FOOL'S EYE VIEW
Seven Deadly Stock Market Sins

By Maynard Paton (TMFMayn)
December 31, 2002

Do you invest in individual shares? If so, there are plenty of pitfalls to be wary of. But whatever share selection strategy you favour, the dangers can be encapsulated in the 'seven deadly stock market sins'.

Pride

Pride comes before a fall. If you have too much belief in your own stock market ability, then danger lurks. Arrogance and complacency can quickly set in. So avoid letting any success go to your head. Indeed, if you think your gains are too good to be true, they probably are.

Over your investing lifetime, you will never stop learning about shares. So respect the market. As soon as you think you have this investing lark totally licked, the market will bite you.

Envy

You'll often hear stories of fortunes made on the stock market. You know, those City traders who can produce a 300% return by March each year, or those punters who bought a share the week before it quadrupled. 

However, there's no point wasting precious time and effort on petty jealousy. You'll get into all sorts of emotional tangles thinking about what you could have made had you bought this or that share. To generate personal stock market success, you have to focus on your own talents, your own investing strategy and your own shares -- not those belonging to other people.

Gluttony

When it comes to investing, too much of anything typically creates portfolio heartache.

Following too many different strategies at the same time is likely to lead to an underperforming mishmash portfolio. In addition, owning too many different shares is also likely to disappoint. If you feel there's safety in diversification, you'll severely restrict any chance of your handpicked portfolio ever beating the market.

Furthermore, the stock market offers far too many distractions for the unwary. Concentrate your time researching your favourite companies or industries, not trying to become an expert on everything under the investment sun. And another thing; too much dealing will make your broker rich, not you.

Lust

Or in other words, never fall in love with your shares. After spending time evaluating a company, it's all too easy to form an emotional attachment with the company's shares. But get this -- the shares won't love you back.

Don't let love blind you from a company's difficulties or an extended valuation. Remember, many entrepreneurs who have spent years carefully crafting their businesses have sold out because they were offered a very good price, or because their business was heading for trouble.

So become ruthless with you portfolio. By all means love a company and its products. But emotion has no place when buying or selling shares.

Anger

Lost money on your investments this year? Do you know who's to blame? If you're angry with the market makers, the shorters, the analysts, Alan Greenspan, Lord Simpson or Osama Bin Laden, then you're in trouble.

If you lose money on the stock market, the only person to get angry with is yourself. Your losses are your fault. If you are taking on the responsibility for you own portfolio, then don't remain in a state of denial over your own stock picking shortcomings. Either knuckle down and get to grips with investing, or consider an index tracker instead.

Greed

While some greed may be needed to maintain an enthusiasm for stock picking, becoming too greedy can lead to somewhat riskier 'investment' pursuits.

Legendary US investor Warren Buffett has produced an average annual compound return of just over 20% during the past few decades. If you're aiming to beat that record, you're being unrealistic. More importantly, you're likely to take on untoward risks, too.

The more your greed is greater than the stock market's historical 12% per annum performance, the more likely you'll suffer frustration and disappointment. Sure, penny shares, futures and options, spread bets and the like can all generate fantastic returns if you win. But more often than not, you're likely to suffer badly. So keep things simple. Adopt a straightforward investment strategy and have modest aims to begin with.

Sloth

Thirty minutes reading the broadsheets every Sunday afternoon isn't going to turn you into stock picking genius. Becoming a successful stock picker requires a lot of time and effort. You need to have a grasp of accounting, you need to know about valuation (and its importance), and you need to monitor the businesses you're investing in.

While plenty of tipsters, newspaper pundits and bulletin board posters all proclaim to have the magic stock market touch, there are simply no short cuts to beating the stock market consistently. So don't rely on other people to do all the hard work for you, especially as they won't be there when trouble (inevitably) strikes. Do your own research. Remember, it's your money at stake.

More: Traits Of A Foolish Stock Picker | Build Your Own Share Portfolio

A version of this article was first published in December 2001