I’m not an expert on the markets, nor do I have a PhD or some quantitative research to support my arguments; I’m a FinTech entrepreneur, passionate about helping investors and traders with relevant and personalised financial news for their portfolio for free at CityFALCON. We are also helping people completely new to investing here.
Here are some of my experiences from investing in the stock markets for the last 15 years. There have been some good and bad years, but having learned from my mistakes, I’ve been able to generate a reasonable (meaning much higher than inflation) return on my stock portfolio (touch wood!). So here are the reasons why most people have lost money in the stock markets.
1. Over-exposure and non-diversification
Back in 2006, everyone was super bullish on India, and I had invested a big chunk of my money in mid and small cap companies, i.e. smaller, less-known companies. While the larger companies were ok, there was a huge fall in the stock prices of the smaller companies that I held. In hindsight, I should have diversified my portfolio to include a mix of big and small companies. Another example of this was when most people working for Enron put all of their pension (401K) into the Enron stock.
You must have heard people say – “This is a sure shot”, “The stock WILL double in the next 2 years”. Today you hear these in the property market more than in the stock markets, and which is why I stay away 😉
Investing 101 – Let’s get you started in the stock market.
What most people do not realise is that apart from the performance of the company, there are several other factors that could affect stock prices. Macro factors such as interest rates, government regulations, and even terrorism today affect countries, sectors and companies. If you end up investing significantly in one stock and that company is affected by any of the macro factors, you may suffer. Ideally you should look to create a diversified portfolio of stocks, bonds, etc. depending on your risk-taking ability, time to retirement, etc.
2. Investing based on “tips” without doing enough research
“Hey, I’ve got some spare money in the bank. Where should I invest?”. Sounds familiar? I remember early in my investing days, I used to call up my friends and ask for “tips”. Most of them would also give me an investment thesis which I would take at face value. It all works in the bull run but when the tide turns, it’s very difficult to stay afloat. At times, I wouldn’t even know if my friends would have sold their holdings.
Today I spend hours researching a stock before investing. Because of not having enough tools to conduct my research, I built CityFALCON in 2014. This summer we have also started a series of Value Investing meetups in London where people can share ideas and discuss the investment thesis.
3. Holding onto losses while booking profits too quickly
“Long term investment is short term trade gone bad”. Imagine a situation where markets turn volatile, and you think of reducing your positions. Most likely, you’ll sell the investments that are in profit while hold on to the loss making investments. Does this make any sense?! What you need to think about when deciding what to sell from your portfolio in such a situation is which of the stocks would you rather buy today instead of focusing on the profit and losses from your trades.
Let’s assume you bought or had both Apple and Nokia in your portfolio back in 2007 when Apple announced iPhone. By the end of 2010, Apple was up c. 130% while Nokia was down 70% over the same time period. Temptation would be to book profits in Apple while hope for Nokia to recover. We know how it ended up from there – Apple is up 150% from 2010 and Nokia is down 30%.
4. Trying to catch a falling knife and not buying because a stock is up 10% in a day is how many lost money in the stock markets.
Apple stock had fallen from $700 to $550 (pre-split) in months in 2012, and those being bullish on the stock decided to buy into the weakness. The stock however kept falling to $390. I was averaging my positions and made a lot of money when the stock recovered, but it was quite stressful to see the value falling so quickly. Today I’m more patient and let the markets settle even if it means I’m giving up some of the upside by not “bottom fishing”. Other examples of buying a falling knife include buying into stocks such as Blackberry and Nokia hoping for a rebound.
On the other hand, most people are hesitant to buy stocks just because they have rallied 20%-30% sometimes even in a day. Most of the money that I’ve made in the markets is from buying a stock when there was a fundamental improvement in the investment story even if the stock had already rallied significantly based on the positive story. I did that with Netflix, Tesla, and Glu Mobile when they announced the Kim Kardasian game 🙂
5. Leveraging too much
Before one quarterly results from Apple, I was very bullish on the iPhone sales figures based on my research and bet a big amount of money which I couldn’t afford to lose on the stock. The iPhone figures were even better than what I expected but their guidance came below what the Wall Street expected. The stock tanked 10% and it was painful. Only bet what you can afford to lose in the markets especially on smaller stocks.
One of the best ways to mitigate the high risk that stock market investing brings is to be updated with latest and relevant financial news for your portfolio or watchlist. With this in mind, I launched CityFALCON from my bedroom in 2013, and today, we are a big team with funds raised to further support retail traders and investors. All our products are free for the retail audiences, and we make money from businesses through our API. Let us know what you think about CityFALCON. We are also helping people completely new to investing here.
12/07/2016 at 3:41 pm
Good advice for handling lost profits in the stock market. The way you handle losses says a lot more about you than how you handle your winnings.
30/08/2016 at 5:37 am
I think ” Investing based on tips without doing enough research” is the worst mistake .
08/09/2016 at 6:29 pm
I have invest some lakh of money on sharekhan ,but i have lost that of all ,so if any one help me to lean how to invest on trading it would be very good for mee
30/09/2016 at 12:06 pm
I have earned in stock market and today i lost all because of over-confidence and greediness.If you want to earn in stock market, try to build a strong mindset which should not be volatile like a stock market.
12/10/2016 at 9:58 am
The given explanation about the investment is helpful and its right that doing some silly mistakes traders get losses. By using some techniques we can improve our investment.
14/02/2017 at 8:51 am
The post is quite informative. It is really necessary to keep constant observation on the market to perfectly analyze the market’s situation and avoid the mistakes.
25/10/2016 at 10:07 am
This are the common mistake every trader do, after reading this article it will be easy to avoid these mistakes.
29/12/2016 at 1:10 pm
Hey its quite an intresting blog, 5 tips you describe its an most amazing tips.We should be careful before investing in stock market first we have to do research and take stock tips then invest.
06/05/2017 at 9:26 am
In every field there is risk with out knowing that field people invest beacause of greed to make quick money this is bad.
09/09/2017 at 5:52 pm
Good One. I think a majority of the people fall into the category of following tips.
Rest of them while holding ontu the losses.
24/01/2018 at 3:42 pm
“Long term investment is short term trade gone bad”. Story of my 1 year investment life, so far. Portfolio is at 8% while NIFTY is up 20% over the same period.
Thank you for the article. Keep going.
29/03/2018 at 12:21 pm
Excellent article for the traders who trade in share market.
22/11/2018 at 10:00 am
Thanks for sharing information, really great post.