4 years. 111 classes. 3,969 graduates.
Even with a clear, simple to execute investing strategy, some investors are still not able to get results.
More often than not, they are burden by 1 (or more) of the 14 reasons...which eventually causes them to lose money in investing or even give up on investing as a whole.
Each reason constitutes a lesson for struggling retail investors. If you can master these 14 lessons, you will probably experience better results regardless of your investing strategy.
I've grouped the 14 lessons into 3 broad categories as listed in the navigation box.
Let's dive into the lessons immediately:
Warning: Many of these issues may appear obvious, but investors still seem to struggle with them.
We all have our own internal gauge for 'success' in investing. But very often, we fail to calibrate the gauge before we use it.
This means, many of our expectations are flawed.
Do you harbour any of the following inaccurate expectations?
#1 - Believing that accurate forecasting is key to investment returns
We hate uncertainty. The market is uncertain.
To cope with uncertainty, many investors resort to relying on market forecasts by experts.
Forecasters are more than happy to feed this human desire to know the future, and to provide forecasts (with disclaimers). They host numerous outlook seminars throughout the year, many of which are sold out.
Yet based on a study by CXO Advisory, predictions were only accurate 47.4% of the time. The only difference between a fortune teller and a market forecaster is the suit.
You would probably make a better investing decision just by maximising the financial information you have access to.
Monash Pabrai also suggest a much better alternative in his book, The Dhandho Investor,
"Wall Street gets confused between risk and uncertainty sometimes, and you can profit handsomely from the confusion. The Street hates uncertainty, and it demonstrates that hate by collapsing the quoted stock price of the underlying business. Here are a few scenarios that are likely to lead to a depressed stock price:
- High risk, low uncertainty
- High risk, high uncertainty
- Low risk, high uncertainty
- Low risk and low uncertainty: This is loved by Wall Street, and stock prices of these security, is loved by Wall Street, and stock prices of these securities sport some of the highest trading multiples.
Avoid investing in these businesses. Of the three, the only one of interest to us connoisseurs of the fine art of Dhandho is the low-risk, high-uncertainty combination, which gives us our most sought after coin-toss odds.
Heads, I win; tails, I don't lose much!"
In other words, uncertainty is necessary if you want to make good money from investments.
#2 - Expecting market to deliver consistent returns
This is related to #1.
Which would you choose?
- Investment that gives 5% per year, or
- Investment that could give anywhere between -10% to +10% per year
Most investors would go for choice 1. Simply because we love certainty and consistency.
There's a reason why parents advise their kids to get a good job. A job pays you consistently. Comparatively, being an entrepreneur means taking up a lot more risk, with the possibility of having no income or even facing losses.
A psychologist, B.F Skinner has proven that reward systems affect behaviour with his famous Skinner Box. Likewise, our preference for consistency has been reinforced by our society's norms.
the stock market does not offer consistent return every year. You may be rewarded with gains for some years, while having to tide over large losses to your portfolio in other years.
You cannot adopt an employee mindset when you approach the stock market and expect the market to give you a consistent return, just because you are participating in it.
The stock market doesn't work for you nor does it care about your well being. It will only provide rewards when you make the right investing decisions.
You have to deal with the inconsistency if you want investment returns.
The best we can do as investors is to make sure we make the best decisions we can, using what we know and have.
#3 - Holding unrealistic expectation of returns
Newbie investors tend to have an unrealistic expectation of returns. I was young once and I now know how unrealistic I was.
Without much investing experience, a rookie investor might think that 20% per year can be easily achieved in the stock market.
"This is the most dangerous perception because you would go around hunting for high returns. Hence, you are more likely run into scams or take too much leverage and risk to multiply returns. The latter is a lesson that I have learned and paid $100,000 for."
The stock market provides a very humbling experience for investors.
Some investors learn faster than the others and hence their mistakes are less costly. There are also those who never learn and carry their mistakes all the way to their graves.
Overtime, wisdom grows for those who learned and start to know (and accept) the realistic returns from various instruments.
#4 - Not having a replicable investment process
Most investors do not have a proper investment process.
"These investors' portfolios often end up like a dish of rojak"
They tend to seek out rumours, tips and advice from the others without understanding the reasons behind their investments. In the end, they merely follow what others say just because they could trust those people.
These investors' portfolios often end up like a dish of rojak. More often than not, the tips and rumours only suggest what to buy but rarely suggest when to sell.
The investor doesn't know what to do with the investments thereafter, so they revert to the path of no action, and become 'long-term investors'.
The rojak portfolio gets messier overtime with more additions and it is of no surprise that the performance is not ideal.
Comparatively, most profitable investors rely on a replicable investing strategy that allows them to make the best investing decisions to grow their money over time.
Parting with our hard-earned money is difficult. Even if it's for a better future.
Having the right expectations is not enough because having the wrong mindset will lead to detrimental decisions in your investing.
The following lessons highlight the most common mindset issues that harm an investor, are you struggling with any of them?
#5 - Not having conviction in their investment process
Owning an investment process is only the first step. We know because we've seen many lack the conviction to follow their investment process diligently.
