Did you know that greed is the most deadly of investment sins? This is according to Gareth Stokes’s book Fear, Greed and the Stock Market.
“Greed pushes you to buy the overheated stock in the market just before the price comes crashing back to earth,” says Stokes.
As an investor, understanding emotions and personality traits is the first step in a more balanced approach to investing. Once you’ve identified these potential threats, you’ll be able to take steps to control them.
If you don’t, “they’ll run amok with your attempts to improve the returns from your stock market investing.”
Avoid making these two detrimental greed-driven investment decisions
1. The “buy for quick profit” syndrome. Greed will force you to buy a share on the expectation of a quick profit. This is evident when investors hear a rumour about a share that’s about to go up in price.
“Greed will immediately kick in, overriding every bit of investment common sense that you possess. You enter the market without the slightest bit of fundamental analysis to back your decision,” says Stokes.
Remember, any trade that’s placed based on rumour is a greed induced trade and greedy investor and his money are soon parted.
2. The “buy after the fact” syndrome. This syndrome is also known as following the crowd. A huge part of this investment error is that prior to entering the market too late, the papers are full of bullish market sentiment. “Greed will force you to enter the market because it won’t allow you to ignore the fact that others are making ‘millions’ while you’re sitting out of the market,” says Stokes.
As a result of greed and the allure of cold hard cash, greed will win out in the end and “you’ll enter the market too late. You’ll follow the herd instead of leading it and enter the market just before the crash,” says Stokes.
How do you keep greed from wreaking havoc with your investments?
Apply a disciplined trading strategy to each and every trade you enter.
By applying a disciplined trading strategy you’ll take the buy and sell decisions out of your hands. And, 100% of the time, you’ll be relying on your own set of rules.
“Provided you don’t bend any of these rules you’ll never be affected by greed when trading again. You should leave no place for greed in your trading system,” advises Stokes.