Capital and Capitalist Vices
The Book of Proverbs says that there are six things that the Lord hates, and a seventh He detests: these things have come to be known as the Seven Deadly Sins.
The Seven Deadly Sins are not necessarily the seven worst things one can do. There are, in fact, two classes of sins: venial and mortal. Venial sins can be forgiven, whereas mortal sins are thought to damn one’s soul for eternity. Noticeably absent from the list of Seven Deadlies are sins that correspond to the Ten Commandments, such as theft, murder, adultery, and idolatry. The idea behind the Seven Deadly Sins is that they are the basis for other sins—once these sins enter your heart, you are likely on the path to committing more concrete venial and even mortal sins.
In fact, another name for the Seven “Deadly” Sins is the Seven Capital Vices—with “capital” being derived from the Latin caput, which means “head,” once again referring to these sins as the basis for other sins. These Capital Vices can also be Capitalist Vices if you practice them in an investment sense, and just as breaking the Seven Deadly Sins can set you on a path to eternal damnation, committing Capitalist Vices can set you on the path to financial ruination.
Deadly Sin #1: Pride
First among the things that the Lord hateth is “a proud look.” Pride is the original and most deadliest of the Seven Deadly Sins. But since the Bible was written in Aramaic, then translated into Greek, Latin, and finally English, what we consider “pride” and what the ancient Hebrews meant by the term are considerably different. It is no sin to be reasonably proud of one’s accomplishments. The real sin is probably better characterized as hubris, a Greek word that was the downfall of many mythological heroes.
The sin of pride (or hubris) is defined as the desire to be more important than others, failing to acknowledge the accomplishments of others, and “excessive” love of oneself. The writer Dante, author of Inferno, said sinful pride was “love of self perverted into hatred of one’s neighbor.” So how does this sin manifest itself in terms of investments?
A prideful investor feels the need to be right. He needs to show himself as being smarter than other investors. This can result in him holding on to an investment well past the time he should sell. For instance, a prideful investor may believe that XYZ stock, currently trading at $10 per share, should be worth $15 or more. He buys 5,000 shares, and then when it falls to $9.20, instead of cutting his losses, he “dollar-cost averages” down and buys another 10,000 shares. When the stock falls to $8, and he’s now in the hole $22,000, he refuses to admit his mistake. Instead of selling, he buys another 500 shares, sure that the stock will turn around.
If the prideful investor is lucky, then maybe XYZ finally hits $15 a share—five or ten years later. He realizes a paper profit, on which he pays capital gains tax. But all the while, a huge portion of his cash has been tied up in a single investment, and in the end, a large portion of the “gains” he realizes are inflationary. Thus, if inflation is high enough, the prideful investor ends up paying taxes on what are real (inflation-adjusted) losses. But to him, this doesn’t matter: he was “right” all along. He was “smarter” than his peers. XYZ did go to $15.
Of course, there is no guarantee XYZ ever makes it to $15. In this case, the prideful investor is eventually forced to take much bigger losses than he would have had to absorb had he abandoned his foolish and sinful pride and sold when the stock was at an 8% loss.
Pride is deadly, both in our interpersonal relationships, and in our investment strategies. Instead of focusing on being “right,” investors need to focus on making money. With a proper investment strategy, you can be wrong more often than you’re right and still make money. For instance, a sensible, non-prideful investment strategy may call for you to cap losses on stocks at 8%, no matter what. For gains, you could set an initial price target of 10%, at which point you sell half of your shares and let the remaining half run. With your remaining portion of the stock, set a “rolling” stop-loss equal to the highest closing price it reaches after beating your first target, minus 8%. In this way, you are locking in gains while letting the stock go as high as it can.
Using this strategy, you could be “wrong” 75% of the time and still make money. Prideful investors don’t like this strategy since, to them, being “right” is more important than being rich. This is why pride truly is a deadly investment sin.
Deadly Sin #2: Greed
Wall Street’s Gordon Gecko infamously said “Greed is good,” and just as with “pride,” whether Gecko is right or wrong depends on how we define the word in question.
Libertarians may argue that greed is what motivates individuals to create wealth and that, barring violence, the only way to create wealth is to serve one’s fellow man. They would agree with Gecko, although they’d have to stipulate that while greed is good, only moral (nonviolent, non-coercive) means should be used toward the fulfillment of one’s greed.
It is true that a desire to better one’s own situation is the basis for civilization. Adam Smith said as much in his 1776 work The Wealth of Nations. The Austrian economist Ludwig von Mises broke down all human action to this desire, which could be characterized as “greed.” Socialists and primitivists may still attack this kind of greed, but it is the desire for wealth that has raised the living standards of humanity and allowed billions of people to live better lives than they otherwise would have.
