What is greed?

With banker compensation limitations all the rage, I was struck by the ex-post nature of most of the claims. The statement “they got greedy” is as much a moral hindsight explanation as anything else – but is there any actual lesson we can learn from it. Can we diagnose ourselves being “greedy”, and avoid it?

Most investors I’ve spoken with who cite “greed” regret not cashing out of an investment before it declined. The usual situation is that someone saw an investment make a good return, but waited too long to cash out, resulting in a lower return. The desire for a great return caused someone to miss a good return.

So if the definition of “greed” is putting to much value on a marginally better outcome, when the possibility of far less is prevalent, how does that help us?

My problem is figuring out a rule to avoid being greedy, but not to endorse a strategy which results in the disposition effect – when you’ve made a good paper return, that isn’t a reason to sell (just to crystallize the gain).

As always the key is to be future-minded. Both exit strategies formed at the time of purchase areĀ  critical, as are as strategies based on fundamentals. They give you a reason to keep yourself anchored, and sell unless the views which have driven you to buy in the first place change. The only reason to sell is because you think the investment will go down in absolute terms, or you have a better alternative investment. If you think an investment will continue to go up, stay with it.

I will say that concurrent (non-hindsight) assessments of greed is often when someone’s self-interest (bankers) is blatantly harmful to someone else (the economy), but not themselves. I can handle this definition, but it doesn’t really work in personal investing.

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