Why Most Investors Lose Money (and How to Not Be One of Them)

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Most investors lose money. And I'm not just talking about retail, "average Joe" investors - people who are sitting at home and buying a few stocks on a mobile app.

No, I'm talking about most investors, period.

Even the Professionals Fail to Beat The Market

Hedge Fund Managers are people who trade and invest money professionally. This is their only job...

...and about 1 in 20 (or 5%) of them actually manage to beat the market. That means 95% of them fail at making a significant return over passive investing (more on that later).

The worst thing you can do is to think that you're somehow an exception and that you'll be able to wing it and make great returns.

The right thing to do, in my opinion, is to get really curious about why so many people lose money in the markets. What makes people fail? If we understand that, we have a better chance of avoiding the same fate.

Put simply, the odds of you losing money in the market are extremely high. But this doesn't mean you can't or shouldn't invest.

3 Reasons Why Most Investors Fail

Let's examine the 3 main factors that make the investing/trading game so tricky.

Reason #1 - The Monkey Brain

When you look at a chart, opportunities for making money jump out at you. Here's an example:

The price keeps going up and down. All you have to do is buy when the price is low and sell when the price is high! If you do that and compound your gains, you can see how you can quickly go from $1,000 to $1MM and beyond, just with a bit of trading!

Unfortunately, hindsight is 20/20. Indeed, it's obvious what you should have done, looking back on a chart like this.

But when it's unfolding in real time, your monkey brain kicks in and leads you to buy when the price is high (FOMO - get in now before this goes to the moon!) and sell when the price is low (panic selling - you've already lost so much, better cut your losses here).

The demonstration in the video shows how trading a market in real time is almost perfectly counter-intuitive.

Reason #2 - Randomness & Irrationality

Now, if trading was perfectly counter-intuitive, we could get around that. It would be hard, but you could try to always counter-trade what your monkey mind suggests.

Unfortunately, there's also a heavy dose of randomness and irrationality in market movements. As the saying goes:

"The market can remain irrational for longer than you can remain solvent."

Even if you have the right thesis and you're making the right moves, the randomness in the market can bleed you dry before you see a profit.

Reason #3 - Fees

Finally, there are fees to consider. Even if you only pay a fraction of a percent on each trade, it adds up! Think about it: a good return is 7-10% per year. 

Even with low fees, it doesn't take much to erase 7-10%.

And this is a big part of the reason why most professional traders don't look so good. It's not that they fail to make any money. They do make money. They just don't make much more than the market on average and they charge fees for their services. After fees are deducted, almost no actively managed fund beats passive investing.

So, let's talk about this "passive investing" thing, shall we?

Time Tested Strategy: "Buy and Hold"

If you look at a broad market index like the S&P500 (stock ticker: SPY), you'll notice something: on a large enough time frame, the price basically just goes up.

Zoom out far enough and look at any index fund. Then look at big companies. Most companies you can think of generally look like this. Prices generally go up.

To be clear: some stocks go down and never come back. Some go to zero.

The companies that come up off the top of your head, are the survivors.

But what these price trends show us is that the economy as a whole has grown for decades. And big, established, good companies have grown for decades as well.

The "buy and hold" approach to investing was popularized by Warren Buffet, one of the most successful investors of our time. His strategy is simple: buy stock in "great companies" and then just forget about them. Don't check the price. Don't try to sell the peaks and buy the dips. Just walk away and check the price again 20 years later.

With this, you're completely circumventing the monkey mind and you're saving out on trading fees too.

A strategy of passive investing - buying established companies and broad index funds and then just keeping them for decades on end - beats almost every professional trader in the world.

And the great thing is: you can easily apply this strategy!

But having said all of that...

Don't be Afraid to Have a Play Anyways

Put $50 in and just give it a go. Buy a stock and sell it. See how you feel as the price goes up and down. There is value in being a participant. Don't be afraid of it. See what happens to your emotions.

Learn and experience that you can do this. Put an amount that you're comfortable losing and can play with. You can do this, it's a simple enough thing to do.

As long as you keep your risk under control, you're good. Become a native of this kind of thing. This is an important step in your development.

Key Takeaways

  • In general, the value of many assets has been going up over long time frames.
  • Companies that are already great tend to increase in value over a long enough period of time.
  • If you invest in multiple great companies, you're likely to make a profit over a long enough period of time, even if some of them go bust.
  • Buying a broad index fund and holding it for a multi-decade period is like betting on the continued advancement of human civilization and the system of capitalism.

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