The 7 Deadly Sins as Investors

In the complex world of investing, even the brightest minds can fall prey to common pitfalls. Did you know that 90% of investors underperform the market? Unlike doctors and lawyers who complete their education before practicing, many investors jump in headfirst and learn expensive lessons along the way. Let’s explore the “seven deadly sins” of investing and how to avoid them.

The Learning Curve: It Takes Time to Master How To Invest

Before we dive into the sins, let’s address a crucial point: becoming a successful investor takes time. Even geniuses aren’t immune to market pitfalls. Take Sir Isaac Newton, for example. Despite his brilliance in physics, he lost a fortune in the South Sea Bubble of 1720. Newton initially made a 100% profit, but after seeing friends get richer, he reinvested all his money—only to lose it when the bubble burst.

Even the best investors typically need 5-7 years before they start making consistent returns. Mark Minervini, one of today’s top stock traders, is a perfect example:

• First 5-6 years: No significant profits

• 1994-2000: Averaged around 220% annual returns

• 2021: Won the U.S. Investing Championship with a 334% return

This progression shows that persistence and continuous learning are key to long-term success.

Sin #1: Not Changing Your Mind

The famous investor Jesse Livermore said it best: “The speculator’s chief enemies are always boring from within.” Being stubborn and refusing to adapt when market conditions change can be disastrous.

Livermore learned this lesson the hard way in 1907. He had correctly predicted a bear market and was profiting from short positions. However, he failed to adapt when conditions changed, saying, “I was so sure of my bearish position that I didn’t look for danger signals.” This stubbornness cost him his entire fortune.

Later, Livermore wisely noted, “Not even a world war can keep the stock market from being a bull market when conditions are bullish.”

Real-world example: The case of CrowdStrike (CRWD) stock illustrates this point. Many investors, expecting the stock to reach $600, held on even as it started failing. A subsequent major technical issue crushed the stock, but signs of trouble were evident before this catalyst.

Sin #2: Believing in Stories, Not Prices

It’s easy to get caught up in exciting stories or “hot tips” about stocks. However, as Livermore wisely noted, “The tape tells all.” In other words, trust the price action more than the narratives.

Livermore once ignored his own bearish analysis of United Steel after receiving a tip about an imminent buying movement. He covered his shorts and even went long. The stock eventually tanked, resulting in significant losses.

Always wait for the price action to confirm a story or tip before investing. Remember, false tips are often circulated to create buying pressure so that large holders can exit their positions.

Sin #3: Not Picking the Best Stocks

Remember, it’s not just about buying cheap stocks—it’s about buying the right stocks at the right time. As Livermore said, “It isn’t as important to buy as cheap as possible as it is to buy at the right time.”

In 1906, Livermore noticed that all stocks were behaving similarly, regardless of individual merits. Instead of focusing on a single stock, he analyzed the entire railroad sector and the broader market. This comprehensive view led him to take short positions across multiple stocks. When the San Francisco earthquake hit in 1906, causing a market panic, Livermore made $250,000 (millions in today’s terms).

Modern example: The semiconductor sector in 2024 illustrates this principle. While NVIDIA made headlines with a 180% return, other companies in the sector, like Taiwan Semiconductor Manufacturing Company (90% return), also performed well. The lesson?

Focus on strong sectors, then identify the best-performing stocks within them.

Sin #4: Not Cutting Losses Short

One of the most critical skills in investing is knowing when to cut your losses. As Mark Minervini’s research showed, cutting losses at 10% changed his returns from -12% to 80%

Consider this comparison of two hypothetical fund managers: a professional and an amateur. The Volatile equity losses out over time

Sin #5: Chasing the Next Big Thing

Don’t fall into the trap of always trying to find the next Tesla or NVIDIA. Instead, focus on developing a system that consistently identifies strong performers. As Livermore said, “There’s nothing new in Wall Street.”

Livermore once lost a fortune chasing a hot tip on Consolidated Stoves, buying heavily against his better judgment. He reflected, “The nature of the game, as it is played is such that the public should realize that the truth cannot be told by the few who know.”

Sin #6: Giving Up Too Soon

Investing is a journey of continuous learning. Many successful investors faced significant setbacks before achieving success. Don’t give up on your investing career or individual stocks too quickly.

There are 2 types of giving up

• Giving up on your investment journey

  • Remember, most investors find success after 5-7 years of study

    • Warren Buffet, Mark Minervini, and Jesse Livermore all took sometime to create wealth

• Giving up on your failed trades

  • Our minds work way faster compared to the speed of the world, so we normally see things before they happen but we are in too soon

  • Many good trades, come after faking out people

Warren Buffet’s Wealth Over Time

Real-world examples of why you should not give up on your trades:

HIMS stock: After being stopped out with a $30 loss, re-entering led to a 680$ (90%) gain.

Tesla: After an initial stop-out with a $40 loss and a re-entry, there was a $500 (40%) gain.

SMCI: A $50 loss on the initial breakout, then a re-entry, resulted in a 1500$(240%) return.

Sin #7: Not Staying Informed and Educated

The final sin is failing to continuously educate yourself about the markets and refine your strategies. Stay informed, learn from your mistakes, and always be open to new ideas.

Conclusion: Persistence Pays Off

Remember Jesse Livermore’s words after a devastating loss: “I had learned my lesson. I was flat broke, but I knew why. And I knew how. I was not altogether rotten yet.” Analyze your mistakes, refine your methods, and come back stronger.

As Livermore wisely noted, “The game taught me the game, and it did not spare the rod while teaching.” The market can be a harsh teacher, but the lessons it imparts are invaluable.

By avoiding these seven deadly sins and approaching investing with patience, discipline, and a willingness to learn, you’ll be well on your way to becoming a more successful investor. Remember, the journey to mastery is long, but the rewards are worth the effort.

Happy investing, and may the markets be with you!

Valentine