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 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.
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 scientifically tested methods, not some cheesy sales pitch. Once you find a system, 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 reduces the probability to investment strategy.
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 backtested 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 used 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 equities on other people’s work and research. This is not a thing more than the 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.