This is a common scenario for the seminar junkies. It is easier for them to hop from one investment process to another, rather than to put in the work and actually execute the process.
It is a catch-22 situation - the investor lacks conviction in the process so he does not follow it. Because he doesn't follow it, he doesn't build conviction in the process.
A profitable investment approach takes an iterative process to refine.
Some approaches can meet the investor's objective but may not be suitable for his temperament. Others are easy to execute but may not meet the investor's objectives.
Once the investor has found a fit, he has to test the approach in the real market. All these takes effort, time and money. Something that not many investors are willing to commit to.
Hence, many choose the easy way out; they give up and blindly follow tips and rumours.
#6 - No clue about their true purpose of investing
Mark Douglas wrote a controversial remark in his book, Trading in the Zone;
"Trading is an activity that offers the individual unlimited freedom of creative expression, a freedom of expression that has been denied most of us for most of our lives."
This applies to investors as much as to traders. Investing in the financial markets could be an avenue of escape from the constraints of our daily lives.
There are constraints at work, home and society. Investing could offer the freedom that one craves, akin to gambling. So much so, it becomes an activity that provides relief and joy to some.
Some investors seem to invest for entertainment. If an investor seeks entertainment, then that's all that you are going to get.
For this group of investors, it is obvious that the investment results would not be important if one is to invest for entertainment. Coincidentally, profits do not come with entertainment.
#7 - Not taking responsibilities of their investment results
Some investors crave for validation from others before they decide what to do with their investments.
We have gotten questions like "this stock can buy or not?" and "should I sell this stock?"
No one is responsible for your investment results except yourself.
Struggling investors like to shirk responsibilities by pushing the decision making to someone else.
They think that the fault always lies with the person who recommended the action and they would be quick to blame others except themselves.
No one is responsible for your investment results except yourself. If you act on a piece of advice, you are still responsible for the action as well as the outcome.
#8 - Treating investment as a hobby
Avid investors follow financial news diligently and get updated about all kinds of affairs that may affect the markets.
They read books and make an effort to discuss trade ideas with other like-minded investors. They are the ones who are checking stock prices in the train, in the toilet cubicle and while queuing up for food.
To sum it up, they eat and breathe the markets.
In fact, they are in love with the markets!
And they treated investing like a hobby.
But here's the hard truth ;
"Hobby Costs Money"
Passion is not a pre-requisite to successful investing. In fact, the right investing approach usually feels like work.
For example, hobbyists would not set investment objectives, understand their risk tolerance nor track and benchmark their investment performance.
Serious investors put their investment thesis to the test and measure the performance in the real world. They are aware if they are doing better or worse than the benchmarks they select.
After testing, they then go back to the drawing board and adjust their investment approach if it isn't beating their benchmarks.
Tracking returns is tedious. I spend half a day updating my portfolio returns each month.
Tracking returns can also be painful because you may need to face the amount of losses you have incurred.
An investor who wishes to avoid this pain is unlikely to track returns if intuitively he knows he is losing money.
Are you a hobbyist or a serious investor?
#9 - Fear of loss
Once, a soft spoken, middle-age man sat through my talk on investing in today's market. He patiently listened to all the questions the others had for me after the talk.
And when the crowd had finally dispersed, he told me that he was looking for an investment to park $1M cash, which he got it after selling his property.
He was looking for something that could guarantee 5-6% returns per year and is safe.
He said no one could guarantee him that.
"Even fixed deposits have counter party risks"
He is not the only one who is looking for such an investment. There were many close variations of such comments.
There is a difference between managing risk and fearing risk.
Some investors struggle with the fear of losing their capital, to the point that it prevents them from taking any action. But at the same time, they crave for investment gains.
Some of them end up start trying to twist reality to fit their desires. And this could also cause them to fall for scams.
You cannot have no risk and everything to gain. Even fixed deposits have counter party risks.
No one can make money in every investment he touches. The only guarantee in investing is that some of your investments will definitely lose.
There will be risks, period.
This is the rule of the game and you have to accept if you want to play it.
We'd like to think that we are rational, logical beings.
But time and again, scientific research has proven otherwise. The following issues are related to biases that investors have to fight against in their journey to investing success.
If you are facing any of the following, recognise and over come them;
#10 - Buying only what they want to buy
An acquaintance once shared his investing woe; "no matter what investing methodology I learned and used, there just isn't any stocks to invest in".
That was not possible, so I had him show me one of his investing methodology. After a few clicks on the SGX screener, he had generated a nice list of 13 stocks.
"See! All these stocks cannot invest one!" - he laments...
Many like to think of themselves as 'value investors'.
But if you were to peek into their portfolio, you would realise that they don't invest in undervalued stocks at all.
They only buy what they feel like buying. This is similar to the rojak portfolio, but it comes with a higher level of ego.
Most value stocks have unfamiliar sounding names and unsexy businesses. Very few investors have the guts to buy them, despite having numbers that prove how undervalued they are.
These investors will use excuses like;
- It is value trap
- The business is in the sunset industry
- The management is not good
- The company's profits are too low
- Now is not the right time to buy
For example, most investors find it comfortable to buy M1 than Captii. It is generally more comfortable to buy the former although it is relatively more expensive than the latter.
