Never Lose Money In The Stock Market

Running of the bullsAs a small investor with less than a couple of million dollars in the market, you should not be losing money. There’s no reason for people to lose money yet time and time again, I see exactly that. Investors have every tool to make good investment decisions, but they still buy a stock when it’s high and sell it when it’s low. Why does this happen? How can you make money instead of losing it? I will answer those questions and I’ll tell you why there’s no acceptable excuse to lose money in the stock market.

I’m going to continue referring to the stock market, but the same thing happens in the bond, mutual fund, option or any other securities market.

Why People Lose Money

Laziness

Number one – people don’t care or they’re too lazy to do some quality research. Who doesn’t want to get rich quick? It’s a dream that many people have but few will ever experience. Investors want to buy some inexpensive stock they haven’t done any research on and watch that stock appreciate exponentially. This strategy produces positive results at a slightly better probability than the lottery.

Inexperience

If you’re investment strategy is not working, CHANGE your strategy. It’s unbelievable how often people continue to make the same bad decisions as though they have amnesia. If you purchase a worthless penny stock and lose most, if not all of your principle, DON’T make that same mistake again. When a lab rat gets shocked multiple times for a certain action, the action is changed as the end result forces different behavior.

On the other hand, of you’ve found a strategy that works, stick to it. Don’t let one or two unsuccessful trades cause you to second guess a fundamentally sound method. My trades are successful approximately 78% of the time. Its impossible to win 100% of the time, but the sum of your gains should always be greater than the losses.

Emotions

This is probably the hardest obstacle to overcome.  Do what ever you can to prevent emotions from dictating your decisions. I know this can be difficult and most of you think it’s impossible, but it can be done. To help take the emotion out of trading, set up orders (stop, limit, trailing, etc.) that will automatically buy or sell based on prices you have predetermined. Nothing is harder than selling a stock when you’ve lost money. However, selling it once it crosses below a support point and continues its downward move can prevent you from losing even more money.

To further reduce your emotions, don’t watch your portfolio all day. Set up your bracket/advanced orders to execute automatically and let the system do what is was designed to do.

Why you should never lose money

You can make money when the market is up, down or flat. All of the possible outcomes are covered so you have no excuses.  Claiming that, “the S&P 500 was down 8% last year, so my 4% loss wasn’t too bad”, isn’t sufficient.  If the market is trending downward and none of the signs point to a recovery, you can make money several ways – shorting, inverse exchange traded funds, put options and many more investments products designed to appreciate when the market declines.

Also, when you’re not investing with millions, you can enter and exit a position fairly easily. Your buying and selling pressure will hardly affect the market price of any security. The larger your account, the more difficult diversification becomes. Owning 1000 or even 10000 shares is not nearly as risky or monumental as owning 12% of a publicly traded company.

What do I do

Confidence

Since 2004, I have not had an unprofitable year in the stock market and that includes the crash of 2008.  At times, my gains have been in the single digits, but to counter that, I’ve exceeded 100% multiple times. That kind of success fuels my financial swagger.  I know it may sound ridiculous, but confidence is just as important in investing as it is in any other aspect of life, whether it’s sports, business, relationships…you name it.  I use a lot of data to help me decide when to buy and sell, but I’ve also learned to use my instincts. The more confident you are in your decisions, the more likely you are to be correct.

External Data

Listen to what’s going on around you. Consciously or subconsciously you cannot avoid soaking in external stimuli. The market, in a large part, is dictated by emotions, which are evident everywhere – TV, radio, social media, friends, etc. If you can learn to pick up on consumer sentiment and use this to help predict the direction that economy is heading, you will have a huge advantage.  As people say, the trend is your friend.

Keep It Simple

Finally, stick to a proven strategy and trade a handful of stocks that you’re familiar with. So often, I see people with 40 – 50 positions in their portfolios.  What’s the point?  If you’re that worried about diversification, buy a mutual fund or an ETF.  Entirely too much work goes into the management of a portfolio that size.  I stick to 5 – 10 stocks that I am very familiar with.  I know exactly where the support and resistance points are, when earnings will be announced, what products are in the pipelines and much more pertinent information.

I will save the subject of charts for a future post.  I only use 4 – 5 technicals and three different time periods.  I believe that the technicals I use predict a very clear direction for the time frame I feel comfortable trading in.

Discovering what strategy works takes time and mistakes will be made along the way. There were a few years prior to 2004, in which I ended the year in the red.  However, if you learn from your mistakes and develop your own level of confidence, there is no reason why you cannot make money in the markets every year.

Looking for more on how to get started in the stock market? Check out these great articles

How to Get Started if you Want to Invest in the Stock Market
3 Things Not to Overlook as You Start Investing in the Stock Market
What You Need To Know About Stock Splits And Dividends

Readers: Who has developed a strategy that consistently works well for them? Who continues to feel the pain of the markets’ so called “bad luck”? Have you caught on to any of your bad practices after reading this?

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Comments

  1. I agree and think many investors make too many decisions based on emotion. For example, many will hold on to stocks that have been losers for many years, just b/c they haven’t broken even yet. It is psychological, which makes it hard to admit that a mistake was made. Yet, by sticking to the loser stock, you are in fact holding your portfolio back. Pick a strategy, stick to it, and don’t become emotionally attached. Know when to cut your losses and move on.

    • That’s true – too many people get emotionally attached to their stocks. They’re just investments and should be treated as such. I had an investor request the stock certificate (back when they were still issued) for a local bank that went under. He never sold and lost his entire principle. The certificate was to remind him of his horrible decision never to sell.

  2. Thanks for this article. I am thinking of eventually having a go on the stock market. When I was a student we played a game where we bought and sold shares, based on the real fluctuations, but not with real cash. I turned £5000 into £7,500 in 6 months. If I remember correctly, if I kept that rate up I could have changed that £5000 into a million in 8 years. I should definitely give this a go!

    • That would be a growth rate you could surely be proud of! I love stock simulations because they allow people to trade with the absence of emotion. You can discover how successful you may have been had you not worried about losing a certain amount or locking in gains when you were up.

  3. There are few rules that I use to protect my nest egg, and for last three years, I’ve grown my portfolio with 30+% with those rules.
    1) I always have exit strategy. If I am wrong, I need to get out with a small loss. No emotions or ego creep allowed.
    2) When I make 15-20% in 8-12 weeks, I take profit without thinking.

    • That’s a great return rate. With rules like the ones you follow, you’re putting yourself in a good position to consistently beat the averages. I’m a fan a trailing stop orders myself. They give me the opportunity to realize upside gains while limiting my losses on the downside.

  4. People and those dang emotions those are killer. I would add stop listening to everyone. People one day say someone said do this next day its do something else. I set my floor price that I am willing to go to and sell if it goes below. If I am up 10% and im pulling in some of those profits. If it dips I buy back in. Up 23% for the past 2 years and its not because I have great stocks. With the runs like these lately my son could pick winners. I play the market to not lose and to play with houses money.

    • What is your deciding factor when picking stops? And I’m assuming you just set a Stop Limit on each order allowing you to walk away from it “emotionally”?

  5. Most people lose money because of emotion. I read “Trading for a Living” by Alexander Elder. The first chapter he devotes completely to the mental approach successful traders have to the markets. It is a good blue print on how to be successful.

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