Why I lose money in the stock market

How do you feel after you lose money in the stock market? I know exactly how you feel. When I lose my hard-earned investing capital I am pretty depressed. I do not understand it. I do research on a company, everything looks good the value and price ratings are good and the logic of why I am buying the stock makes sense. However, I still lose money. The purpose of this post is to explain why I have lost money in the stock market and what you can learn from my experience and give you three tips to change your luck.

Why I have lost money in the stock market

The stock market is brutal. You can make all the decisions and still have a bad outcome. You can make all the wrong moves and make money. Some people think in the long run all you will only get  8% at the end of your investing life.  That is nothing to get excited about.  I personally have done exceptionally well over the long-term, I have invested for 30 years.  Here are the reasons why in the past I have lost my hard-earned investment capital. Read and learn, please.

  • I have lost money with most of my hunches. I am not a super-naturalist, however, I feel I am intuitive. When I meet my wife I knew she was the one. I often can sense a person’s intentions pretty well even when others do not. I have been pretty lucky with most of my major moves in my life. I think most people have intuition.   However, when they try to invest in equities and try to tap into some of this, they lose money in the stock market. I do not know why, but intuition and hunches do not work with stock trading.  In fact, it almost works the opposite in my experience. It is like putting money on your favorite sports team. You should not do this as there are too much ego and emotion. Maybe it is greed that binds people. But whatever it is do not trade some sixth sense.   Similarly, I recommend you do not play other people’s tips. These things do not work. Hunches, tips, intuition has no place in the stock market. They may work from time to time, but that is just luck.
  • I rely on my own subjective research more than a quantitative method – this is how most people lose in the stock market. My biggest piece of advice is narrow your universe of stock to only the best. Use MSN top ten stock picks or valuengine.com.  Using these professional quantitative services are vastly superior to your subjective research, screen stocks, online ideas or anything less rigorous than quantitative mathematical investing. Do not try to reinvent the wheel. Base your investment decisions on a base of other people’s research. Once you have a small universe of stocks that are likely to be top performers based on years of quantitative methods and testing, then knock yourself out. Dollar-cost average, trade the stocks, buy, sell, leverage, use trading software, research management, use your intuition, go with companies that you like and products you buy. Whatever your personal style of stock trading, use it, but first narrow the universe to the best of the best. Why? When you lose money, you will not be kicking yourself as much. This is because at least you were using good judgment based on quantitative backtesting. Your ego will not be destroyed and your nerves not as jarred with each gyration of the stock price, if you stay within a discrete selection of stocks that have a better probability to perform than others. If you lose money, this is life, but it was not because of some get a rich quick tip or rash more based on intuition. Use respected quantitative research that has been rigorously tested.
  • I have a disciplined strategy for investing and I ignore it. For example, many times the market as a whole is in a downward trend, I have bought.  It is trading below the 12-month moving average and the 12-month moving average trend on the S&P is down and I am buying because I feel the market should reverse. Wrong. If the market is trending down, stay out until there are more positive signals. Take up a hobby like playing chess and have a cream soda, but do not trade if the market is in a strong downward long term trend. An exception to this is when I sometimes I do ignore my buy/sell strategy, for example, when I am not sure that the market has really broken through the 12 months moving average.  Sometimes I wait a few weeks or a month.  The market could go down another 5% but I like to wait and see until the trend is confirmed. So I do use flexibility but do not ignore my rules altogether.

In conclusion, every time I have lost money in the stock market is when I did one or more of the three things above. You do not have to lose money in the stock market or get 8% returns. You can beat the market if you know how to make money in stocks and this starts with the know-how not to lose. If you do not feel that you can avoid the three above mistakes I recommend index investing. Index investing is a way to diversify your investments and not worry about the ups and downs of the market.

Also remember when it’s a bull market everyone is a genius, day trader and market wizard. Even tips from websites like fool.com seem to do well.  When there is a bear market, everyone is losing, except the people who are out until the trend reverses. Do not evaluate your performance as a stock market trader until you have experienced both bull and bear markets.

Please let me know about your personal experiences with losing money in the stock market and what you did to lose and win. I am very curious about other people’s experiences as I am not expert on life. I have only done well because I have come to the conclusion that there is too much information to be processed and I am increasing relying on disciplined investing and mathematical models.

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3 responses to “Why I lose money in the stock market”

  1. Tim

    It is rigged. Miss by a penny and it free falls 35%.
    Nobody can beat this rigged market over time.

    1. Mark Biernat

      It can not be rigged in the long run, as the there are too many people analyzing it. There are contrarians as well fundamentalists, and investors who follow the technical elves. When contrarians take the opposite bet from the crowd in a rigged systems they would win. There is always a way to make money in the stock market. However, I do not think it is a short term game. There is too much randomness in the short term. In the long term the random walk settles into a pattern correlated to the growth of the economy.

    2. Max

      @Tim: It’s not rigged, but at the same time, the very nature of the system means that the majority have to lose money at it for others to gain money. It is a big game of who is luckier and more well researched about their predictions.

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