Why are so many otherwise smart people so inept when it comes to money?
Probably for the same reason that so many intelligent investors lose money in the market. Every Wall Street expert will tell you: "Bulls make money. Bears make money. Pigs get slaughtered."
If the valuations of stocks were way out of sight and the profit you could have made was almost obscene, the real question we all have to ask ourselves is, why didn't we sell?
The god of greed never lets us sell before our stock reaches its ultimate record high.
There's only one honest answer. It's because we were greedy. We wanted to squeeze out every last possible dollar from holdings that seemed to go nowhere but up. The god of greed never lets us sell before our stock reaches its ultimate record high. Only with the wisdom of hindsight do we realize that stocks never give us a signal exactly when they plan to fall.
Doctor Moola, almost certainly a pseudonym for a financial advisor, is right on the money when he offers this tip of how to succeed as a short-term trader:
Most important is that you need to establish your sale parameters. This is where people usually go wrong. Recognize the fact that from time to time you should take your losses. If, after studying the stock you're interested in, you determine it can drop 15 percent below its market price on any given day, then you should establish your sale parameter 20 to 25 percent below your purchase price. Learn to take your losses right away. As soon as you hold on to try to get even, you are eventually doomed to seriously losing money.
Establishing sale parameters on the downside will prevent losses from becoming so large that your entire portfolio performance will be seriously affected. But you also need to establish sale parameters when a holding is rising. Do not try to squeeze out the last dollar of profit. Put down a written goal that you would like to achieve. And don't waver when the stock reaches that point. If you're afraid it will continue to rise forever, with you now just watching, then at least include a partial sale as part of your goal.
Sounds pretty easy, doesn't it? So why don't people do it? Again, the one-word answer is greed.
In 1987, Michael Douglas won an Oscar for Best Actor in the movie Wall Street. In it, Douglas played the role of Gordon Gekko, a fiendishly avaricious stock market speculator. To thunderous applause, in one of the climactic scenes of the film, Douglas alias Gekko tells his adoring audience: "There's a new law of evolution in corporate America. Greed is good."
It is a quote that was to become an accepted motto for the decades that followed. Many cultural analysts define the eighties and nineties as "decades of greed" -- a time when only money counted and it didn't matter how you got it. It became socially acceptable to desire excessive amounts of material possessions. Greed became not only accepted; it was encouraged.
Today greed is not only accepted as a good, it's encouraged it in ways that would have seemed utterly impossible years ago. There couldn't have been a more outlandish illustration of our idealization of greed than Fox network's brilliant concept for a show called Who Wants To Marry A Multi-millionaire? Thousands of contestants competed to marry a man they hadn't dated or even met just because he was a "multi-millionaire." Encouraging this gross display of greed were the more than twenty million people who actually tuned in to the premier show.
Let's Talk Turkey
Contrary to Gekko's conclusion, greed is not good. Greed will always leave you dissatisfied because you'll never be able to get everything you desire. Greed never allows you to think you have enough; it always destroys you by making you strive ever harder for more. Perhaps most important of all, though, is that greed motivates us to make mistakes we would otherwise never be stupid enough to commit.
Greed never allows you to think you have enough; it always destroys you by making you strive ever harder for more.
A friend of mine told me the secret of how he managed to come out ahead in the market. He said he always remembered the story of the farmer who set a trap for wild turkeys. The trap was a box about six feet square, with one side tilted up and supported by a pole. The farmer hid in the bushes and held on to a long cord tied to the pole. When he would jerk the cord, any turkeys that wandered under the box would be caught. To entice them to enter, he left trails of corn leading to the trap.
One day, 12 turkeys came close to the trap and 11 of them stepped in. "In just a minute," the farmer thought to himself, "I'll have the other one too."
While he waited, three of the 11 in the trap walked out. That's when he wished he would have been satisfied with the 11. He made up his mind that as soon as one of the three went back in, he would pull the cord. Instead, five more walked out. That left only three turkeys inside. Surely, he thought, by waiting just a little bit longer he could count on at least two or three coming back to the corn he left inside the trap. As he was debating with himself what to do, the remaining turkeys all left, leaving the trap empty.
