Incidentally I came across an old report written by Berstien in 2007 boom.
It is so apt today to revisit it. Penning down some key insights from the report. These are sins in investing most people unknowingly practice during bull market.
I can think only of smallcap stocks and funds while going through each of these sins. They fit perfectly!
Pride: Overconfidence leads to some quite specific implications. Investors tend to be too confident in their ability at predicting returns and also in what proportion of returns come from stock picking vs luck.
Envy: The desire to keep up with peers can distort behaviour, leading to either insufficient or excessive risk taking and hurting returns. Envy can also lead to chasing Momentum forgetting fundamentals.
Wrath: Leads to underperforming positions being sold too soon and focusing too much on short term returns vs long term.
Sloth: Not working hard enough on portfolio construction, risk management and asset allocation. Sloth can also lead to failure to understand costs, and paying too much.
Greed: In a competitive world there is pressure on investors to have strong views. The problem is that it leads to selective analysis and data fitting and justifying their views.
Gluttony: Excessive concentration, excessive trading and Crowding are all examples of ‘gluttonous’ behaviours in investing, the recent exuberance towards smallcap stocks and funds is one striking illustration of this. Better portfolio construction and risk management can help mitigate this.
Lust: Investors do fall in love with stocks, themes, and recent runs of success. This leads to over-valued “glamour” stocks. Hard to resist.
Lastly, we all have these sins and not accepting it is the last sin. Ignorance.