If you were raised is a religious family or even if your weren’t, you have probably heard of the seven deadly sins. These transgressions: wrath, greed, sloth, pride, lust, envy and gluttony are human weaknesses that can lead to large losses in the markets.
In the trading world, these same seven deadly sins apply. These “behaviors,” just like in life, lead to poor trading outcomes. Therefore, to be a better trader, you must recognize these “moral transgressions” and learn how to overcome them.
Wrath – Its not worth getting angry; find out whats wrong and move on.
Individuals tend to believe that investments that they, or their stock picking service make should “always” be profitable. They don’t and they won’t. Getting angry about a losing trade only delays taking the appropriate actions to correct it.
“Loss aversion” is the type of thinking that can be very dangerous for traders. The best course of action is to quickly identify problems, accept that trading contains a “risk of loss” correct the issue and move on. As the age-old saying goes: “Cut losers short and let winners run.”
Greed – greed causes more traders to lose more money than anything else.
The human emotion of “greed” leads to “confirmation bias” where individuals become blinded to contrary evidence leading them to “overstay their welcome.”
Traders regularly fall prey to the notion that if they “sell” a position to take a “profit” that they may “miss out” on further gains. This mentality has a long and depressing history of turning unrealized gains into realized losses as the investment eventually plummets back to earth. I can tell you this one gets me all too frequently.
It is important to remember that rule number one of trading is to “buy low” and “sell high.” While this seems completely logical, it is emotionally impossible to achieve. It is “greed” that keeps us from selling high, and “fear” that keeps us from buying low. In the end, we are only left with poor results. One way I have found to overcome this “Sin” is to take a small entry position and add to it as the market proves to me my opinion is correct.
Sloth – don’t be lazy; pay attention to your money because if you don’t – no one else will.
It is quite amazing that for something that is as important to our lives as our “money” is, how little attention we actually pay to it. Not paying attention to your trades, even if you use a stock picking service will lead to poor long term results. Portfolios, like a garden, must be tended to on a regular basis, “prune” by rebalancing the allocation, “weed” by selling losing positions, and “harvest” by taking profits from winners.
Pride – when things are going good don’t be prideful – pride leads to the fall. You are NOT smarter than the market, and it will “eat you alive” as soon as you think you are.
When it comes to trading, it is important to remember that a “rising tide lifts all boats.” The other half of that story is that the opposite in also true. When markets are rising, it seems as if any investment we make works; therefore we start to think that we are “smart traders.” However, the reality is that there is a huge difference between being “smart” and just being “along for the ride.”
Lust – lusting after some investment will lead you to overpay for it.
“Chasing a hot momentum stock” is a guaranteed recipe for disaster as a trader. For most, by the time that “performance” is highly visible the bulk of that particular stocks gains are already likely been had.
“Lusting” after a hot stock leads to “buying high” which ultimately leads to the second half of the cycle of “selling low.”
It is very hard to “buy stocks when no one else wants them” but that is how trading is supposed to work. Importantly, if you are going to “lust,” “lust” after your spouse – it is guaranteed to pay much bigger dividends.
Envy – this goes along with Lust and Greed
Being envious of someone else’s trading portfolio, or their returns, will only lead to poor decision-making. It is also important to remember that when people talk about their trades, they rarely tell you about their losers. “I made a killing with XYZ. You should have bought some” is how the line goes. However, what is often left out is that they lost more than what they gained elsewhere.
Advice is often worth exactly what you pay for it, and sometimes not even that. Do what works for you and be happy with where you are. Everything else is secondary, and only leads to making emotional decisions built around greed and lust which can have disastrous long term results.
Gluttony – never, ever over-indulge. Putting too much into one stock is a recipe for disaster.
There are a few great traders in this world than can make large concentrated bets and live to tell about it. It is also important to know that they can “afford” to be wrong – you can’t.
Just like the glutton gorging on a delicious meal – it feels good until it doesn’t, and the damage is often irreversible. History is replete with tales of traders who had all their money invested in one stock, companies like Enron, Worldcom, Global Crossing; etc. all had huge, fabulous runs and disastrous endings.
Concentrated bets are a great way to make a lot of money in the markets as long as you are “right.” The problem with making concentrated bets is the ability to repeat success. More often than not individuals who try, simply wind up broke.
If you don’t have time or expertise in picking stocks this is where using the services of a Professional Stock Picking Service will come in handy as they will do all the research for you. They have been thru the ups and downs and learned the hard way when to buy and more importantly when to sell, avoiding the seven deadly sins.
Here are the two I use in addition to my own research:
Regardless of which Stock Picking Service you use or if even if you choose to go it alone, please download my free eBook: “The 7 Habits of Millionaire Traders”
You can read all my reviews on stock picking services here:
If you have any questions on sector analysis, feel free to contact me.
– Robert Walsh