The investment life expectancy of the average private investor is short. There are even less active private investors buy and selling stocks than Obamacare signups.
I’m not talking about folks that buy funds, bonds and other such instruments. I’m talking about people who actively manage a portfolio of stocks. Before the dotcom crash there was an army of them.
Now it’s a platoon.
Why is that?
Its simple, most people that start investing in stocks lose their shirts. Every time there is a crash another generation of investors gets financially degloved.
So what is going wrong?
The stock market attracts gamblers and because they play hard the market gets a reputation for being high risk. This reputation stocks and encourages the very behaviours that keeps most of the high profile bit of it insanely high risk.
Sensible people keep away.
It’s a vicious circle.
Under the hood of it all are certain behaviours that market participants on the whole cant seem to stay clear of.
Here are five habits of highly ineffective investors.
Short termism.
Frequent traders treat the market like a casino and the market returns the favour by treating the trader like a gambler. Making a percent a day is impossible. If you could do that you could turn a thousand dollar into a billion in less than 5 years. No one ever does.
What kills you are your trading costs. Trading costs are what turns your capital into dust. Trading 50/50 bets isn’t going to turn out well. So why does a private trade have any sort of edge trading against the big boys? As such even if the edge is not negative, those costs slowly grind the short term investor into kibble.
2. Ignore fundamentals.
Reality is like gravity, you can go against it and win but it is always pull you back to the ground. Fundamentals are the bedrock of investing. Many star stocks simply don’t have many, if any and at a casual glance you would think therefore fundamentals like the balance sheet, comparative values to peers and financial history and ratios are not very important. Isn’t the glossy narrative where it is at, isn’t it the sizzle that sells steak?
In the short run the answer is yes, in the long run its all important.
3. Don’t study.
As a number one best-selling investment book author I can assure you Harry Potter sells more books in an instant than the whole of the investment book landscape in a year. It is not a coincidence that 75% of traders are men but only 25% of book readers. Investing and especially trading is a skill game. Reading the news every day is not enough. You would think reading a book a month to becme well versed in your investments wouldn’t be too much to ask, but the sad fact is most traders have the foggiest clue about market theory. That like playing blackjack in Vegas without mastering a basic count.
Think the market is inefficient and non-random.
4. Not diversified
Gamblers ruin is what normally dispatches the hapless trader. They make a series of 50/50 bets, eroding their capital on average by their costs only. This is like running randomly at a cliff edge but starting slightly close to it each time. At some point the trader falls off. Hey will of course blame it on that one bad deal, but in reality their slow, trade by trade approach to the abyss was really the cause, not the final slipping off the apron of the cliff.
5. Confuse owning a stock with having a relationship.
Stocks are for buying cheap and selling not cheap. A share of stock is only a legal document. It grants the holder a slightly tenuous right of ownership over a piece if a company. It is not a lover. It can’t let you down. It doesn’t care about you. A company is not a football team or a horse dashing at the finishing line of the Kentucky derby. It doesn’t make you smart to own it. It doesn’t make you a fool if it loses you money. Investors pay the market for any form of attachment.
The stock market pays you in cash or in kind. If you get paid in kind, through any type of emotional gratification, that will cost you in cash. It makes the 50/50 trader more determined in his dash for the cliff. Talk to a busted investor and it will be the share they loved that broke their heart and their bank.
A loss avoided is the same as a profit earned, which is why it is important to avoid the pitfalls as much as it is to grasp the opportunities. It isn’t actually to difficult to get a great return investing in stocks and running your own portfolio. What does seem hard is to do it with caution but without fear and to invest for a nice profit but without being overcome with greed.
That seems the tricky bit.