My friend told me from that moment on he took to heart the moral of the story: The 11 turkeys the farmer could have had were just paper profits!
Bernard Baruch, the financial genius, summed it up best in one line: "I always made money by selling too soon."
Yes, Virginia, There Is An Alternative To Greed
CEOs and captains of industry were stunned by a story that made headlines all over the country. Aaron Feuerstein, the hero of this remarkable tale, realized that "Other CEOs feel I'm sort of a stupid guy who doesn't know what to do with his excess money." But Feuerstein not only intuitively knew the right thing that he had to do, but also believes that his example will eventually become accepted as a model for success in the twenty-first century.
Feuerstein is the owner of Malden Mills, a business founded by his grandfather in 1906. On December 11, 1995, while Aaron Feuerstein was celebrating his seventieth birthday in a Boston restaurant, an explosion almost completely destroyed his textile factory. The sane and standard business decision would have been to collect the insurance and to close the business. Feuerstein knew, however, that his factory was in an economically depressed region of old mill towns north of Boston, and thirty one hundred high-paying manufacturing jobs would disappear.
Feuerstein, a devout Jew, said that everything about his upbringing and his fifty-year history in the local business told him to rebuild. "It was the right thing to do and there is a moral imperative to do it irrespective of the consequences." Smoke was still rising from the rubble when Feuerstein prepared to speak to his workers at a Lawrence High School gym. "We were ready to hear that it was over," recalls Paul Coorey, the union local president. Surely, he thought, the owner would take the three hundred million dollars in insurance money and then relocate to a place where labor was cheaper. In all honesty, Coorey thought, Feuerstein would be stupid not to do exactly that.
Instead, here's what happened: Feuerstein took the microphone and started making promises. They would cost him a million and a half dollars in payroll every week. He committed himself not only to rebuilding the plant, but to pay every worker's December wages as well as a two hundred seventy-five dollar Christmas bonus.
The workers who came expecting to be laid off cried like babies. They offered prayers of thanks and promised their everlasting loyalty. As for Feuerstein, Peter Jennings named him Person of the Week, and Tom Brokaw referred to him as "a saint for the nineties" and "the best boss in America." President Clinton invited him to be a guest of honor at his State of the Union Address.
Greed lost out to goodness. What's even more important is that Aaron Feuerstein's model of corporate compassion has had a trickle-down effect. "He's still pretty lonely, but the idea has appeal," said Michael Useem, Professor of Management at the University of Pennsylvania's Wharton School. "The thinking is: Employees can be seen as an ultimate competitive advantage. If you treat them well, they'll pay you back in really hard work later on." Remarkably enough, in a study by Massachusetts Institute of Technology Professor Paul Osterman, he found that between a quarter and a third of U.S. companies are taking steps to convert to a model like Feuerstein's. Who knows? Maybe the time will come when sound business judgment will dictate that Michael Douglas was wrong and Aaron Feuerstein was right!
The Geography of Greed
According to the Bible, God has a special affinity for the land of Israel. For centuries, it has been referred to it as "the Holy Land." In Jewish tradition, the land is linked to God even by its geography, which offers us spiritual lessons applicable to our own lives.
In the north of Israel, there is a sparkling river. The Jordan is the source of much-needed water in an arid climate. Fish abound there and serve as a delectable food supply. It is beautiful to behold and commonly acknowledged as a source of life.
That very same river flows south into another sea. From these waters, neither man nor beast will drink. It is foul smelling and forbidding.
What could possibly account for the difference between these two waters? The Sea of Galilee receives the waters of the Jordan but does not greedily retain them. For every drop that it gets, it gives another. The sea into which it flows, however, has a different mode of behavior. Every drop that it gets, it keeps. So while the Sea of Galilee generously gives and lives, its terminus that only knows how to hold on to what it has is called the Dead Sea.
The seas of Israel serve as symbols of people. Those who give, live. "Ninety percent of all mental illness that comes before me could have been prevented, or cured, by ordinary kindness," claims National University Professor Dr. William McGrath. As Eric Fromm, the famous psychiatrist, put it, "Not he who has much is rich, but he who gives much."
Ironic, isn't it, that after all is said and done, it is the greedy who are really needy!