Playing the Stock market: What Every Retail Investor Should Know
The purpose of this article is to address the recurring phenomenon of retail investors losing money in the financial markets and to provide a roadmap for realistic and profitable investing for non-professional investors.
The points below are meant for non-leveraged retail investors and not for institutional and leveraged speculators. Although the general philosophy in investing is applicable to all classes of players, the strategies and methods will differ for different players. The pointers below of course are not comprehensive but are to the best of my knowledge as a market practitioner.Before we begin, let us consider: Why do retail investors lose money?
The reasons normally fall into one or a combination of the following:
1. Investors buy shares at relatively high prices and sell them at lower prices.2. Active trading results in high commissions, where costs become a big factor.3. Investors hold shares bought at high prices during euphoric, bull period with big unrealized losses and take small profits from other shares purchased.4. Investors buy ''in-fashion funds'' promoted by financial institutions during a particular time window. This is despite the good past performance of the funds.
Underlying factors that cause the above-mentioned tendencies:
1. Not knowing who you are in relation to the marketplace2. Not knowing what the marketplace is about3. Not understanding the basic human weaknesses of greed, fear, impatience, pride and laziness4. Listening to the counsel of those who do not have the skill-sets to help you make money.5. Not applying common sense but being confused by endless emphasis on unprofitable semantics of what are blue chips and what are not, what is investing and what is speculating, what is safe and what is not making skills will be covering the rich and powerful.
Rule 1: Know who you are in relation to the marketplace Successful investing starts with knowing your limitations and strengths.
The limitations which affect most retail investors are:
Time: the limited time available to track and learn the markets without affecting other responsibilities adversely
Resources: the limited financial resources that most can hardly afford to lose without jeopardizing the fulfillment of family responsibilities
Knowledge: the little knowledge and ignorance of the intricacies of products and the dynamics of the markets
Cost: the highest per unit cost of transaction among all players
The strengths of retail investors are:
Investing is not your job, therefore you are under no compulsion to trade you can afford to waitYou need not be leveragedYour trades will not affect market prices; therefore there is no slippage in execution
Honesty is required to arrive at this understanding and to come to accept your strengths and weaknesses. The key is to focus on minimizing the adverse effects of your limitations and exploiting your strengths to your advantage.
Devising an investment strategy along this line is essential. A good fisherman must first know that he is a fisherman; his job is to catch fish and not be the fish.
The retail investor cannot be a successful ''Goldman Sachs'' and apply the methods of an institutional player. You should concentrate on being ''that profitable retail investor''. With this clear self-identity you can then cut out 95% of investment literature which though at times sounds logical, realistically is not applicable to your situation. This will thus eliminate confusion and result in clear thinking and improve your ability to focus on learning what matters. The learning costs involved in perfecting the art of investing, within the science of probability can then be kept to a minimal.
Rule 2: Know what the marketplace is about
The marketplace should be seen as mass human forces of buying and selling that result in various prices over a period of time on a continuous basis. At a certain point in time buying forces will dominate, while at other times selling forces will be dominant. The market trades on float and not on a total basis.
This fundamental understanding is needed to comprehend the underlying psychological behavior of extreme movements that frequently occur in markets over time. A hard look at financial markets should make one come to the conclusion that "markets are the biggest re-distribution of wealth mechanism invented by the capitalists."
This realization should lead to two conclusions and raise the antennae of care and caution. One, that participation in markets necessarily means that if I dont make money, I will be losing my money to someone else. And two, if I want to win then I have to learn to apply an appropriate strategy that incorporates the right philosophy, principles and methods that suit my situation, from people who have done it successfully and consistently before as retail investors.
Rule 3: Identify the basic human weaknesses
How do human weaknesses empty your pockets? If one initially makes money, greed usually makes him gradually increase his positions until his biggest holdings are always at, or near, the top of the market in the intermediate or long term. When the correction or crash comes, due to heavy exposure, there is a necessity to cut positions at dramatically low prices resulting in big losses.
Fear makes one miss investing in the market when shares are at bargain basement levels. Fear always is the major hindrance to exploiting good opportunities.
Impatience leads one to invest when good opportunities have not arrived, thus committing resources in a unproductive manner and finding oneself in a ''no bullet'' situation when the opportunities finally come.
Pride makes one hold to unprofitable beliefs, prejudices and behavior, cutting a person off from learning and adjusting to truth and realities. Pride is so expensive that no one can afford it.
Laziness makes one stick to shortcuts in life, but the truth is that there are none. One always reaps what one sow If one applies sound investing philosophy, principles and methods appropriate to ones station, he has to reap profits. There is no other way. But if one sows wrong counsel and applies unsound philosophy, principles and methods, one must surely reap the pain of an empty pocket in due time.
