Money money money, must be funny, in the rich man's world.
Indeed it is. It might sound strange to people of older generations to know the rate at which money has pretty much become a necessary commodity in our everyday lives. It is hard to imagine life without money in 2018. Everywhere you look, someone is making money, monetising assets, providing new services, investing.
And let's face it. Money is to a great degree necessary; for shelter, food, leisure...you name it. It is the crux, the driving force of a country's economy. It does have its benefits if used correctly as it can be used to spread wealth around the world.
However, it comes to no surprise that there is also a negative aspect to money, and that's greed. The more money people have, the more they want. They never seem to get enough of it.
I will not go into the dark world of what money can lead people to do. That's not up to me to judge what is right or wrong as everyone has his/her own circumstances and social issues to deal with.
What I can do is perhaps shed some light on the psychological aspects of investing, and how greed can become a (negative) factor in investment decision-making. As investment managers, we are faced with countless decisions on a day-to-day basis on whether for example to close off a position which we are sitting on healthy gains, or perhaps add on to these positions in the hope of greater returns, even if valuations appear pricey. Or perhaps enter into an investment knowing that the risks by far outweigh the potential gains but nevertheless could result in healthy profits.
Investment managers are also tempted by greed but are well equipped with the necessary skills set to not expose the investments which they manage to such risk and be so susceptible to risk. They take rational decisions and have the luxury of knowing how to read the market, time entry and exit points as well as have the necessary infrastructure and systems to ensure that greed does not overcome rational decisions.
The same cannot be said unfortunately for the inexperienced investor who opts to go solo in his/her investments, with the required market knowledge to get the best out of an investment and know when it is time to move on to the next. Excessive unrealised gains/losses can lead to panic, irrational decisions and also greed. When an equity is up 30% for example, one might be tempted to be greedy and double up on his/her position. Or for example, when an equity is down, the investor might opt to hang in there hoping for a recovery, or even be tempted to double up at cheaper valuations, as opposed as looking into why there was such a large negative or positive price movement and read into what the prospects for that investments are going forward.
Greed is definitely a trait an investor must not have. It all boils down to the ability to know when to take profits or cut losses, and acknowledge when the time is right to close positions and not hope for things to go your way without making the necessary research beforehand or by refraining to ask for professional investment advice.
Disclaimer: This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
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