Sexy, Sultry and Sensual Shares
What company could be sexier than Enron in the last decade? As one of the world's leading electricity, natural gas, pulp and paper, and communications companies, with claimed revenues of USD111 billion in 2000.
Fortune named Enron "America's Most Innovative Company" for six consecutive years. In August 2001, Enron's stock price hit its highest value of USD90. If you had bought into the hype without understanding how their business operated, let’s just say that it might be an investment decision you would have never recovered from.



2. Putting all your eggs in one basket
Lust can blind you to the extent you are willing to sacrifice everything to obtain the object of your desire. There are many reasons why you would lust after a company:

(a) Celebrities CEOs such as Larry Ellison, Richard Branson or Steve Jobs;
(b) Booming sector like the Internet during the late 1990s;
(c) Love for product such as the Sony Walkman or Apple iPod;
(d) Shares in your own company; or
(e) Believing in the hype by stock analysts and the market.

It is at times like these that you may blindly pour all your love and life savings into companies like Lehman Brothers. And this is what might happen:



The Quiz:
Earlier, I posted a simple quiz to test a person's vulnerability to the Seven Deadly Sins of Investing. Let's start by reviewing the first question.

1. To Buy A Car
Oil prices have just gone up and your wallet has taken a huge dent. Your rickety old car is good enough for your needs even though you need to spend money servicing it frequently.

One fine day, you hop over to a car dealer just to admire the car. Immediately a car sales person pounces on you and brings you to look at a shiny brand new Toyota Altis. It appears to be reasonably price and looks gorgeous. Besides, you would be saving on repair costs on your old car. No harm rewarding yourself after working so hard, right? Further, your year end bonus is coming up soon.

The Answer:
This question tests your abilities to withstand the temptations of Lust. In the above scenario, you would be better off avoiding purchasing a new car. Even if you have the money to buy the car on a cash term basis, why bother?

An Intelligent Investor would consider investing in assets such as houses or shares. With prices being currently depressed, it might be wise to conserve cash and start looking at good investment opportunities.

Conclusion:

TRUST BUT VERIFY
LUST BUT DIVERSIFY


When investing, it might be wise to consider diversification to avoid the dangers of Lust in investing. Even though you believe beyond reasonable doubt, that the stock you lust after, is a sure thing: DON’T put all your eggs in one basket. Who would have thought that companies like AIG, Merill Lynch, Lehman Brothers and Bear Stearns would face bankruptcy? Remember, there are NO SURE THINGS in the life.

8 comments:

Damien Tan

I've met people who see buying a branded car as an investment. The returns are the number of opportunities it opens. I tried it for fun once - drove my brother's Mercedes SL to a party and a month later, an older Toyota Corolla to another party. More people wanted to know me in the 1st party than in the 2nd so ... I guess it's how the world works. People judge you from the outside.

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Dear Damien,

Being fascinated by branding and superficial images are not that surprising. The only unsettling part is that people are growing increasingly obsessed with it.

We should remember that 'All that glitters is not gold'.

Rgds

Keong

damien tan - "More people wanted to know me in the 1st party than in the 2nd so"

Agreed, sometime we got to show-off to garner attention, wtf. This is how the world works.

I keep on receiving this comment: "Hoi, you're a manager now. Why u still driving bastard wira. U got to change to show your status".

Bloody hell, what's status? What's wrong with my current car? It serves me well. Why I do I need to change?

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Dear Ah Keong,

In the quiz, I thought you wanted to upgrade to Toyota Altis already? :)

Rgds

Marketing Deviant

TRUST BUT VERIFY
LUST BUT DIVERSIFY
That's a great quote there, did you make it up!? When people lust, all rationalities are gone. So, think of all the bad things when you lust and you won't do so! Don't go into excess on anything.

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Dear Marketing Deviant,

You liked it? The first line is a well know quote. I thought up of the second line and it rhymed with the first one, so there it was ... a poem (sort of).

As to lust, sometimes things are not quite so clear cut, especially if we are the ones in the thrall of lust. It's easy to see it in someone else, but difficult to discern it in oneself.

The Malays have a saying about this:

"Gajah seberang laut nampak,
Kuman depan mata tak nampak."

For the benefit of non-Malaysian readers, loosely translated, it means that whilst one can see the elephant on the far side of the ocean, one fails to see the bacteria in front of one's eyes.

Rgds

News Pie

I'll share my stock trick: Sell in. Buy out. One thing this trick teaches is not to buy into anything and not to sell out.

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Dear News Pie,

Great trick, one that I'll remember.

BTW - Is that your picture? It looks a bit like Saruman :)

Rgds

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