"Greed is a bottomless pit which exhausts the person in an endless effort to satisfy the need without ever reaching satisfaction." ― Erich Fromm, Escape from Freedom
Stock investing, with its promise of wealth and prosperity, often draws individuals into the realm of financial markets. It is seen as a tax-free lucrative source of income – a path to great wealth. However, beneath the surface of potential profits lies a powerful force that can lead investors astray: greed. Greed is a reality. It's manifestation in stock investing has consequences but there are some potential remedies.
The Temptation of Greed
Greed, an insatiable desire for more, can manifest itself in various ways within the stock market. Investors may be enticed by the allure of quick riches, leading them to pursue high-risk, speculative ventures without due diligence. They may succumb to the fear of missing out (FOMO), impulsively buying into trending stocks without considering fundamentals or valuation metrics. Moreover, the pursuit of ever-higher returns can drive investors to engage in unethical or illegal practices, such as insider trading or market manipulation.
FOMO is fear laced with greed. Although fear and greed are the two primary emotions fuelling the stock market, it is sometimes difficult to determine whether we are being motivated by fear or by greed. An investor who has determined his exit price realises his stock has achieved the exit price. But there is always a potential that prices may move higher. The investor decides to 'wait and see' when logically, and rationally, he should sell since his target price has been reached. So, is it the Fear (Of Missing Out) or sheer greed that is motivating the investor to 'wait and see'. The elements of fear and greed often form a complicated nebulous amalgam of sorts to shape (or rather, befuddle) the investor's rationality and logic.
In economics, we learn about diminishing marginal utility. Diminishing marginal utility refers to the phenomenon that each additional unit of gain leads to an ever-smaller increase in subjective value. For example, three slices of a pizza are better than two slices, but the tenth slice does not add much to the experience beyond the ninth (and could even make it worse – a tummy upset accompanied by discomforting bloating, perhaps). There is no diminishing marginal utility with greed. It is a malignant creature that fuels itself to unquenchable lust.
Consequences of Greed
The consequences of greed in stock investing can be dire, both for individual investors and the market as a whole. On a personal level, greed can lead to financial ruin, as investors expose themselves to excessive risk in pursuit of unattainable gains. The emotional toll of greed-induced losses can be significant, eroding confidence and leading to irrational decision-making.
At a systemic level, unchecked greed can destabilize financial markets, contributing to bubbles, crashes, and systemic risks. The speculative frenzy driven by greed can inflate asset prices beyond their intrinsic value, creating unsustainable market conditions. When the bubble inevitably bursts, the fallout can be catastrophic, with widespread wealth destruction, economic downturns, and regulatory crackdowns.
Greed drives overvaluation – be it at a stock level, sector level or market level. Greed has been politely cloaked and phrased as "irrational exuberance" by the then-Federal Reserve Board chairman, Alan Greenspan, in a speech given at the American Enterprise Institute during the dot-com bubble of the 1990s. The phrase has been interpreted as a warning that a stock market might be overvalued.
Despite the veneers that we place on ourselves and our behaviour, there is a need to expose our true patina. Greed lurks often disguised as something noble or something irrationally justified – if you tell a lie often enough, you may very well end up convincing yourself and believing it or at the very least, give it a sheen of righteousness.
Remedies for Greed
Mitigating the impact of greed in stock investing requires a multifaceted approach that addresses both individual behaviour and systemic issues. Education plays a crucial role, empowering investors with the knowledge and tools to make informed decisions and resist the temptations of greed. Financial literacy programs, investment seminars, and regulatory initiatives can help raise awareness about the risks of greed and promote responsible investing practices.
Institutional safeguards are also essential for curbing the excesses of greed in financial markets. Robust regulatory frameworks, stringent enforcement mechanisms, and transparency measures can help deter unethical behaviour and maintain market integrity. Furthermore, promoting a culture of long-term value creation over short-term speculation can incentivize investors to prioritize sustainable growth over quick profits.
Greed, with its seductive allure, poses a formidable challenge to investors navigating the complexities of the stock market. Its consequences, from individual financial ruin to systemic instability, underscore the importance of addressing this pervasive issue. By fostering a culture of responsible investing, grounded in education, ethics, and long-term vision, we can mitigate the impact of greed and build a more resilient and equitable financial system for the future.
*The writer is a former chief executive officer of Minority Shareholders Watch Group and has over two decades of experience in the Malaysian capital market.