But of course, the word “greed” has a more commonly understood negative connotation. Perhaps this is deeply rooted in Judeo-Christian ethics, or maybe there really is a difference between “good” greed and “bad” greed. The “greed” that the Bible talks about, at least in its incarnation as a Capital Vice, is something that fills one’s heart and encourages him to commit other sins in the name of greed. Some even argue that avarice is a better word for the sin, as it describes behavior inspired by greed, such as disloyalty, betrayal, and bribery.
As it applies to investments, we are obviously talking about this “bad” greed. The good kind of “greed”—that is, the desire to accumulate wealth for oneself and one’s family—is no sin. The problem is when investors become “greedy,” and there’s a very clear difference.
For example, in our discussion of pride (see above), we talked about setting stop-losses and price targets for our stock plays. The greedy investor has no problem sticking to tight stop losses—assuming he isn’t stricken with the disease of sinful pride, too!—but he will have a problem taking half of his position off the table once it reaches its first price target. “Why not let the whole thing ride?” he asks. He might even tell himself that he’ll sell half if it dips below a certain level or once it hits a new high, but each time the stock hits the appropriate threshold, he can’t seem to pull the trigger—he’s holding out for bigger gains.
Another way greed can afflict an investor is in the use of leverage. Not satisfied with reasonable gains, the greedy investor always wants more. He uses margin to buy stocks, or even takes out bank loans. Many investors lost everything by taking second mortgages on their homes during the peak of the housing bubble to buy stocks, or worse yet, to load up on high-leverage options or futures!
The use of leverage is acceptable for some traders, but no matter what your situation is, you can overdo it. They say use of leverage depends on your risk tolerance, but some risks are reckless no matter how high your tolerance. Margin should be used appropriately, high-leverage options and futures should make up only a small portion of your entire investment portfolio, and you should never borrow large amounts of money to buy stocks. Those who fail to follow these simple rules are guilty of the investment sin of greed.
Deadly Sin #3: Gluttony
Throughout most of human history, the vast majority of people died from what are called “diseases of poverty.” Now, we in the Western world are much more likely to die from “diseases of affluence.” Diseases of poverty are brought on, in large part, from a lack of access to adequate food. Diseases of affluence—such as heart disease, diabetes, obesity, and arguably cancer—are brought on from an overabundance of food. In short, we in the West are largely guilty of the sin of gluttony.
In the Christian religion, gluttony was viewed as a sin because the over-consumption of food to the point of waste was seen as taking away from the needy. With the supply of quality, nutritious food being so scarce in Biblical times, this is understandable. Even today, in the Third World, millions of people starve or die from diseases related to poor nutrition. And yet, in the West, the medical establishment has declared gluttony—“overeating”—a disease itself.
How does gluttony relate to investing? Well, just as the food glutton overeats, the investment glutton over-consumes investments. This means he allocates too much of his wealth into stocks, bonds, mutual funds, and other investment vehicles, perhaps even going into debt in the process. This may sound a lot like greed, but whereas big gains are the objective of the greedy investor, simply accumulating investments is the real goal of the greedy one.
Investment gluttony can also mean taking oversized positions in individual investments, or it can mean the opposite: having an overly diverse portfolio with “one of everything,” so that gains made in one investment class are typically canceled out by losses in another. A non-gluttonous investor has a diverse portfolio with reasonable position sizes, without “over-diversifying,” and without overextending himself in the name of having the biggest portfolio.
Finally, a gluttonous investor may not only gorge himself on stocks and other investments, but also on investment literature, programs, and books. The investment glutton spends too much time on investing, at the expense of other aspects of his life. This almost always ends in ruin, as the real objective of investing—to make money in order to live a better life—is lost in the pursuit of investing for investing’s sake. Just as the man who eats not because he’s hungry or even because the food tastes good, but simply for the sake of eating, the investment glutton never realizes the damage he’s doing until it’s too late.
Deadly Sin #4: Sloth
Today, we think of the sin of sloth as referring to laziness, but the original word used for this sin was acedia, which is “the neglect to take care of something one must do.” In an investment sense, this makes sloth very much like the opposite of gluttony: instead of spending too much time following one’s investments, the slothful investor ignores his portfolio at his own peril.
From the beginning of Wall Street through the 1980s, “buy and hold” was considered a virtue. Of course, the people promoting it as a virtue were the big brokerage houses who made money selling stocks and taking management fees. With the advent of the Internet age and the “discount broker,” the emphasis shifted to more frequent trading, with sleeker brokers making their money on commissions every time shares were bought or sold, and thus “buy and hold” has largely been deemphasized—but not entirely. In fact, there are those who think “buy and hold” is the prudent, “conservative” way to invest.
