October 4, 2007, 7:00 am

8 reasons why you are losing money on the stock market

by: The Financial Blogger    Category: Trading
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Losing money is never fun. There are several patterns that make us losers with our investments. I pointed 8 things that make you lose money on the stock market. There is probably more than that but we all have to start somewhere, don’t we?

stop losing money

#1 You can’t admit it

Most people simply refuse to admit when they commit a mistake. This is why they keep their bad stocks until the end. They know they should not have bought this stock but selling it at a loss would confirm officially that they made a mistake. We rarely find people that are able to sell their bad stock in a heartbeat without looking behind them.

#2 You are greedy and scared

When your stock is going up and up and up, you might think of selling. But are you going to do it? Or are you going to wait for another to gain another five bucks a share? Thinking that you will always make a little bit more might make you lose big time. On the other side, one can sell his stocks after a short gain of 20% in order to cash-in profit right away. If you sell too fast, you might miss a great opportunity. Maybe the stock only starts to rise. The key lies in determining the initial reasons why you made that purchase. Then, you sell only when those conditions are not met anymore.

#3 You simplify everything

The price of gas is climbing; therefore you should buy stocks from Oil Companies. Human beings have this tendency of simplifying things by generalizing from a few observations. The world of finance is becoming so complicated and is evolving continuously. This is the main reason why we are trying to make shortcuts with our brain. Try to establish a more rational evaluation grid than the simple facts that you see.

#4 You are overconfident

If you think that you are the next Warren Buffet, that your 30% average yield over the past 5 years is enough to bring you over the average investor; therefore, you might be a little bit overconfident. I used to be overconfident with stocks myself. But I discovered that it was easy to make high returns for the past five years. The real investors will be able to obtain good results in the next five years. This is where we will separate the adults from the children.

#5 You are buying the flavour of the month

One of the most recent flavours of the month was bank stocks in general. The economy was steadily growing; they were making big bucks out of the subprime market and then boom! The subprime lenders go into a crisis. This is what is happening when you are buying what it is hot at the moment: it rises to a point that it becomes ridiculous. Then, it drops back to what should be its real value. If you were at the end of the increase, you will find the roller-coaster a bit hardcore for your portolio.

#6 You are looking at the past

In finance in general, we have this good old habit to look at what happened in the past. We take the last three or last five years results and we project them in the future. However, this is completely wrong. What tells you that the company will live through the exact same environment for the upcoming years? Nothing. If we take the bank industry for example, chances are that they won’t live another magical period in the near future. The interest rate has gone up, the Canadian dollar is now at par with the US dollar and the economy seems to slow down a bit. The past conditions will not be reproduced during the next years.

#7 You are living in the past

Human beings have also this strange habit to go back in the past and think that they could have predict what would happen to a stock or an industry back then. It is easy to find a rational explanation to what happened when you have all the information and the graphs in front of you. Then, we think we are able to predict the future and replicate past tendencies. In fact, there are a very few of us that can predict the future. Don’t think you can look at graphs and obtain the absolute truth from them. Things are easy to explained, once they happened!

#8 You think you know your company

Your department just cracked their yearly objective, they are hiring and you receive a great bonus. That’s it! You invest your bonus into your employer’s stocks. It doe not mean that if you know what is going on in the inside, that it will actually being reflected in the future price of your company’s stocks (unless it is insider information, which results to be illegal). In fact, financial analysts probably know as much as you and your actual growth was expected and reflected into the shares price. Keep in mind that your department might be rolling; it does not mean that the whole company does.

In the end, if you can avoid these 8 psychological mistakes, you will have made a big step into the investors’ court. Being an investor corresponds to control your mind (and its emotional sparks) on a daily basis. Good luck with your investments!

 

 

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Comments

Good post FB! Where have you been lately? You’re usually very active commenting on other blogs.

I think #5 is probably the most common mistake because a lot of advisors push the flavour of the month and then tell their clients to move money out when its no longer the flavour of the month to the new trend.

Great post. I definitely fell into #8 during the dot-com boom. My justification was that I worked in technology, so I had every right to buy tech stock (whereas everyone else was just being greedy speculators). Turned out I was just a greedy speculator too (who, if I had actually understood the industry I was working in, should have known better).

One of my favorite articles of late is on the Digerati life: Top 10 Wealth Building Ways of Ordinary People

If you look at #3, she says that a stock market trader’s main asset is genius. Of course, I figure that’s totally bogus and I wrote that the main asset was actually discipline. My step-father was a “broker” for 20 years and we talked about every one of these points, multiple times. Here’s how I put it on the Digerati Life:

The secret that most Traders don’t share or that isn’t discussed, is that they’re wrong, a lot. The wealthy traders don’t bat .900, it just looks like they do, b/c they know how to cut their losses. The top traders are batting like .600 it’s just that they ride their victories more than their losses.

When my step-father moved in to manage his own hedge fund (only the second in Manitoba), he spoke of the “batting average” pretty regularly. Part of the reason for starting the fund was that he was sick of trying to explain to his regulars that it was time to sell or time to cash in victories. They would give all of the reasons above for not moving and then they would lose money.

I’ve bookmarked this post for future reference, thanks for the gem :)

by: The Financial Blogger | October 4th, 2007 (6:07 pm)

FT, I’ve been pretty busy this week. Between the MBA projects and my newborn baby, my boss managed to send me on training for 2 days this week. This is why I didn’t have access to my computer as I usually do. I also celebrated too much with some friends yesterday night, I’m kind of dizzy today!

#4 is definitely my biggest flaw! I need to learn to control myself when I’m making big bucks. I guess my poor -5% for this current year will call me down!

TMW, Mr. Cheap, Gates, thx for your good words :-D