Don’t be too quick to judge greedy investors
A different form of greed can impact even the savviest investors.
Emotions play a large role in investing outcomes. We are hit by waves of greed and fear as the market surges and falls. This is a topic that has been discussed and studied exhaustively. There are countless memorable quotes from such investing heavyweights as Ben Graham and Warren Buffett. Savy investors scoff at novices who let emotions control their actions – even if these same investors struggle in extreme conditions.
Of the two polar emotions it is greed that is often the target of the most scorn. Investors who pile in at the top of the market are viewed as unsophisticated lemmings who deserve any misfortune that may befall them. Yet the emotion of greed is not as straightforward as it seems.
My own experiences during the .com boom and bust in the late 1990s and early 2000s was a formative experience in my own investing journey. We are products of our accumulated experiences and this perilous time for investors inoculated me from the traditional definition of greed.
I see bubbles coming from miles away. I even see them when they don’t exist. I steer clear of anything with a hint of speculation. And while I may miss out on some genuine opportunities, I’m ok with this trade-off. I’m an income investor and prefer boring companies that are unlikely to be infected by speculative excess.
That doesn’t mean that my original investing experience doesn’t impact me to this day. Over time and through some self-reflection I’ve come to realise that the traditional definition of greed does not fully encompass the impact on my investment results.
My COVID market experience
Markets were tanking in March of 2020 as the world recoiled in the face of COVID. There was a palpable sense of fear as we shuffled along the near empty streets giving wide berth to each passerby. The fear was also infecting markets.
I was ready. I had my wish list of investments that I wanted to add to my portfolio and a cash cushion I was ready to put to work. Despite the increasing chaos of everyday life, I was rationally approaching markets as more bargains appeared. Or so I thought.
Shares that I had thoroughly researched and followed for years were selling for prices that I believed provided more than an adequate margin of safety. Even when accounting for the uncertainty of COVID.
And then something happened. I wanted lower prices. I kept coming up with new target prices. A couple dollars cheaper. A little bit of a higher dividend yield. Prices would fall and I would move the goalpost.
It is hard to describe my emotional response to the prospect of lower prices as anything but greed. It may not meet the traditional way we think of greed when it comes to investing. But nonetheless, it was greed.
My expectations that markets would continue to fall did not come to fruition. I did manage to invest a small portion of my cash. But nowhere close to what I planned before the furious rally.
I assumed that the market would keep falling by looking at history and knowing the average bear market was close to 10 months. It didn’t occur to me that the market would go from peak to trough in only 23 trading days. In retrospect it should have been obvious that an unprecedented event would not follow historical patterns.
How not to let structure get in the way of opportunities
I believe structure is an important component of any successful investment process. The biggest issues that most investors confront are the behavioural biases and emotions that lead to poor investment decisions. Structure is a way for investors to alleviate the impact from our own worst instincts.
Structure means having clear goals and an investment strategy designed to achieve those goals. A key component of an investment strategy is defining criteria to select investments. Valuation is a mainstay for successful investors.
Buying shares with an adequate margin of safety protects investors from an unknowable future. And buying at attractive valuations lowers risk and gives an investor a better chance of achieving favourable returns. An investor that maintains discipline around valuation is on the way to achieving their goals.
Warren Buffett summed up the value of patience when he said, “The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot.” Yet some investors are like me and are a little too precise about their investment ‘sweet spot’.
Fixating on a specific share price before buying a share can be a case not seeing the forest because of the trees. And I learned the hard way. The fixation on a price implies a precision in valuations that just don’t exist.
If a share has fallen to $100 with earnings of $5 dollars a share a drop of an additional $10 to reach a price target of $90 would only mean the price to earnings ratio moving from 20 to 18. If this is truly a great company with a bright future that change may have little impact on the long-term opportunity.
In the same scenario with a $3 dividend per share the yield would only rise from 3% to 3.33%. Meaningful? Perhaps. Just not over the long-run.
My other investing sin was assuming that I knew what the market was going to do over the short-term. Intellectually I know that predicting short-term market movements is a futile endeavour. My greed for lower prices counteracted common sense. And that is what emotions do. They override rational decision making.
The inherent issue with my fixation on lower prices during COVID is that it didn’t align with the rest of my investment strategy. As a long-term investor the small differences in price will be washed away by time.
There are many factors that lead to success of a long-term investment. Valuation is important but there are other factors that come into play. Success comes from taking a more balanced view. A less emotional view. One without greed.
Have you missed out on opportunities hoping for lower prices? Let me know your story at firstname.lastname@example.org