I recently finished a book about insider trading in hedge funds and the traders involved. Insider trading is taking non-public information about a publicly traded company and profiting from that information. It is illegal and has put several hedge fund managers and traders in jail.

On the surface, the individuals in this book sound like the typical greedy and corrupt Wall Street professionals we have read about before. However, when I dug deeper into character study, it was more about competitive, smart, motivated individuals who were unable to draw a line in the sand to determine what was right and wrong. The problem was compounded by the emotional desire to ‘win’ by making trades that earned significant sums of money for their firm and for themselves. In short, I believe most of these individuals got caught up emotionally in what was happening around them. Since they did not decide ahead of time where they would stop, they ended up crossing ethical lines.

Although our stakes as individual investors are not as high, we are still susceptible to letting our emotions take over if we have not established boundaries that guide our decision-making. If we have not established a clear line as investors, we will almost certainly make poor investment decisions at some point. Particularly, if we spend time with those who view investing differently than we do.

Unlike the case of hedge fund traders, greed is typically not the primary emotion I see motivating most ordinary investors. It is fear. Fear that we are taking on too much risk, that we will lose our portfolios to the government, or that we will miss out on a certain booming sector. These fears lead us to make decisions that contradict our overall philosophy or perhaps worse an irrational and illogical approach to investing. It won’t land us in jail, but it can easily disrupt our goals and peace of mind.

If you find yourself falling into one of these traps, call us!

What investing traps have you found yourself in and how did you get out?