Why do Most Investors Lose Money?
Dec 19th, 2007 by Martin Lee
There are many reasons why an investor or a trader can lose money.
One main reason is being too fixated on the price of his stocks.
When Warren Buffett buys shares, he treats it as a purchase of a business (either whole or part of). The market price is simply a quote that he can use to buy up stakes. He can choose to take it or ignore it. If the price is favorable, he makes use of it to his advantage. If the price is not, nothing needs to be done.
In actual fact, a long term investor will always want prices to be low so that he can buy businesses at a cheap price. If I tell you that you can buy 100% of Google for only one million dollars, will you buy it? Of course you will. The irrational market provides the astute investor a chance to buy shares at a discount to their true value.
If you become too obsessed with the market value of your stock-holdings, your emotions might cause you to do the wrong things at the wrong time. Focus on the investing inself, and the profits will take care of themselves.
Do you check on the valuation of your property every day?
The same thing applies for short term traders. Too many traders are fixated with whether their trades are winning or losing. They are quick to take profits for winning trades and fail to cut loss for losing ones. It is human nature.
The aim of trading is to make money over the long run, and not to get a 100% trading accuracy. It is better to have a 50% trading accuracy and make money than to have 90% trading accuracy and lose money.
When you start focusing on the money during trading, your emotions will cause you to make all kinds of silly decisions.
Let me give you an analogy.
When a professional sportsman is playing his game, he focuses entirely on his game. He plays well and gets rewarded well too. If he starts thinking about the prize money during his game, it is almost certain that his game will be negatively effected.
When you trade, focus on your trading and the money will come naturally.
I totally agree with you, because I am also an investor and some time back, I lost a bit of money. The amount was not that much, but it taught me a lesson. Since then I am very careful about investments. Your opinions will help me in my future investments.
You said: “It is better to have a 50% trading accuracy and make money than to have 90% trading accuracy and lose money.”
This is an excellent point. Accuracy is great, but only if you’re profiting at the end of a trade or investment. It is possible to be less accurate and still make a lot of money.
Accuracy is one thing, but in trading it is just as important if not more important to have consistently.