Identification of all these common and normal human weaknesses and their adverse effects on the pocket is essential if one aims to be a consistently profitable retail investor. One needs to prepare oneself psychologically to overcome these human weaknesses when markets move to a certain situation that puts one to the test. And in order to come out on top, there is a need to ''dehumanize yourself'' and institute a certain systematic methodology, through the basic of ''knowing yourself and knowing the marketplace.'' This is the basic principle of successful engagement.
Rule 4: Garbage in, garbage out: Know the quality of your counsel
Too often investors concentrate on their desire to get rich without paying detailed attention to the process and to working on the process that is suitable to him. The truth is that if you get the process right and work on it, the desired results will be the natural consequence, in due time. Therefore the quality of your counsel to help you to arrive at the process is important.
However, one of the most common mistakes among retail investors is to rely on their brokers to help them make money. But really, if they can help you make money they would most likely not be your brokers. A broker ''brokes''. It is unrealistic and not reasonable to expect your well-intentioned brokers to have the skills to help you make money. They are there to help you execute your trades. The few exceptional brokers with some moneymaking skills will be covering the rich and powerful.
Retail investors also rely too heavily on tips. But can a good insider tip get to a small retail investor and be of relevance? This is almost impossible. Even assuming that the tip is reliable, by the time it reaches the ''small potatoes'', in all likelihood the big "sharks" would already be waiting to take profit on this new batch of buyers.
The underlying reason for the existence of ''rumours and tips'' in the marketplace is mainly because a player or group of players has an inherent position in the market and want to influence prices in order for them to profit from the impact of this news. This is a silly and ultimately painful way for retail investors to engage in the market.
Retail investors also tend to rely on the publications of reputed, established financial institutions to make investing decisions. However, there is no positive correlation between the profitability and reputation of a financial institution and the relevance of its research in helping retail investors making money.
And investors rely on the past good performance of a stock fund to invest without examining the following points: Firstly, did the dedicated fund have outstanding results due to the mere fact that that particular sector or country had a huge rally? Secondly, was the past good performance due to the same time window of the bull market phase?
There is a need to seek highly skilled fund managers who consistently outperform the market, and invest in these funds. However, the truth is that in most cases these seasoned veterans have already more than enough money to manage. Retail investors are therefore likely to be left with fund managers from institutions that are still in the ''experimenting process''.
Good fund managers are individuals who are identifiable; they are not institutions. Successful investing is a personalized skill. Most institutions are profitable because they are very good at marketing.
Rule 5: Apply common sense
Between the individual and the market, one is controllable while the other is not. Therefore investors should focus on improving the controllable "self" to en
Playing the Stock market: What Every Retail Investor Should Know
The purpose of this article is to address the recurring phenomenon of retail investors losing money in the financial markets and to provide a roadmap for realistic and profitable investing for non-professional investors.
The points below are meant for non-leveraged retail investors and not for institutional and leveraged speculators. Although the general philosophy in investing is applicable to all classes of players, the strategies and methods will differ for different players. The pointers below of course are not comprehensive but are to the best of my knowledge as a market practitioner.Before we begin, let us consider: Why do retail investors lose money?
The reasons normally fall into one or a combination of the following:
1. Investors buy shares at relatively high prices and sell them at lower prices.2. Active trading results in high commissions, where costs become a big factor.3. Investors hold shares bought at high prices during euphoric, bull period with big unrealized losses and take small profits from other shares purchased.4. Investors buy ''in-fashion funds'' promoted by financial institutions during a particular time window. This is despite the good past performance of the funds.
Underlying factors that cause the above-mentioned tendencies:
1. Not knowing who you are in relation to the marketplace2. Not knowing what the marketplace is about3. Not understanding the basic human weaknesses of greed, fear, impatience, pride and laziness4. Listening to the counsel of those who do not have the skill-sets to help you make money.5. Not applying common sense but being confused by endless emphasis on unprofitable semantics of what are blue chips and what are not, what is investing and what is speculating, what is safe and what is not making skills will be covering the rich and powerful.
Rule 1: Know who you are in relation to the marketplace Successful investing starts with knowing your limitations and strengths.
The limitations which affect most retail investors are:
Time: the limited time available to track and learn the markets without affecting other responsibilities adversely
Resources: the limited financial resources that most can hardly afford to lose without jeopardizing the fulfillment of family responsibilities
Knowledge: the little knowledge and ignorance of the intricacies of products and the dynamics of the markets
Cost: the highest per unit cost of transaction among all players
The strengths of retail investors are:
Investing is not your job, therefore you are under no compulsion to trade you can afford to waitYou need not be leveragedYour trades will not affect market prices; therefore there is no slippage in execution
Honesty is required to arrive at this understanding and to come to accept your strengths and weaknesses. The key is to focus on minimizing the adverse effects of your limitations and exploiting your strengths to your advantage.
Devising an investment strategy along this line is essential. A good fisherman must first know that he is a fisherman; his job is to catch fish and not be the fish.