True believers in “buy and hold” say that, over time, the stock market can be expected to produce annual returns of around 10%. You can’t “time the market,” they say; you are better off buying and holding until you’re ready to retire. But there are several problems with this philosophy.
First and foremost, the entire reasoning behind “buy and hold” is that the stock market always produces gains “in the long run.” Well, as John Maynard Keynes said, “in the long run, we’re all dead.” Secondly, the basis for their belief that the stock market will always produce gains is that it always has—but past performance is no guarantee of future results, and these “conservative” investors fail to realize that we are living in a much different world than the one of the 1980s and earlier. And finally, there is the issue of inflation, which has severely cut into the real gains made by stocks over time, and which is almost never calculated into the supposed returns one can expect from “buy and hold” investing.
A more specific way sloth manifests itself in investing is in the retirement account. Millions of employees have 401(k)s that they put money into with every paycheck, and pay no attention to. They may think this is the prudent way to invest, but it is slothful, and actually much riskier than active trading. Yes, a slothful approach to investing can work, but you’re rolling the dice just as much the active day traders you’re trying to differentiate yourself from. And if you’re not even reading your account statements, who knows how much you are losing in management and account fees? Don’t fool yourself: Being a slothful investor is just as bad as being a gluttonous one.
Deadly Sin #5: Wrath
Also known as anger, wrath is the fifth deadly sin. It is characterized by uncontrolled feelings of hostility, hatred, and rage. Eventually, those stricken with wrath turn their anger inward on themselves: wrath is self-destructive, with its ultimate manifestation suicide.
It is often said that investors need to be as emotionally detached from their investments as possible. Falling in love with your investments is the sin of lust, detailed below; while acting rashly or out of anger typifies the sin of wrath. While both can be equally deadly to your portfolio, wrath is the less forgiving of the sins, as lust can be tamed and stopped before it’s too late, while wrathful actions are by their very nature quick and done in the heat of the moment.
The most common example of wrath is selling out of anger. The wrathful investor becomes frustrated, either because his investment isn’t performing as expected, he regrets not taking profits earlier, or perhaps he is angry about another investment he could have gotten in on if his money hadn’t been tied up. Regardless, he acts out of passion, selling with no real deliberation as to where the investment is likely headed from that point forward, nor as to how the sale fits into his overall investment goals. More often than not, this will lead to further regrets, and perhaps additional wrathful actions. In this way, wrath can create a vicious cycle.
Wrath can also result in irrational buying. For instance, you might be upset that you didn’t buy XYZ stock when it was at $10, and then when given the slightest reason to enter the position at a later date, you take it. Unfortunately, the time for entering the stock had long since passed, and if you acted in a cool, calm, and collected manner, you would have realized this and never executed the trade. Entering the position is ultimately self-destructive.
Deadly Sin #6: Lust
There’s a thin line between love and hate, and an even thinner line between wrath and lust. Biblically speaking, lust refers to excessive or inappropriate desires of a sexual nature. In terms of investing, lust takes on a more romantic hue, in which an investor “falls in love” with his investments. Since an investment is not a legitimate object of love, this can be rightly considered “lust.”
It’s important not to anthropomorphize your investments. This is especially easy when it comes to stocks and bonds. For example, you might really like Target. You shop there with your family and you love the ambiance. You love what the company stands for and what it represents. However, you make a grave mistake when you conflate Target the company and Target the stock. Target the company owns and manages stores that you love to shop at, and it may earn your loyalty and even your love. Target the stock, however, is just a piece of paper—it neither wants nor deserves your love. The stock is a vehicle through which you make or lose money, and if you fall in love with it, the latter is much more likely.
Another way to fall in love with an investment is to grow an attachment to the investment itself, as opposed to the company it represents. For instance, maybe you’ve held shares of an obscure REIT for years, and it has been very good to you in terms of both dividends and capital appreciation. You may feel loyalty to the investment, but this loyalty is not warranted. Lust is the flipside of wrath, and whereas wrath encourages you to buy or sell out of anger, lust inspires you to hold out of misplaced allegiance. Your only allegiance in the investment world should be to the bottom line of your account statement.
Deadly Sin #7: Envy
The sin of envy refers to the desire to have that which others rightfully possess. Biblically speaking, desiring equal wealth to Warren Buffett would not be a sin (at least not the sin of envy—it could possibly be considered the sin of greed), but desiring that which actually belongs to Warren Buffett would be. In terms of investments, the sin of envy stems from looking to others for your desired outcomes, which almost inevitably results in trying to achieve their results using the same formula they used. Unfortunately, this is normally doomed to fail.
