The Ten Commandments provide guidance for the Faithful. With a little understanding, they can guide investors as well.
The Ten Commandments have been described as “negative morality.” They lay out a series of proscriptions and “Thou Shalt Nots” that keep followers of Jehovah from straying. With investors, negative exhortations and prohibitions are similarly useful. Much of investing is a loser’s game, in which you win by not making mistakes. “Thou Shalt Nots” keep us from making simple, unforced errors that cause many investment losses.
The second commandment to the Children of Israel was “No idols”: don’t make any visual depictions of God. The idea was that since God was the author of creation, God could not be represented by creation. For investors, it’s not pictures that are the problem, but distraction—distraction by market noise, distraction by scary news stories, distraction by our own restless minds. The second commandment is a reminder that the goal of investing isn’t simply financial gain; the goal is satisfying financial needs.
Here’s the difference. If you’re just pursuing investment gains, you’ll tend to get swept up in the latest investment fad—oil companies in the ‘70s; Japanese companies in the ‘80s; biotech and internet companies in the ‘90s, and so on. These fads almost always lead to overpricing. Then the investment can’t keep up with the implicit promises embedded in the investment price, and investors lose.
But investors focused on financial needs build diversified portfolios that provide the combination of cashflow and capital growth sufficient to meet those needs. They won’t be tied up in illiquid speculations when then need money in a few months–so they don’t need to sell and create permanent losses at just the wrong time.
“No idols” kept the Israelites minds focused on an ethereal deity. “Financial goals” can help focus the minds of investors as well.
Douglas R. Tengdin, CFA
Chief Investment Officer
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