Why Do I Always Lose Money in the Stock Market?

 

The common advice from the internet or the authority to the investors is always to ask us to study the fundamentals of the company before we invest. A good fundamental company will be a safer choice for us to invest in. Yes, it is true! At least these companies will have a lesser chance to go default or be delisted. But investors will still lose money in the stock market because of the price fluctuations. 

 

The True Nature of Financial Market

I believe investors know the risk of investing in the stock market. If they are looking for a safe investment, they can just go for FD or bonds. What we want is to profit from the stock market. Investing in a good company is not enough, we need to understand the timing and the financial market pricing mechanism is no longer about the fundamentals of it, it is about the expectation of the big boys, like the big funds. That’s why Warren Buffet is being squeezed out from the top 5 of the Forbes richest ranking in the year 2021. The majority of the Forbes top 10 richest men are mainly tech companies owners. 

 

 

However, some of these tech companies' earnings are not as good as those stocks in the Berkshire Hathaway portfolio. This is because the stock price is not influenced by the business performance but the future expectation. 

 

The above is the law of the financial market universe. Ultimately, the reason why we lose money in investment or trading is our mindset. The mindset of the trader or investor is very important. It distinguishes whether we are gamblers, opportunistic traders or investors. If we want to change our investment performance, we first need to change our mindset. We can ask ourselves the following questions:

 

At some point in your trading life cycle, will you feel greedy and overconfident about your decisions? For example, when you enter a transaction, you think that the price will definitely go up/ down. But when the price goes against you, you will want to enter more to reduce the average cost per share.

 

However, when you increase your positions and notice more losses, you will change your investment objective from short term capital gain opportunist to long-term investments in order to make yourself feel better with the hope that the price will rebound or convince yourself as a dividend investor. (How many years of dividend do you need to collect to cover a 30% to 50% loss in the capital?) 

 

Why do we prefer to average down over cut loss?

This is because we refused to accept our wrong trades, and it is too painful to stop losses. We would rather believe that the transaction will rebound one day, and by extending the holding period, we can place greater hope on this erroneous transaction. While convincing ourselves that the transaction will get better one day, we blindly believe that our decision is correct.

 

The financial market is not a place where we can put ourselves or our ego first (unless you are one of the big boys in the market). The market will prove to us whether we are right or wrong through the price that is against us. When we lose money, it means we made the wrong trade, which is a fact that we cannot reverse. The stock market is a place that will crush us if we are trying to prove ourselves right.

 

Only scholars need to try to prove the right and wrong of their theory. As investors or traders, what we have to do is to profit in the stock market while limiting our losses.

 

On the contrary, we should try to stick to the current position, if the price is not good for us, please stop and cut the loss. Many traders simply increase their positions in a transaction, exposing too much risk, resulting in huge losses.

 

Profitability or probability, which one is more important?

We often encounter this question: What is the probability of your strategy? Is it effective? What is the ROI in one year?

 

Before we answer the above questions, ask yourself the following questions: "Do you invest in the stock market to prove that you are right, or to make a profit?"

 

Most of the answers will be “to make a profit”. 

 

If your intention is to make a profit from the stock market, you shouldn’t ask what your probability is. Probability is for academics, researchers, or scholars to prove their theory or thesis. You are not trying to prove your trades right like how the academics try to prove their theory is right. That’s why there are people in the market that are good at analysing but not good at trading or investment. When 1 of their stocks move higher, which was mentioned before in their blog or post a long long time ago, they start to promote how good their stock picks are, as if the scientist found the footage of a black hole! Because they are happy that they are right!

 

In the stock market, the end result is profit.

 

You can hear people talking about their probability of losing 9 to 1. But their profit per transaction is RM100 (total RM900), and their loss is -RM1000 (maybe they hold some stocks with floating losses.).

 

There is a case study of a higher incidence of cancer in rural areas than in urban areas. People will immediately think that rural areas lack medical support, sanitary conditions are poor, and healthy lifestyles are not maintained. The real fact is that the rural population is lower than that of the city, so it is higher in percentage or probability than the city! This teaches us not to blindly believe in numbers, we should understand the components of calculating these numbers.

 

But to know how good a trader or investor is, we will understand through him/her maintaining the consistency of profitability.

 

You can have a good probability, it doesn't mean you will make a profit. If you have a profit, then your probability is not important.

 

What’s the next thing we should do after changing our mindset?

The next step is to control our emotions and avoid being too greedy or afraid of sudden price fluctuations. Because we are all human beings, it is difficult to control our emotions, but we can manage our emotions by understanding the root causes of these emotional transactions.

 

The reason why investors and traders are easily trapped by high prices or easily dumped by sudden price drops is because they are afraid of losing money and trying to make more money.

 

Greed and fear exist in each of us. We need these two emotions to balance our decision-making. Either of the two extremes is not good, and both extremes will get worse. It's like stretching on both ends of a rubber band (greed on one side and fear on the other). When the rubber band can no longer bear the tension, it will break at some point.

 

 

These are the emotions that many investors face in the market. They want to make money, but they are afraid of losing money. They stretch their emotions excessively and force themselves to make decisions under stressful emotions. Investors did not solve the transaction problem, but avoided the transaction by holding the transaction for a long time and hoping for a future price rebound.

 

Starting from the initial capital allocation, by understanding how much we are willing to lose, the above problems can be minimized. ALWAYS assume that we will lose all or at least 70% of our initial capital. Then ask yourself, are you willing to lose 70% of your initial capital? If not, please reduce the amount of funds until you feel comfortable.

 

This is to reduce the pressure of excessive trading, which is beyond your ability to bear. Most traders and investors are unwilling to reduce their losses because they have never experienced huge losses before. Moreover, they never thought that they would lose so much. We have seen many beginners jump into the stock market with huge amounts of money and start to panic when they lose positions. Because they never anticipated that the loss would exceed their emotional tolerance. The easiest way to overcome this problem is to anticipate the loss first, and then start with the small amount you are willing to lose.

 

Once you have done the above, the next thing is to control your risk exposure by setting the same number of units for each stock. We have done a video about position sizing, you may follow the link below to find out the full version of our risk management to help you in your investment. 

https://youtu.be/ebeovsGZcA0

 

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Malaysia stock market is a unique market, hence it requires a customized trading approach to tackle & swerve. Many existing traders in Malaysia apply a plug-and-play strategy from the overseas stock market, but it is not necessarily the best strategy to trade in KLSE. This is due to the difference in local and overseas stock market regulation and the size of market participants of institutional funds & retail investors.

 

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This blog is for sharing our point of view about the market movement and stocks only. The opinions and information herein are based on available data believed to be reliable and shall not be construed as an offer, invitation or solicitation to buy or sell any securities. Round & Surge and/or its associated persons do not warrant, represent, and/or guarantee the accuracy of any opinions and information herein in any manner whatsoever. No reliance upon any parts thereof by anyone shall give rise to any claim whatsoever against Round & Surge. It is not advice or recommendation to buy or sell any financial instrument. Viewers and readers are responsible for your own trading decision. The author of this blog is not liable for any losses incurred from any investment or trading.