The retail investor cannot be a successful ''Goldman Sachs'' and apply the methods of an institutional player. You should concentrate on being ''that profitable retail investor''. With this clear self-identity you can then cut out 95% of investment literature which though at times sounds logical, realistically is not applicable to your situation. This will thus eliminate confusion and result in clear thinking and improve your ability to focus on learning what matters. The learning costs involved in perfecting the art of investing, within the science of probability can then be kept to a minimal.
Rule 2: Know what the marketplace is about
The marketplace should be seen as mass human forces of buying and selling that result in various prices over a period of time on a continuous basis. At a certain point in time buying forces will dominate, while at other times selling forces will be dominant. The market trades on float and not on a total basis.
This fundamental understanding is needed to comprehend the underlying psychological behavior of extreme movements that frequently occur in markets over time. A hard look at financial markets should make one come to the conclusion that "markets are the biggest re-distribution of wealth mechanism invented by the capitalists."
This realization should lead to two conclusions and raise the antennae of care and caution. One, that participation in markets necessarily means that if I dont make money, I will be losing my money to someone else. And two, if I want to win then I have to learn to apply an appropriate strategy that incorporates the right philosophy, principles and methods that suit my situation, from people who have done it successfully and consistently before as retail investors.
Rule 3: Identify the basic human weaknesses
How do human weaknesses empty your pockets? If one initially makes money, greed usually makes him gradually increase his positions until his biggest holdings are always at, or near, the top of the market in the intermediate or long term. When the correction or crash comes, due to heavy exposure, there is a necessity to cut positions at dramatically low prices resulting in big losses.
Fear makes one miss investing in the market when shares are at bargain basement levels. Fear always is the major hindrance to exploiting good opportunities.
Impatience leads one to invest when good opportunities have not arrived, thus committing resources in a unproductive manner and finding oneself in a ''no bullet'' situation when the opportunities finally come.
Pride makes one hold to unprofitable beliefs, prejudices and behavior, cutting a person off from learning and adjusting to truth and realities. Pride is so expensive that no one can afford it.
Laziness makes one stick to shortcuts in life, but the truth is that there are none. One always reaps what one sow If one applies sound investing philosophy, principles and methods appropriate to ones station, he has to reap profits. There is no other way. But if one sows wrong counsel and applies unsound philosophy, principles and methods, one must surely reap the pain of an empty pocket in due time.
Identification of all these common and normal human weaknesses and their adverse effects on the pocket is essential if one aims to be a consistently profitable retail investor. One needs to prepare oneself psychologically to overcome these human weaknesses when markets move to a certain situation that puts one to the test. And in order to come out on top, there is a need to ''dehumanize yourself'' and institute a certain systematic methodology, through the basic of ''knowing yourself and knowing the marketplace.'' This is the basic principle of successful engagement.
Rule 4: Garbage in, garbage out: Know the quality of your counsel
Too often investors concentrate on their desire to get rich without paying detailed attention to the process and to working on the process that is suitable to him. The truth is that if you get the process right and work on it, the desired results will be the natural consequence, in due time. Therefore the quality of your counsel to help you to arrive at the process is important.
However, one of the most common mistakes among retail investors is to rely on their brokers to help them make money. But really, if they can help you make money they would most likely not be your brokers. A broker ''brokes''. It is unrealistic and not reasonable to expect your well-intentioned brokers to have the skills to help you make money. They are there to help you execute your trades. The few exceptional brokers with some moneymaking skills will be covering the rich and powerful.
Retail investors also rely too heavily on tips. But can a good insider tip get to a small retail investor and be of relevance? This is almost impossible. Even assuming that the tip is reliable, by the time it reaches the ''small potatoes'', in all likelihood the big "sharks" would already be waiting to take profit on this new batch of buyers.
The underlying reason for the existence of ''rumours and tips'' in the marketplace is mainly because a player or group of players has an inherent position in the market and want to influence prices in order for them to profit from the impact of this news. This is a silly and ultimately painful way for retail investors to engage in the market.
Retail investors also tend to rely on the publications of reputed, established financial institutions to make investing decisions. However, there is no positive correlation between the profitability and reputation of a financial institution and the relevance of its research in helping retail investors making money.
And investors rely on the past good performance of a stock fund to invest without examining the following points: Firstly, did the dedicated fund have outstanding results due to the mere fact that that particular sector or country had a huge rally? Secondly, was the past good performance due to the same time window of the bull market phase?
There is a need to seek highly skilled fund managers who consistently outperform the market, and invest in these funds. However, the truth is that in most cases these seasoned veterans have already more than enough money to manage. Retail investors are therefore likely to be left with fund managers from institutions that are still in the ''experimenting process''.
Good fund managers are individuals who are identifiable; they are not institutions. Successful investing is a personalized skill. Most institutions are profitable because they are very good at marketing.
Rule 5: Apply common sense
Between the individual and the market, one is controllable while the other is not. Therefore investors should focus on improving the controllable "self" to en
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