The Investor Diary Entry #40: May 14, 2023
The title of the third chapter in the book The Psychology of Money is “Never Enough.” The way I understood this chapter is helping us understand one of the fundamental factors in our relationship with money. It is basically to comprehend the definition of greed.
Yes, success brings confidence. A lot of success, and continuous success can bring overconfidence. Overconfidence lets your guard off, and as Bill Gates once explained, it can make a person thinks he/she is invincible.
Luck, Greed, and Risk
In a previous diary entry, we talked about the Luck Potion, and how successful people use the luck concept to ground themselves from the feeling of overconfidence. When a decision they take goes the right way, they give credit to luck and not their cleverness and insight.
They do that by understanding that the other face of the coin is called risk. They adhere to the fact, that this decision could have gone the wrong way, and against the intended outcome that they wanted.
Others, also successful, pushed their luck. I guess they didn’t understand that it was their luck, or thought that luck is sticking around for a while.
Luck is similar to risk; it cannot be controlled or summoned. Luck and risk can be thought of as forces of nature. One can never know which one will hit the decision or action taken. Therefore, in my point of view, greed is thinking that those forces are within our control.
What Is The Meaning Of Greed?
I will not look into the meaning of greed in general. I am interested in understanding the meaning of greed in money in general and in investment in specific.
To understand what is the meaning of greed, I would describe it as overconfidence in luck, and not respecting the power of risk. To continue to take decisions and actions thinking that every time the outcome will be in my favor without any consideration of the consequences lying ahead if the risk force was able to push the luck force away.
My previous understanding of risk is the action that holds two possible scenarios. One is positive, which is in my favor, or what I wish to have as a consequence of the decision or action taken. The other is negative, which if happened will cost me some losses.
In that context, greed could be taking a decision or action that the negative outcome if happened costs more than the positive outcome expected. Yes, this makes sense.
Risking What Is Important
When in any business you calculate your costs, add a margin of profit, and decide on your price. When analyzing a business, one looks at current assets and sees if they cover the current liabilities to decide on the strength of the balance sheet. A stronger balance sheet is one that covers the total liabilities.
Therefore, in making any decision or action one needs to know if he/she is capable of paying the cost of the risk if the negative possibility was the outcome.
The next question would be, if the negative possibility was the actual outcome and it was paid, would one still be able to continue the business or the process, or that will be the end of it all? If it will be the end of it all, then this was not risk, this was stupidity.
Therefore, when taking any action; investment or otherwise, the risk cost, even if you can pay, should not stop you from continuing.
The Worst Case Scenario
This worst-case scenario has been the trap of so many “have been” successful people. It is not a worst-case scenario that rarely people do. On the contrary, and especially, not exclusively, in both worlds of trading and investing, many people fall into this trap.
The worst-case scenario is to risk what is important for what is not important. Yes, many people have done, and people are still doing it, and unfortunately, people will still do it.
Many people lost their houses, family, and other extremely important parts of their lives, for some extra benefits that they didn’t need. Many have even risked their freedom and went to present for an addition to what they already have.
One example mentioned in The Psychology of Money talks about one of the most successful investors of his time, whose wealth was above the 100 Million Dollar mark, risking everything, including his freedom, to be within the billionaires’ circle.
The first and second chapters of The Psychology of Money ask us not to judge others or ourselves. I am going to apply this here as well. How the opportunity was presented, what was going on in his mind at the time, and many other factors are beyond our knowledge.
The example is being presented not for judging the person in the example but as a lesson to us. We don’t know how we will react, and what we will decide if we were presented with that same opportunity. The whole idea of this chapter is to give us examples to learn from, and train our brains, not to get into such situations where we risk what is important for what is not important.
Never Enough
I think the conclusion of this diary entry, is not only understanding what is the definition of greed but also understanding the notion of knowing when enough is enough.
When we say understanding enough we mean understanding when we stop feeling the need for something. Many successful investors continue working even after achieving more than they hoped to achieve. The important thing is to know what are continuing for. Is it for more money, more thrill, or the inability to stand still without doing anything?
Many of the investors interviewed in William Green’s Richer, Wiser, Happier, are well-established successful investors who could be in their eighties and are still working in the field. They are still working not for their need to increase their wealth, but for the love of the industry and what they do. Yes, meanwhile they are increasing their wealth by following the strict rules that they have set for themselves.
Therefore, what I need to understand here is not only knowing when is enough but also what is enough.
The Investor
Sunday 14 May 2023
About The Author
I started to look into individual stocks in January 2022. I created this diary initially for myself to track my investing progress, and second, as a place where I can share my ideas publicly hoping that others will share their ideas and learn from each other, and lastly, as an online business where some links that I share are affiliate links, and if anybody bought anything by clicking those links I will get a commission based on that successful sale, which of course will not affect the price that you are buying the product or service at.
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