Investing In the Stock Market: Why Most Investors Fail

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Investing In the Stock Market: Why Most Investors Fail

It is a well-known fact that many investors, in fact, most retail investors lose money investing in the stock market. The goal of most stock market investors is to buy low and sell high for a profit, however only a few manage to do so consistently.  Why is it that so many individual investors perform so poorly? There are a few possible reasons for this including: having a get rich quick mentality, failing to set realistic goals, failing to do proper research, trading based on emotions such as fear and greed, panic trading, poor trading strategy, and more.

Trading based on emotions

Many investors lack the emotional self-control necessary for successfully investing in the stock market. Investors lose money when they let their emotions (Fear and Greed) get the best of them and drive their investing decisions. Fear and Greed are the two main emotions that cause investors to make poor hasty decisions and loose money in the markets. When investors see other investors selling off stock, many of them tend to follow the masses, which usually puts further downward pressure on stock prices. This is popularly referred to as the “follow the herd” mentality, where investors follow what other investors are doing instead of doing their own research and analysis and possibly even taking the opportunity to buy at those heavily discounted prices. This is a common mistake made by new traders as they blindly “follow the herd”, and often end up either selling too fast or paying too much, buying into overvalued stocks.

At the other extreme, investors out of the fear of missing out, (FOMO) may end up chasing investment opportunities, further driving up prices and buying into overvalued assets. Emotions cause too many of us to buy high and sell low, however with a more measured, calm and tactical approach we should be able to make better investment decisions.  Investors should avoid making irrational emotional decisions, and instead do their proper research, be patient and exercise good judgment. They must learn how to effectively manage fear and greed and should have the right psychological approach to trading and investing if they want to increase their chances of success.

Having a get rich quick mentality

Many persons lose money in the markets because they make the mistake of viewing stock investing as a get-rich-quick opportunity. They are not interested in investing for the medium or long-term and instead, they chase instant gratification, instant profits, and instant success. Their vision becomes clouded by flashy marketing campaigns, dollar signs, must-buys, stock alerts, false promises, etc., but these investors fail to realize that they are setting themselves up for failure and disappointment if they go into it with these unrealistic expectations. Many investors, as soon as they experience a few loosing trades or stock prices decline, they panic sell and off they go looking for the next lottery or get rich quick stock. Sometimes success in the markets is just a matter of holding out instead of selling, riding out the lows, taking profits in some instances and selling at the right time. In some situations, it’s just a matter of sitting tight and waiting for stock prices to rebound.

Instead of falling for hyped-up investment opportunities or the next lottery penny stock, try to research and invest in stocks that have solid fundamentals, sound management teams, and great growth potential. Take a more methodical long-term investment approach and you will avoid getting lured into irrational stock market investments.

Failing to set reasonable expectations

Before investing in the stock market, investors need to have realistic goals. When you have reasonable realistic expectations, you avoid getting lured into promises of fast money, quick riches or the holy grail stock. With realistic expectations Investors will exercise more patience, they won’t chase the markets, they won’t panic, and they will invest consistently with a goal in mind. They have a plan, are less driven by fear and greed, and are more focussed on long term growth, profitability and stability.

Overconfidence in their ability to time the market

Too many investors are overconfident and swear by their ability to perfectly time the markets, however timing the market to perfection is not as easy as one might think. It’s not recommended that investors spend too much time and effort into trying to time the market, as nobody has the crystal ball to do so consistently. Sometimes, it’s just a matter of luck. In trying to time the market, many investors act impulsively on rumors, instead of facts, and they do not take the time to confirm if what they are hearing is true.

Investors too often and too easily believe the first thing they read or hear, without taking the time to research for themselves.  They blindly follow investment professionals on social media who tout certain stocks as must-buys. They may make a few profitable trades; or get lucky resulting in a false belief that they are now experts at timing the markets, which may not necessarily the case. Timing the market may occasionally work, especially for the short term or for day trading. However, it’s proven that steady long-term compounding gains achieved via stock price appreciation and dividend payments usually outperforms the gains achieved via short term holds or day trading activities.

Failing to do proper research. 

Stock Investors should always do solid research to avoid investing in risky, hyped up investment opportunities. Dive deep into the company fundamentals, the management teams, the growth potential of the companies that you plan to invest in. Research the company products and services and ask yourself:

  • What are the future plans or direction of the company?
  • Are they expanding into new markets?
  • Do they pay dividends or plan to pay dividends in the future?

Don’t rely solely on the media, or on information from financial blogs. Don’t depend on so called financial experts offering you a gateway to rapid financial success via the next goldmine stock. Don’t invest based on conversations you overheard between friends talking about a penny stock they bought because of an upcoming merger, or a ground-breaking product launch. Do your own research. Many new traders and investors are guilty of not conducting adequate research or due diligence, which is a huge mistake.

Not having a trading or investment strategy

Many newbie traders or stock market investors do not have a trading or investment strategy in place and even if they have one, they do not stick to it. Try to choose an investment or trading strategy that suits your personality, objective and risk profile. Most importantly, commit to your plan and be disciplined. Have an idea of the amount of capital you wish to invest in the stock market, the amount of risk and the maximum loss that you are willing to take. Know your entry and exit points. Try to implement a well-defined plan before you make your first trade. You can always adjust as you go along, but don’t start investing in the stock market without a solid plan. Successful Investing takes time, discipline and patience.

How investors can increase their chances of success in the stock market

A lot of Investors and traders sometimes get into their own way derailing their chances of success. When it comes to successfully trading or investing in the stock market, your emotions, or your psychology is extremely important. Treat your trading practice like a real business, not as a hobby. Be patient, stay knowledgeable, set realistic expectations and exercise good judgement. If you are a newbie to investing in stocks, consider paper trading for a few months, until you develop some level of comfort. Create a plan or a trading strategy and stick with it. Stay away from get rich quick opportunities, the next goldmine stock recommendation or promises of superior guaranteed results. If it sounds too good to be true, it probably is. Instead look for opportunities to invest in value companies, profitable companies with excellent growth potential based on your solid research and analysis.

After you have gained some valuable stock trading experience, you can research how you can utilize options trading or options trading strategies to enhance or compliment your stock trading activities.

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