Why you lose money in the stock market (and how to pick winning stocks)

Have you ever bought a stock that appears to be on an uptrend, then sorrowfully witness it’s price plunging right after? Or have you ever sold a stock only to see it rising to the moon the next month?

 

Here are the 4 main reasons why you always lose money in the stock market, and how you can turn things around by learning how to pick winning stocks from this point on.

 

Hint: it has nothing to do with your luck!

 

You based your stock picks on hearsay

 

Maybe a friend gave you “insider news” that a certain stock will increase dramatically in price the next few days. You have no evidence at all that this will really happen, but you go ahead and buy it because “someone told me to”.

 

Do you see the problem here?

 

For every stock, there is an underlying business behind it. How well a stock performs in the long run ultimately depends on how well the underlying business performs! What you should have done is perform fundamental analysis to assess if this company is a great business in the first place before deciding if it’s worth buying.

 

You buy stocks based on news

 

why you lose money in the stock market zoom example

 

You see that Zoom’s adoption rate has increased so you bet your entire capital on it, but did you know it was extremely overvalued by the time you entered a position?

 

why you lose money in the stock market nike example

 

You read on the news that Nike is closing its stores in March so you panic and sold all your shares, but did it cross your mind that this was all temporary and Nike is still a fundamentally good business?

 

The mainstream news always sensationalises every little event. And news will only report on events that are going to happen. By the time you read that article in the newspaper about so-and-so event happening and so-and-so’s price dropping, it’s already been at least 12 hours and you have missed the boat.

 

And this, my friend, is what’s causing you to lose money in the stock market.

 

Before buying or selling any stock, always do your own research so you know if this company is well-equipped to withstand crises and continue thriving for years to come. In a bit, I’ll share with you my 6 key Financial Data To Picking Winning Stocks. If you use this cheat sheet to analyse Nike, you will know that it has a proven track record of amazing financial performance along with a strong balance sheet capable of withstanding temporary crises And instead of dropping your Nike shares, you would have bought more shares since you can get them at a greater discount!

 

Psst…at the point of this article, Nike is up more than 40% from the lows caused by the market crash!

 

You make irrational decisions based on your emotions

 

As many famous investors like Warren Buffett have always preached, no one can predict the short term price movements of the market and you don’t need to in order to make money from the stock market. As long as you’re investing in fundamentally great businesses at undervalued prices, you know for certain that these stocks will do well in the long term.

 

However, in the short term, price movements are irrational. This is when many retail investors make unwise decisions driven by their emotions of greed and fear, causing them to lose money in the stock market.

 

lose money in the stock market

 

The chart above shows the different scenarios for a retail investor during the 2008 Global Financial Crisis. If you had invested $100,000 in the index at the worst possible time (highest point) before the crisis, you would be down significantly within a year.

 

In scenario 1 (green line), if you had gave in to your emotions of fear then and sold out of panic, you would be left with $55,125 after 10 years. Note that this hasn’t even taken into account your losses from inflation by holding cash the past 10 years.

 

For scenario 2 (dark blue line), if you had got back into the markets once the economy looks to be recovering, you would end up with $155,356 after 10 years. This isn’t too bad.

 

However, if you had just held on to your position like in scenario 3 (light blue line), you would end up with $238,447 after 10 years. The difference is pretty significant. Plus, can you imagine your returns if you had continued adding to undervalued stocks of great businesses throughout this 10 years? It would be far greater than what’s shown in scenario 3.

 

It is easier to make rational decisions when you’ve learnt how to pick winning stocks based on fundamental analysis. You will know that the companies you’ve picked are great businesses, and stop letting your emotions cause you to lose money in the stock market.

 

You look at short-term gains and lose sight of long-term goals

 

Many people call themselves long-term investors but fail to truly understand the power of compounded growth over the long term. Instead, they are quick to exit at the sight of short-term gains.

 

Following up on the earlier example – if you were invested in the index and know that by year 2018 you would end up with $238,447, would you have taken profit in 2013?

 

Similarly, when investing in fundamentally good businesses, we know that it will always go up in the long term. Hence, as long as the fundamentals remain intact and prices remain undervalued, it would be wise to hold on to your positions to let it compound your wealth!

 

Of course, this only applies if you know how to analyse businesses and separate the good one from the bad. This is where the ability to pick winning stocks comes in.

 

On A Last Note 

 

To be consistently profitable, you need a solid strategy that is based on careful analysis. I do this diligently in order to pick winning stocks. When you learn how to do this, you will stop second-guessing your investments and sabotaging your own investing profits with these emotional mistakes.

 

 

June 05, 2020

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