I once read an interesting observation by a Malaysian investment advisor not so long ago.
I can’t place where I have seen it but the gist of his observation was that a common reason – if not the most common reason – why people lose money in the stock market is because they forget their original objective for playing the market.
They think there is always a short-cut method to beat the market – more so now than ever before – so they go in to make quick and easy money.
But there is no short-cut. The winners are the traders who have done their homework well. They study the companies’ fundamentals and they understand the companies thoroughly. They are well-tuned to the investing world around them and they set themselves targets.
Not everyone is like them. Those who were burned in the past, e.g. when the stock market collapsed in 1998, will likely remember the pain but people who have never experienced them are throwing caution to the wind. They will play on rumours, they will play on the expectation to make quick gains, they will play on greed. They are the speculators. You can also call them losers. Are you one of them?
Investing is also another main activity of the stock market. By investing, I mean investors who “buy and hold” as oppose to trading which means “buy and sell”. Trading, I’ve already explained above.
But somehow, there is also a third category of people that “buy and forget”. They think they are trading but they are the greedy ones. It’s so natural to be greedy but it’s unhealthy to be over-greedy. The overly-greedy are blinded by the greed of anticipating that the price will go up even higher.
And when there is a correction, greedy optimism makes these “traders” forget to sell. Too late! Reluctant to accept the losses, they start holding on to the stock. Suddenly, the “trading stock” becomes a “long-term investment”. The moment they do that, they’ve lost their original objective. Such people will likely incur huge losses later because they failed to cut losses sooner.
So when you want to play the stock market, you must know whether you want to invest or trade. Traders are never greedy. They set targets and will sell their trading stock the moment they sense that the market is going downwards even if it means that they need to incur high losses. Remember, trading means “buy and sell”. Don’t hold on longer than necessary…