Psychology of money

7 deadly investment habits

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There are a lot of bad investing habits that cost investors all over the world millions and billions of dollars. Here is a list of 7 investment mistakes that are most common according to the book „The Winning Investment Habits of Warren Buffet & George Soros”.

DEADLY INVESTMENT SIN NO 1

Believing that you have to predict the market’s next move to make big returns

REALITY

Highly successful investors are no better at predicting the market’s next move than you or I.

One month before October 1987 stock market crash, George Soros appeared on the cover of Fortune magazine. His message:

„That [American] stocks have moved up, up and away from the fundamental measures of value does not mean they must tumble. Just because the market is overvalued does not mean it is not sustainable. If you want to know how much more overvalued American stocks can become, just look at Japan.

While Soros remained bullish on American stocks, he felt that there was a crash coming – in Japan. He repeated that outlook in an article in the Financial Times of October 14, 1987.

One week later, Soros’s Quantum Fund lost over $350 million as the US market, not the Japanese market, crashed. His entire profit for the year was wiped out in a few days.

But what does Warren Buffet – considered by some as the greatest investor ever – think about timing the market?

Well – he simply doesn’t care about what the market might do next and has no interest in predictions of any kind. To him, „forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

Successful investors don’t rely on predicting the market’s next move. Indeed, but Buffet and Soros would be the first to admit that if they relied on market predictions, they’d go broke.

It seems that predictions are the bread-and-butter of Wall Street analysts and mutual fund marketing – not of successful investing.

DEADLY INVESTMENT SIN NO 2

The „Guru” belief: If I can’t predict the market, there’s someone somewhere who can – and all I need to do is find him.

REALITY

If you could really predict the future, would you shout about it from the rooftops? Or would you keep your mouth shut, open a brokerage account, and make a pile of money?

There are a lot of people that have correctly predicted a bull or a bear market but this is not because they were smart or they knew something that others didn’t – it was simply because at any given moment there is always somebody predicting a crash or a boom. There are many famous market predictors but none of them have managed to predict the market correctly more than once.

DEADLY INVESTMENT SIN NO 3

Believing that „inside information” is the way to make really big money.

REALITY

Warren Buffet is the world’s richest investor (and he started from nothing). His favorite source of investment tips is usually free for the asking: company annual reports.

When Warren Buffet and George Soros started investing, they were nobodies and could expect no special welcome. What’s more – both Buffet’s and Soros’s investment returns were higher then, when they were unknown, than they are today. So if either now draws on insider information in any way, it clearly isn’t doing them much good.

There is a famous quote by Warren Buffet – „With enough inside information and million dollars you can go broke in a year”

DEADLY INVESTMENT SIN NO 4

Diversifying

REALITY

Warren Buffet’s amazing track record comes from identifying a half dozen great companies – and then taking huge positions in only those companies.

According to George Soros, what’s important is not whether you’re right or wrong about the market. What’s important is how much money you can make when you are right and how much you will loose when you are wrong. The sources of both Soros’s and Buffet’s successes are the same: a handful of positions that produce huge profits that more than offset losses on other investments.

Diversification is just the opposite: Having many small holdings assures that even a spectacular profit in one of them will make little difference to your total worth.

However it cannot be stressed enough that even Buffet and Soros do diversify – they just don’t diversify as much as many investment advisors would like them to. Successful investors keep to what they know – if it means sticking with 10-15 different stocks then be it!

DEADLY INVESTMENT SIN NO 5

Believing that you have to take big risks to make big profits

REALITY

Like entrepreneurs, successful investors are highly risk averse and do everything they can to avoid risk and minimize loss.

Just like entrepreneurs are always trying to lower their risks, so are successful investors. Avoiding risk is fundamental to accumulating wealth. Contrary to the academic myth, if you take big risks you’re more likely to end up making big losses than banking giant profits.

Remember the investing rules of Warren Buffet. Rule No.1 - Never lose money. Rule No. 2 – Never forget Rule No. 1.

Like entrepreneurs, successful investors know it’s easier to lose money than it is to make it. That’s why they pay more attention to avoiding losses than to chasing profits.

DEADLY INVESTMENT SIN NO 6

The „System” belief. Somebody somewhere has developed a system – some arcane refinement of technical analysis, fundamental analysis, computerized trading, Gann triangles, or even astrology – that will guarantee investment profits.

