There’s a gland that must be in the body that doctors have never found. But we know
it is there. We call it the “greed gland.” Wikipedia says a gland is an “organ in an
animal’s body that synthesizes a substance for release such as hormones… often into
the bloodstream or into cavities inside the body or its outer surface.” When we hear that
others are profiting from an investment and getting wealthier and we’ re not, this gland
starts excreting the envy chemical. Envy is an emotion that “ occurs when a person lacks
another’s (perceived) superior quality, achievement or possession and either desires it or
wishes that the other lacked it.”
Greed glands were on fire last week when LinkedIn went public. Maybe this was your
mental ticker tape: “ How could I have gotten in on that action? Why did I miss Linkedin
and now Yandex? When Zynga, Facebook and Foursquare IPO how can I get shares?
How about all those Silicon Valley geeks getting rich again and I’m not! Are new social
networking companies going to become another tech bubble and will I profit from it?
Am I going to just sit on my hands? Maybe I’ ll just buy LinkedIn now at $90. It is a
good company. I use it. It will eventually go higher.”
That’ s the greed gland talking. There’s no doubt that LinkedIn is a fantastic business!
This professional network has over 90 million members will soon have revenues of $400
million and has a model with all of the wonderful characteristics of a web-based business.
But it is likely not worth anywhere near $9 billion today. Fortunes have been lost buying
great businesses at the wrong price. Fortunes have been made buying bad businesses at
great discounts (Warren Buffett called it “cigar-butt” investing).
The greed grand and its secretion of envy will drive you to buy when you feel you are
being left behind. Those who fall prey to it become speculators. It might be wise to clip
the following words and read them when your greed gland starts convulsing:
When you invest or loan your money to companies that operate in our capitalistic system,
you as an owner will be paid. Over the time period that retirement investors care about,
say 20 or so years, that return has been in the 8% – 10% range. Think of capitalism as a
train. If you get on it, your money will grow just because the system demands a return
on invested capital. Over the journey, the train will slow down, backtrack, or speed
up, but it will keep chugging along. Eighteen years ago in 1993 you could have bought
the S& P 500 in a newly minted product called SPY (the first Exchange Traded Fund)
for $33. Today SPY is worth four times that – $132. You’ d have made no decisions,
clipped some dividends and paid minimal taxes without breaking a sweat. No CNBC, no
commentary, little anxiety. Just by owning your small piece of American capitalism.
If you get off the train, you become a speculator, thinking you can get farther than the
rest of us who are on the train. Speculating is thrilling and it cures the temporary itch of
the greed gland. But there are two problems that few overcome. First, you pay taxes on
the gains so your winnings are automatically cut by one third to one half. You have to
run even harder and faster. And second, all speculators make mistakes. Few investors
like to talk about investment mistakes, but everyone makes them. Every seasoned
professional investor knows that avoiding and limiting the inevitable mistake is the single
most important characteristic of investment success.
If you think you have a talent for buying LinkedIn and other IPO shares and sprint ahead
of the train, you may get a town or two ahead this year. But sooner or later, you will
make a mistake. You’ ll buy too high on an oversized bet and feel pain as your losses pile
up. Like all speculators, the train will pass you or run over you at some point in the next
10 or 20 years. Your friends will be having fun on the train and you’ ll be roadkill. So
please, just stay on the train, buy yourself a drink and enjoy the ride.