Both are in the telecommunication industry. M1 has lost 31% while Captii gained 54% in the last five years.
So much for buying stocks you 'think' you know better. There is a price to pay to feel comfortable with familiar stock names - lower returns as compared to truly unfamiliar undervalued stocks.
#11 - Being Precisely Wrong rather than Roughly Correct
Due diligence is necessary before you make an investment. But, 'due diligence' means different things to different people.
We are often impressed by the rigour in a piece of work, especially if its lengthy and deep.
Likewise, we trust a lengthy investment thesis rather than one that is skimpy with its words and calculations.
Dr Wealth's investing philosophy is very wary of relying on assumptions or forecasting in stock valuation.
For example, when using the Discounted Cash Flow method, one has to forecast the future cash flow years in advance and predict the cost of capital of company. We doubt that even the CEO can predict the company's revenue for the following year with a high degree of confidence.
You can do a lot of precise calculations and analysis, but it could be precise in the wrong place. Let's visualise this:
The target board is the area of research you can carry out on a company. The bullseye is what really determines the future performance of this company, or "the truth".
The target board on the left illustrates 'imprecise' research that generally closer to the bullseye. The target board on the right shows very relevant and coherent research, which however is further from the truth.
Relatively, the non-precise research was closer to the truth and hence gets better results.
The key is to focus on "the truth" first before diving deep into research and 'due diligence'.
#12 - Buying only if an investment has gone up
We often hear investors talking about investing in U.S. stocks rather than Singapore stocks in the past few years.
The reason they often give is that the U.S. market has been going up while the Singapore stock market is dead, ranging between 2,700 to 3,300 for the past 5 years. No one can make money from a dead market.
Seeking greater returns from Properties
Most Singaporeans were more interested in the property market in the past few years. We have reached the state where the Government has to implement cooling measures to keep a lid on the prices before it skyrockets further.
Seeking greater returns from Alternative Investments
Recently we hear investors asking about Bitcoin and Ethereum, and they seem interested to buy and hold some. It is of no coincidence that the interest picked up after Bitcoin was reported to have smashed a record high of US$5,000. News headlines such as "If You Bought $5 of Bitcoin 7 Years Ago, You'd Be $4.4 Million Richer", fueled more greed among investors.
Fear of Missing Out
We have learned something about humans - we are only interested to invest when something has gone up in price, we need that 'proof' that it could really made money.
It could be explained with greed or FOMO (Fear of Missing Out). It exists and manifest in every generation regardless of our education levels.
This goes against the "buy low sell high" mantra. Everyone knows the mantra, but most don't practice it because it goes against human nature.
The few who are able to remain sane and resist the temptation to buy high are the ones who make money in the markets.
Unfortunately, this cannot be taught.
#13 - Selling small winners but keeping big losers
You invested in a stock that gained 10% in a week after you have bought it. Jubilant! You sell it.
You had also invested in another stock, it bought a 50% loss. Sad, let's not look at it. You keep it.
Proper portfolio management is to go against what is comfortable.
We tend to sell our winners quickly because we fear that the winnings will disappear eventually. We tend to keep losers and hoping that they will turnaround, and emerge as a 'winner'.
Overtime, it is of no surprise that a typical portfolio ends up as a sea of red. It is filled with numerous paper losses, simply because only the gainers have already been sold!
I had shared the concept of portfolio management with the analogy of a garden previously. In the garden, we see good stocks and gainers as flowers and bad stocks and losers as weeds. A garden would look very ugly if a gardener cuts flowers fast and keep weeds forever.
Proper portfolio management is to go against what is comfortable.
We should be selling bad stocks even though they are losing money, and keeping good ones even though they are making money.
#14- Seeking confirmation for their investment ideas
There's a behavioral bias known as "confirmation bias".
It means that we tend to look for information to confirm our belief, and are constantly blind to evidences that go against our belief.
Many psychological experiments have proved that humans decide first and rationalise later.
For example, we decide to buy an iPhone. We 'research' by reading reviews that support and say good things about iPhone, and ignore the negative points. We feel encouraged by our research and we go ahead and buy the iPhone, feeling satisfied that we know everything we need to know about it.
Similarly, we may have a preference for a company because we buy their products. We extend that preference to the stock and we want to invest in it.
We start to 'research' about this stock and pick up the good points to support our investment decision while conveniently leaving out the bad points which could be more crucial.
To overcome the confirmation bias, philosopher Karl Popper encourages us to consciously look out for dis-confirming evidence.
However, it is a very difficult thing to do.
4 years has passed in a blink of an eye. We don't see it as a 'long' journey, but it has opened our eyes to the 14 key reasons why investors lose money in the stock market.
Each reason constitutes a lesson that helps you to overcome issues that are hindering your investing results. And overcoming them will take you one step closer to consistent profitability in the markets.
You might have noticed that there is a common thread even though we have broken the 14 lessons into 3 categories (Expectation issues, Mindset issues and Biases).
They are all 'internal' issues.
Instead of jumping from one investing strategy to another, you may just experience better returns if you were to master these 14 lessons first.