REALITY

This is corollary of the „Guru” belief – if an investor can just get his hands on a guru’s system, he’ll be able to make as much money as the guru says he does. The widespread susceptibility to this Deadly Investment Sin is why people selling commodity trading systems can make good money.

The root of the „Guru” and „System” beliefs is the same thing - a desire for a sure thing.

DEADLY INVESTMENT SIN NO 7

Believing that you know what the future will bring – and being certain that the market must „inevitably” prove you right.

REALITY

This belief is a regular feature of investment manias. Virtually everyone agreed with Irving Fisher when he proclaimed: „Stocks have reached a new, permanently high plateau” – just a few weeks before the stock market crash of 1929. When gold was soaring in the 1970s, it was easy to believe that hyperinflation was inevitable. With prices of Yahoo, Amazon, eBay, and hundreds of „dot-bombs” rising almost every day, it was hard to argue with the Wall Street mantra of the 1990s that „Profits don’t matter”

This is a more powerful and far more tragic variant of the first deadly investment sin. The investor who falls under the spell of the Seventh Deadly Investment Sin thinks he already knows what the future will bring. So when the madness finally comes to its end, he loses most of his capital – and sometimes his house and his shirt as well.

DEADLY INVESTMENT SIN NO 8

Don’t drink and drive - you won’t be there to enjoy your money

REALITY

Well, its not in the book, but seems like a good idea

Posted in Books, Investment principles, Warren Buffet | 3 Comments »

I think this guy might be right

Without money we’d all be rich.
Think about it

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The natural law of money

Each and every one of us has seen the natural law of money at work.

It is so simple that most of us are familiar with the law in a subconscious level but almost never think about it consciously.

So what is this law you ask?

It is simple. The natural law of money is as follows:

The more money you have the faster you will get to the point that you don’t have any money at all. The less money you have the slower you will get to the point that you don’t have any money.

In other words - the more money you have the faster you will spend it.

This is a universal law but it only works in the middle of the scale - it will cease to work when you don’t have any money at all or if you are a wealthy multi billionaire.

So, the natural law of money says that the more money you have the faster you will get rid of it?
How can this be you ask? It is common knowledge that in order to make money you need to have money in the first place - aren’t these 2 statements contradicting?

Well, not really - the natural law of money only works if you are not thinking about how to make more money. If you start to think about how to keep your money - or better yet - how to grow your money then the natural law of money stops working.

If you start thinking about how not to spend your money your chances of multiplying what you have grow exponentially.

Posted in Cutting costs, Goals, Natural law of money, Saving money, getting started | 3 Comments »

Why Warren Buffet doesn’t like to spend money

So you spent a 100 dollars today without even thinking twice?

We’ve all spent money that we shouldn’t have without thinking much about it. The reason is that money is relative - if you have a lot of it you tend to spend more. If you only have a little you spend little or nothing. There is a huge difference in the perceived value of 100 dollars if you only have the 100 dollars for the whole week or if you have 10 000.

The worlds wealthiest investor Warren Buffet has a secret about the way he thinks of money.

When we think about a 100 dollars we usually give value to it by thinking what we could have or do with that money. While it’s the most common way to think about money, it is also something that holds back a lot of people from becoming rich.

When Warren Buffet thinks about 100$ he doesn’t think what will he get when spending it today but he thinks what will he get from it in the future - while gaining 20% interest on the money annually.

If you decide to save 100 dollars and INVEST it with an expected annual payoff of 20%, in 5 years you would have 248 dollars and in 10 years you would have 619$. After 20 years your initial 100 bucks would be 3833 dollars.

It’s pretty tough to spend 100$ when you know that by doing that you will loose 3833$

This is an excerpt from “The Winning Investment Habits of Warren Buffet & George Soros”:

[Buffet’s wife] Susie… was a virtuoso shopper. She dropped $15,000 on a home refurnishing which “just about killed Warren,” according to Bob Billig, one of his golfing pals. Buffett griped to Billig, “Do you know how much that is if you compound it over twenty years?”

Well - it’s 575 064 dollars. (compounded with 20% which is the average pay-off of Warren Buffet’s stock portfolio)

Posted in Books, Future value of money, Saving money, Warren Buffet, getting started | 2 Comments »