Does the thought of investing scare you? Are you afraid of losing money in the market?
Well it should. Because the fact is that most people do.
Most of the people who invest in the stock market lose money...
However, what if you can understand the real reason why most people lose money in the market? And with this knowledge, what if you can avoid being the ‘majority’ that loses money in the market?
In this post, I want to share with you 3 reasons why most people lose money in the market and how you can learn to avoid it.
1 – Most people think they can time the market
We’ve all heard the stories from one of our friends or co-workers.
“Hey this friend I know bought the Tesla stock when it was trading for pennies and sold it when it was a million so now he is a gazillionaire!”
“I bought this stock when it was at its lowest and sold it when it hit its peak. I know a bargain when I see one and can’t pass up the opportunity!”
And we can help but think. What a genius! He got in when it was low and sold it when it was high. How did he do it? Can I do that too??
However, stories we don’t hear are the majority of people who’ve done the opposite. Buying a stock when it was soaring high and being devastated when it plummets – selling it at a loss.
The ideal notion that we can consistently buy when it is low and sell when it high sounds quite appealing.
However, the reality is that, timing the market is close to impossible...
The reality is that most people (the herd mentality) buy high and sell low. When the news is filled with doom and gloom people can’t help themselves but sell because they are afraid that what they own is going to fall further.
And when the news is filled with glitz and hope for the future, people buy and artificially drive up the market even more.
Trying to time the market is a hopeless goal. Our human psychology is instinctively wired to follow the herd mentality – if a group of people started running in one direction in histeria, how many of us would have the rational mind to stop and try to think why they are running? We’d run first and ask questions later.
It takes awareness and intentional effort to counter this natural human tendency.
2 – Most people think they can beat the market
Most people can’t pick winning stocks. However, a lot of people think they can.
How many of us have heard these stories:
“Last week when I was at Target I saw a new brand of baby soap that was amazing – it had this crazy scent and glowed in the dark! I knew this product would be a hit – so I went home that night and bought a thousand shares of that company’s stock! And now I am a gazillionaire!”
“I was driving down the street when I saw the latest F-150 from Ford. It looked sick! I knew right away it would sell like crazy. I went home and bought as many shares of Ford as I could and now I’m a gazillionaire!”
And we can’t help ourselves but think – can I do that too? Am I not being active enough in identifying potential winning companies and missing out on becoming a gazillionaire myself???
I want to stop you right here – you can’t pick winning stocks.
And don’t feel bad about yourself because most people can’t. This is the fact.
In fact, in the world there are probably only a handful of individuals that have year after year been able to find winning stocks and beat the market – you’ve probably heard some of these names; Warren Buffet, Peter Lynch. And you know of these names because this skillset is so rare.
I find it fascinating to think that some people truly believe they are just as good or even better than some of these seasoned professionals.
Most people can’t beat the market and neither can you. Focus on following the market with a good index fund like VTSAX and you’ll beat the majority of people out there when it comes to getting a good return for your money. And this is coming from Mr. Warren Buffet himself.
“By periodically investing in an index fund, the know-nothing investors can actually outperform most investment professionals.” – Warren Buffet
3 – Most people think they understand the market
We have friends that are constantly talking about the stock market. They could be actual professionals that work in the finance industry or just individuals that ‘think’ they completely understand the ins and outs of the market.
You sit down for lunch with him and the conversation normally goes like this.
“Hey did you watch CNBC last night? It sounds like Facebook is about to make a big announcement. You know one of my business school buddies’ wife works at Facebook and I overheard her talking about how they are installing new non-flushing toilets at their Melbourne office. They are currently trading at $x per stock. I just bought an option for $0. I’m pretty sure I’ll make a killing.”
“I was reading Wall Street last night and I read how there is a new land agreement being signed between Saudia Arabia and Russia. And given that the wind in Moscow is blowing west by 16 degrees I’m sure the oil stock price will increase by 4.834% next Monday. I’ll make a killing with my latest buy”
If you are insecure about your knowledge of the market, you might be thinking. Wow this guy is so smart. Maybe I can understand the market like him one day and become a gazillionaire!
The sad fact is that most people who think and talk like these don’t completely understand the market or they are focused on the wrong things.
JL Collins uses a fantastic analogy of foam vs. the beer in his book to explain this concept, the Simple Path to Wealth
In his book, he refers to the stock market being made up of two things – the actual beer and the foam.
- The Beer – this is the actual underlying business that the stock represents. The product that this company sells. The people that develop great ideas and bring them to the market.
- The Foam – this is the late night, short-term stock crazed news. The rumors of who the new CEO is going to be. What new products Apple might be launching. This type of news drives the daily and weekly volatility of a stock. It’s interesting, but this isn’t tied to the core fundamental of the business.
If you want to become a real gazillionaire, you must ignore the foam. Networks make money by getting people to watch more of their content. And the way they do this is by talking more and more about the foam; the short-term ups and downs. Who would want to sit glued to their television when the host is talking about the benefits of long-term index investing?
The market isn’t what we see on the news. It’s made up of thousands of businesses that are creating value for its customers that will in the long run drive the market up.
Does the thought of investing still scare you? Well don’t be! By reading this article and understanding why the majority of people actually lose money in the market, you are 90% ahead of most wannabe ‘investors’ out there.
Take action and start investing in low cost index funds, like VTSAX today and see your net worth go up!