For instance, a trader may have a neighbor who made a killing in pork belly futures. He may envy his neighbor’s new boat or his fancy clothes. In a Biblical sense, the sin would be desiring the boat and the clothes—essentially stripping them from the neighbor. But in terms of investment sins, the problem arises when the trader tries to copy his neighbor’s formula. Without knowing much about futures trading or pork bellies, he plunges into that world. After all, if his neighbor did it, he thinks he can do it to. But what this trader does not realize is that perhaps his neighbor invested countless hours of research and study into learning futures trading and pork bellies in particular—or, perhaps it was just dumb luck. Either way, the copycat trader in this example stands little chance of repeating his neighbor’s success.
The investment sin of envy leads to copying in the most basic sense. Emulating the strategies of other successful traders is not necessarily envious, but trying to do exactly or almost exactly what they did, for the purpose of repeating their results, is. This sin most often rears its ugly head during speculative bubbles, such as the booms preceding the dot-com and housing busts. We all know people who got into these bubbles near the top because they were envious of their friends and neighbors who’d gotten in earlier. Years later, some of these envious latecomers have seen their fortunes erode, and some have even lost everything. The sin of envy is a wicked one indeed.
The Seven Sins and Gold (and Silver)
To recap, the Seven Deadly Sins of investing aren’t specific things not to do—they are ideas that enter your brain, pervert your thinking, and inspire you to commit unwise acts. These ideas that you must not let into your mind are:
- Pride: Putting the desire to be “right” above the desire to make money.
- Greed: Holding out for bigger gains instead of selling when the time is right.
- Gluttony: Gorging on investments or an investment and thereby having an unbalanced portfolio, and/or an unbalanced life.
- Sloth: Ignoring your portfolio and comforting yourself with the notion that “buy and hold” is a reliable strategy.
- Wrath: Investing emotionally; specifically, being inspired by anger.
- Lust: Anthropomorphizing and “falling in love” with investments.
- Envy: Being focused on other traders’ results and trying to achieve them by copying what they did.
What is the best way to steer clear of these pitfalls? Invest a reasonable portion of your portfolio into gold and silver. Gold and silver are “God’s money” after all, so it only makes sense that they’d be the least sinful of investments.
By buying gold and silver, the desire to “be right” is lessened because you are truly in it for the long haul—and in the long run, you will be right. The sin of pride is thereby mitigated, since you can take comfort in your ultimate success, just as the faithful can take comfort in their ultimate reward in Heaven.
The sin of greed is impossible with long-term investments in gold and silver, since greed afflicts those who hold on too long and miss their chance to cash in on gains. With gold and silver, you can hold for as long as you need to and be confident you are doing the right thing. Gold and silver should be held until they are ultimately spent—most likely in a post-dollar barter economy.
The risk of gluttony is also lessened for the gold and silver investor. Because you’re not always chasing the hottest new thing, you need not spread your investments around too thinly. On the other hand, making sizeable investments in gold and silver is no sin, since historically, they are money. There is much less risk in holding tangible precious metals than in pieces of paper said to represent companies or government debt. And as for spending too much time and energy on your investments, gold and silver do not require much, which also makes the sin of sloth virtually impossible.
Wrath is also unlikely, so long as you allow yourself the serenity that is afforded by knowing the inevitable fate of the dollar. With the dollar crashing, there is tremendous flux in all dollar-denominated assets. Paper claims on wealth, such as stocks and bonds, will all ultimately be radically devalued. But as the dollar goes down and occasionally up, and gold and silver move in the opposite direction, you can take solace in the fact that gold and silver are forever.
It may be somewhat easy to “fall in love” with gold and silver, but one may question whether or not this is even a vice! Regardless, it is virtually impossible to anthropomorphize them, since you don’t shop at gold or drive a car made by silver. In fact, with their commodity status and each ounce being essentially identical to all others, you may learn to love the idea of gold and silver, but not the gold and silver themselves. And the idea of gold and silver is really the idea of financial liberty.
Finally, we return to envy, which is the desire to have what others have by means of doing what they did. By the time the hyperinflationary scenario plays itself out, it will be too late for those envious latecomers who hopped out the tech and housing bubbles near their tops. Instead, those who invest in gold and silver will be the ones they copy, but it will be to little avail.
Gold and silver should not necessarily be the only investments in your portfolio. Indeed, this could be the sin of gluttony on its own, and there are tremendous short-term opportunities in paper investments for those so inclined. Historically, brokers have advised their clients to keep between 5-10% of their holdings in gold as a “hedge against inflation.” Coming out of the last inflationary cycle, this may have been sufficient, but now that we are charging towards the final speculative bubble in fiat currency, it may be wiser to keep all but 5-10% of your holdings in precious metals. This is particularly true because of the fact that paper investments will be extraordinarily volatile in the days ahead, which will make falling prey to the Seven Deadly Sins all the more likely. The best path to absolution is to begin shifting your holdings into “God’s money,” which is gold and silver.