Why people lose money in stock market

People lose money in the stock market for two reason

The reason why people lose money in the stock market is twofold. Either they are unlucky, as the stock market is still a combination of skill and luck, or they do not have a disciplined approach to investing. It is that simple.

You can make all the right decision and still lose money. You can make all the wrong decisions and make money in the stock market or in life. This is the way it is. Life is an interaction between the knowledge and probability. Many people who have made money in the stock market are lucky, not skilled. Skill comes into play when you have a system and perfect it.

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Prevent losses with systematic trading

If you want  decrease your chance or losing money in the long-run, in the stock market, here is the way.  I would recommend researching the best trading systems. Search high and low until you find one or two that is convincing and backed up by real sceintically tested methods, not some cheesy sales pitch. Once you find a sytem, your mission is to build on it. It could be a simple investment approach like buying the S&P 500 index and holding it. With this you will get about 10%, in good times.  This is a trading system.

Compare the simple index model above with the approach most people take, that is buying and selling equities based on hunches or tips or a few hours of research. These people may do well, but it is like the player in Vegas that does well in the short-term. In the long-run the odds are against the investor for earning greater than normal returns.

Your objective in buying and selling equities is to change the stock market financial game from backgammon to chess. That is reduce probability to investment stragegy.

How to earn greater than average returns in the stock market

  • Choose the best trading system – Compare various systematic approaches to investing over the long-term. Find one that achieves a significantly greater return. I like valuengine.com and MSN money top ten picks. These are tested and back tested to give you a better return than most of the high paid wizards of Wall Street with fancy degrees. Why reinvent the wheel?
  • Do live trades or use paper trades to get use to the system – Once you feel comfortable with trading with the system you chose, try to add a little finesse or your own creativity. It could even be with paper trades at first. I once saw on an IQ test a proverb question. ‘If it is not broken do not fix it’. The question was what could happen if you try to fix something that is not broken. My people would say you would take something that is working and break it. I disagree. If you try to fix something that is not broken you could improve it. And on the IQ test that was the correct answer. Therefore, try to build off a tried and tested system to break new ground an improve it.
  • Use your own intelligence to invest creatively – To improve a tested trading system, maybe add leverage or one more layer of technical analysis.  Narrow the universe of stocks to a reasonable level. Then analysis what could improve on this. This is the point where you should trust yourself. That is, once you have a winning team of stocks then you can try to create a new strategies book working with winners.

How losing in the stock market is like having a bad work team

Here is a metaphor I think everyone can relate to. Every manager in business knows, that if they have a winning team of workers under them, almost no matter what they do, it is hard to not reach your target goals. The department is really on autopilot. On the other hand, if you have a team of people who are lazy or do not know what they are doing, no matter what you do, the team does not reach its planned matrices. And so it is with stock market investing, start off with the right team of winning stocks. Base this universe of equites on other people’s work and research. This is not thing more than division of labor. Let the technical people crunch the numbers and you be the high level decision maker.

If people followed these rules I think they would not be asking themselves why I lose money in the stock market. Although I initially said it was luck or not being systematic, in the long-run luck can be controlled with a disciple approach to investing.

3 Replies to “Why people lose money in stock market”

  1. Hi,

    I’m following your blog and it’s so interesting for me. I have been looking at the SP500 chart and lasts weeks, the index has broken up the 12 months MA at the msn.com charts. Does it mean that its the time to buy a index fund on sp?

    What do you think, could I buy now or wait something?

    1. Mark Biernat says:

      I think there is always more risking being out of the market than being in because in a growing economy the market usually goes up. So that is the first thing to consider. As long as stock market money is not your last penny do not be afraid to take some risk as long as you do it wisely.
      Second, yes there is a lot of uncertainly in the markets, like always so no one has the answers, not me or the President. However, if you have a sum of money to invest, one thing you might want to consider is entering the market in systematic allocations, or dollar cost averaging in. It is a conservative way to approach it. That means today you invest 10 or 15 percent of your free capital and do the same next month. After a year you are fully invested. This takes the risk out having a downturn the next day or week.
      Me I tend to be more aggressive but I do not want to advice that here as I have lose money sometimes. I personally would put 1/3 or so in this month, if I was not already fully invested and 1/3 the next.
      Index funds are great. I love them to invest in. You could try to put part of your money in an index and see how it goes. They are diversified and do fairly well in the long-term.
      I do not invest any more in them prefer individual stocks, but if you want to get your feet wet, I really love indexes.
      I can not give direct advice here (that is why I might sound a little wishy washy), all I can state is my opinion about my personal investment strategy.

  2. Jason Channing says:

    TA, goes out the door when institutions buy and sell. Plus news. But yeah day trading isn’t an easy tasks.

    Nasdaqs always bounce. Learn to take losses. Bottom plays could be profitable ones.

    This economy has been random. So goodluck trading.

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