“Why am I always make losses in the stock market?” kcchongnz

I have been in the share market for more than 20 years. Since five years ago, I started reading i3investor and from there read that many people are making a lot of money in the share market. I too hope to make some quick money from the share market. As I am still working, I have no time to learn about proper investing but merely relying on recommendation from my friends, remisiers and colleagues, The Edge Magazine and other investing periodicals and the internet space such as in i3investor. However, I really don’t believe my luck is so bad that each time I bought the recommended share, even from some very successful investors who have made millions, its share price went up a bit, but eventually dropped a lot. I have lost quite a lot of money since I started dabbling in the share market.
I have read many of your articles recently in i3investor, and you seem to be good in your investment. Could you advise me how I, as a full-time employee who have no time to learn about the proper investing, is able to change his luck in the share market and make some decent returns?
Thanks in advance.
John Ng”

Hi John,
I sympathize with your predicament in the stock market. The good news is you are not alone. I have the same bad experience when I was in my first 20 years of speculating (not investing) when I first started work. Been there, done that. I have to say this has changed drastically in the last 20 years, not relying on luck, but some acquired knowledge and experience on the “right path” of investing.
In fact, both of us are not alone too. You may have read many made a lot of money, but there are many more lost a lot of money in the stock market. Statistics and research have shown that 90% of those people who dabble in the stock market under-performed the overall market, so that many of them just got out completely from the stock market, dread and refuse to talk about it anymore.
Let’s see how retail investor speculate (again I don’t use “invest”). This most likely including you.

How do most people invest?
Most individual market players treat buying a stock as bidding for a piece of paper. They have no clue nor do they care about what the company of which the stock they buy is doing. They hope that the piece of paper they buy will go up in price within a day, a week, or a month, so that they could take profit. They hope by doing it repeatedly will make them rich quickly.
These individuals are relying on rumours and stock tips from friends, colleagues, bloggers, remisiers, analysts, and worse still some famous individuals whom they trust. They chase those stocks touted by them which prices have risen sharply to dizzy high from not long ago. Most if not all of them lost their hard-earned money, huge amount of money.
Yes, it is that bad, and you are not alone. So, stop doing the wrong thing over and over again. If you do not learn something about investing following the “right path”, please, my very sincere advice is, get away from the stock market completely, and put your money in the fixed income instruments.
But is it really true that most retail investors lost money in the stock market, or is it just a myth? Why can’t you be an exception? Let’s see what the statistics and research show.

What do the research say about the investing experience of retail investors?
Below shows a chart in JP Morgan’s 1Q 2014 Guide to the markets regarding the 20-year returns of some asset classes.
 Based on their analysis, the average investor had a 2.3% annualized return over the 20 years from 1993 to 2012, way underperformed the broad market return of 8.4% during the same period. To put that into perspective, an investor invested $100,000 in the S&P500 20 years ago would today have a total portfolio value of around $502,000-compared with only $156,000 for the average investor. This return is not even enough to beat inflation of 2.5% during the period. The total money left 20 years latter can’t buy the things one could buy 20 years ago.
Brad M. Barber and Terrance Odean in their paper “The behaviour of individual investors” confirms that collectively individual investors trading on their own under-performed the market. However, this average performance of individual investors masks tremendous variation in performance across individuals. This means those savvy individual investors (those who have the proper approach in investing) would have done much better than the average, and the lower half of individual investors much worse than the average. Many of them lost their savings completely. The underperformance was due to information asymmetry, overconfidence, failure to diversify, easily influenced by rumours, tips, media and internet forums etc., and last but not least, sensation and action seeking, going in, make one of two sens, and out, and in again, but eventually lost a bundle when some of the stocks tanked sharply. They do the same thing over and over again. I am sure you have read about this in i3investor too.
Why do individual investors lose money or perform so poorly?

