On Suppressing Temptation

 | Jan 09, 2013 | 3:00 PM EST
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Of all temptations known to man, none is stronger -- not even sex -- than the temptation of money. This goes back to the very beginning of humanity, even before the actual development of a monetary system; in fact, a huge percentage of the Biblical verses are devoted to money matters. Of course, it's absolutely fine to be motivated to make money and even harbor some desire to become wealthy. But temptation becomes dangerous when it leads to sloppy behavior -- so, as an investor, I suppress it.

Motivation is what allows me to bet big when the price right, to hold shares for years if the price is still attractive, to buy at $10 and, if the stock drops to $5, to buy even more. Motivation is what also prevents me from chasing a rising stock price out of fear that I will "miss out." Most of all, it's what enables me to think independently, even if that means the consensus is thinking differently from how I am.

Temptation, on the other hand, is fraught with danger. It's what causes many to chase an overvalued stock higher, and it's what causes folks to engage in bottom-fishing for cheap stocks without doing any research. The temptation to make a quick return also prevents many from taking an advantage of obvious opportunities. In short, the temptation to make a lot of money in the stock market often results in the realization of little to no money.

This is what fed Facebook's (FB) initial public offering, and what got everyone begging to buy at $38 – even as those same buyers were the first to exit when shares dropped to $18. Of course, those folks sold these shares to investors like George Soros -- people motivated by their passion to make money.

With all that in mind, I love everything about Amazon's (AMZN) business. I think the corporate culture is fantastic, and the company's singular focus on its customers is right on the mark. I also think Amazon is the online shopping destination of the future. But I avoid the temptation to invest in the business. Sure, Amazon shares may go up another 10% in a few months -- but I'm looking at a business, not a stock. I love Amazon and will continue to buy a lot of stuff from it, but I won't pay $267 for one share that produces per-share free cash flow of $4.

It's also tempting to buy small-cap name like RadioShack (RSH) -- stocks that trade for $2 and have book value of more than $6. But book value is a worthless measure when a company's assets are unable to generate cash flow.

The higher the stock market climbs, the greater the temptation gets for you get in on the action. That's the type of behavior that cost many people tons of money in the dot-com and housing bubbles. It's easy to understand, now, why these are the four most dangerous words one can utter in financial circles: "This time it's different."

The market will never rid itself of tempted players; but you can choose what side you want to be on.

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