How people lose money in the stock market

People talk a lot about how you can make money in the stock market. However, knowing how people lose money in the stock market can be as important to avoid losing your hard-earned money.

So let’s look at some ways you will be guaranteed to lose money.

” Rule 1, don’t lose money. Rule 2, don’t forget rule 1. ” ~ Warren Buffett

1. Trying to become rich quickly

There is no shortcut to becoming rich. Definitely not in the stock market. However, some people still think they can outsmart everyone else. Chances that you will find the next “Amazon” or “Google” before anyone else does is about as likely as winning the jackpot in the casino. If you still believe you should try to get rich quick in the stock market, go to the casino instead, you’ll have much more fun while losing your money.

Take Warren Buffett for example, he is considered one of the best investors of all time. Even he did accumulate 99% of his wealth after his 52nd birthday, even though he already started investing at age 11.

Instead, look for stable companies that have a strong history of stable and growing earnings.

” The stock market is a device for transferring money from the impatient to the patient. ” ~ Warren Buffett

 

2. Trying to time the market

Trying to get out when markets decline and getting in when markets are about to rise is very difficult and has been statistically proven to underperform.

While you might be able to predict some market movements right, consistently timing the market is nearly impossible. The problem with this strategy is that events that tend to move the market in the short term are very unpredictable, as the outbreak of the Coronavirus, for example.

However, this doesn’t mean you don’t have to care about timing at all. It is basic knowledge that there are better buying opportunities during a recession than during all-time highs. You just shouldn’t base your investing strategy on timing the market. Rather try to find undervaluation.

Another downside of timing the market is that you will lose money on taxes and fees because you are buying and selling often.

” Time in the market is more important than timing the market.” ~ Charlie Munger

 

3. Not knowing what you are doing

There are a few ways someone can invest in the stock market. Some people like to spread their portfolio over many businesses, industries, and regions. Others like to pick individual stocks.

For most people diversification is a great way to mitigate risk. The downside, however, is that diversification can not only mitigate risk but can also reduce returns. Therefore some people choose to invest in individual companies. Doing this though does demand a good understanding of the companies you invest in.

Picking individual companies without doing the necessary research will put your portfolio at risk and will increase the chances of you losing money.

If you don’t want to invest your time but still want steady returns, consider passive investing in index funds.

” Risk comes from not knowing what you are doing. ” ~ Warren Buffett

 

4. Buying stocks at any price

Buying stocks should be thought of as buying companies. When you buy a company, you would want to know how much it is worth, so that you would be able to determine a fair price.

So when you are looking to buy a stock, the price of that stock is very important. The price it is selling for will greatly affect the return you can expect. Many people, however, pay whatever the stock is trading for. The only way you can get a high return doing that is by hoping that the next person that comes along, will be willing to pay even more.

Tesla stock is a good example of this phenomenon. It went from approximately 450 dollars a share to 900 dollars a share in only a few weeks! The rise in this price, however, wasn’t backed by anything meaningful. It doesn’t come as a surprise that only a few weeks later the price started to tumble again.

One way value investors try to make money is by determining what a company is worth, and then attempting to buy that company at a price that is way below its intrinsic value. Believing that the rule of “Regression toward the mean” will eventually bring the company to its true value.

” Consciously paying more for a stock than its calculated value – in the hope that it can soon be sold for a still – higher price – should be labelled speculation. ” ~ Warren Buffett

 

5. Listening to bad advice

As an investor, it is good to always base your decisions on your own research. Unless your uncle is Warren Buffett, it might be wise to not buy the companies he suggests without doing your own research first.

It is common for people to love giving advice, whether or not they are in the right position to do so. Before you decide to listen to someone’s advice, it’s a good practice to realize that by listening to their advice you will most likely not get anywhere further than they have come.

You can, of course, listen to advice from respected investors on how to invest. But avoid any advice concerning specific companies to buy.

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Photo by Helloquence on Unsplash

6. Basing judgment on subjective info

When determining whether or not to invest in a certain company, it is important to base your analysis on facts and research.

Don’t suggest that Apple is doing well because many people you know have an iPhone. Instead, look at how the management is doing. Go through the company’s balance sheet, income statement and cash flow statement to determine if the company is in good financial health. Do industry research; what market share does the company you are about to invest in have? ; Is that industry expected to grow?

These are the kind of questions you need to ask and answer before deciding to invest. This might help you in doing that: This is how you get high returns in the stock market

” Without data, you are just another person with an opinion. ” ~ W. Edwards Deming

 

7. Letting emotions influence decisions

Letting your emotions influence your investing behavior is a sure way to lose money. However, remaining calm when seeing your portfolio losing half of its value isn’t easy either.

We humans like to follow the herd. When everyone is running in a certain direction, we turn around and run along with them. When people see a share price going up, they feel like they are missing out on an opportunity. Buying on greed often results in stocks getting seriously overvalued. This is the result of a phenomenon called “FOMO” which means “Fear Of Missing Out”.

Some events trigger fear, like the Coronavirus for example. Events like this tend to make people sell on fear. People sell their stocks quickly to avoid losing more money. This often results in undervalued stocks and a great buying opportunity for investors who base their decisions on facts.

” Widespread fear is your friend as an investor because it serves up bargain purchases. ” ~ Warren Buffett

 

8. Only basing your analysis on numbers

We already said that looking at objective data is important. Nonetheless, basing your analysis solely on numbers like operating margins and other ratio’s can also get you into trouble.

There are other factors to think about as well. One important one that will greatly affect a business is its management.  Research the company’s management. What do they say about the risks involved with the business? What are their plans for the future?

” People calculate too much and think too little. ” ~ Charlie Munger

 

And what do you think? Are there other things that make people lose money in the stock market? Let me know in the comments, we might learn from you as well!

 

 

*DISCLAIMER: The content on this website is made in good faith and I believe it’s accurate. However, the content on this website should be considered informational and not for making financial decisions.

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