The odds are against retail investors
Bursa is dominated by 70% of fund managers and institutional investors, local and foreign. The investment bankers and fund managers especially have all the financial, human and computer power and all kind of resources at their disposal. Furthermore, there are syndicate players, insiders, rich investors who can easily manipulate the market at the expense of retail investors. They can move the market where retail investors dwell. Hence if you are a trader and speculator, and most retail investors in Bursa are, the odds are leaning heavily against you in an uneven playing field
If you think charts alone can provide all the information for you to make money, think about it again. Even if a chart can predict human behavior correctly, when there is a “breakout” or going to be one, or something else, who will spot it first? Who have the resources and computer power to do all the charting fast and furious before you see it? Hack, syndicates and insiders can just build the nice charts to deceive you, without blinking their eyes.
This is what John Bogle, the founder and retired CEO of The Vanguard Group said:
In 30 years in this business, I do not know anybody who has done it successfully and consistently, nor anybody who knows anybody who has done it successfully and consistently. Indeed, my impression is that trying to do the market timing is likely, not only not to add value to your investment programme, but to be counterproductive.”
This disadvantage of retail investors is made worse by the cognitive bias of individual investors in human psychology.
Human Psychology
Retail investors are greatly influenced by emotions when making investment decisions. It is part of who they are as human beings. They tend to exhibit herd’s mentality. You buy, I buy. What business does the company do? Are they making money? I don’t know and I don’t care. They chase hot stocks, tips, hypes and fads from interested parties when their prices have gone up sky high. Well it is ok to buy high as there will be others who will buy higher from us; the greater fool theory and the “me too” lemming investing strategy. You make a lot of money, I want to make more, and so many people run, I run too; why? I don’t know and I don’t care; greed and fear.

When a stock is going up, everyone gets excited and start to join in the party, only to experience the power of mean reverting shortly after that. The cognitive bias of loss aversion prevents them from selling when they realize that they are wrong in their judgment, only to sell close to its bottom when they then need money to chase other hot stocks or suddenly remember this strategy of cut-loss thingy. So, the buy high and sell low strategy. This is one of the biggest reasons why so many people lose money when they invest, in spite of the fact that the general trend of the market is up.
Overconfidence of individual investors also explain their relatively high turnover rates causing high transaction costs and poor performance.
Many people treat investing as entertainment, like many people like to gamble. This sensation seeking activities lead to high trading activities in hot stocks, hypes and fads with high volume, going in and out for fun, action chasing and ultimately incurring high transaction costs and leading to huge losses and detrimental to their investments outcome.

What should you do in the stock market?
You can see most retail investors don’t do well speculating in the stock market, forget about relying on luck to get-rich-quick from the stock market. However, if you still want to earn better return from the equity market, here are some choices;
  1. Discard your speculating instinct. Learn, follow and arm yourself with the proper and proven successful approach, the right approach in investing.
  2. Invest passively in unit trusts through investment banks, fund houses, broker-dealer platform, licensed investment advisers etc.
  3. Invest through exchange traded funds
  4. Buy closed-end fund
  5. If you have substantial amount of money and wish to invest in individual stocks, invest through fund managers.
  6. Get some guidance on investing from someone following some proven successful processes and methodologies in investing for long-term.
There are advantages and pitfalls for each of the choices on investing above. We will discuss them in detail in the next article.

I have been providing services for item (1) above; i.e. teaching the proven successful value investing, treating investing in a stock as investing in part of a business. This I can do it from anywhere in the world and you can learn it at any time and at any place convenient to you.
I know you have a career and busy in your work, and you have to focus in your work. Every good employee does. But putting off something so important in your personal life, such as acquiring some good investment knowledge and skills, is not a good excuse. It is a matter of priority. Isn’t your financial wellbeing as important, if not more important?
For those who really have no time to learn about the proper way of investing in (1) above, which does require considerable time and effort, service number (6), i.e. a stock pick service, may suit you well. This of course got to be from someone with a plausible investment process, and established and proven successful records. My provision of this, however, depends on demand.
If you are interested in any of these two services, you may contact me at
Remember there is no free lunch in life, the same for investing.
Happy investing.

KC Chong