Monday, May 5, 2014

85% of the Investors Lose Money

Recently, I was browsing the website of an investment related company and come across an article penned by an investment advisor. He is advising investors to be cautious about the recent stock market rally. Another click, another advisor advices the public to be optimistic on the current rally.

The noise are everywhere…

Do you know that 85% of the professionals in the stock market lose their money by the end of the bull bear market cycle? Only 15% are able to get out of it with their heads intact. So, if 85% of professional were losing money in the stock market, how would a beginner or someone with zero knowledge would fare against the masters? The logical answer would be the beginner may lose more money than these 85% losers.

Planet+Orange
http://www.flickr.com/photos/90483352@N00/96795910
Consider an amateur basketball player playing against a professional basketball player. Lebron James or Kobe Bryant are basketball professional players. Anthony Davis is the top amateur basketball player in the USA and he was the number one draft pick in the 2012-2013 season. Now, if Anthony Davis will go up against LeBron James or Kobe Bryant in the NBA, what would be the result? It will be a mismatch and Anthony Davis will be “schooled” by either Lebron or Kobe. Why? LeBron and Kobe have been in the league for at least seven years. They are veterans of professional basketball already. They know the rules very well, they are quite familiar with their opponents, and they know when to attack and when to defend basketball. They know when to give up a foul or a layup and they know what it takes to win a championship. Anthony Davis? Oh he’ll get his due later on but meantime, it will be a Lebron or Kobe show.

Now, imagine an ordinary man or woman plunging in the intricate world of stock market where learned and educated men abound. Surely, he will be gobbled up by these sharks that make their living in the stock market. A professional versus amateur, the result is a mismatch.

If 85% of these professionals lose their money in the stock market, then how come it is still advisable to invest in the stock market?

The Lucky 15% Investors

Most of the 15% investors who earn a profit in the stock market are not active traders. Majority of the 15% smart investors are people who don’t care whether the market is up or down. They rarely buy and sell within a month. They do not care what is the daily price of the stock. What is most important to them is that the company is doing very well, it is an established enterprise, has a real growth, has massive potential to increase in value, and will last in your lifetime. I am not saying that professionals do not make money at all. In fact the 85% investors who lose money consist of every kind of investors. You have the investors who have limited knowledge, investors with good knowledge and investors with extensive knowledge in the stock market. Yes, all kind of investors can be included in the 85% losers and in the same way, all kind of investors can be included in the 15% investors.

One of the strategies of the 15% fortunate investors is buy great companies every month and ignore its daily fluctuations. They research, investigate, and make enquiries about the companies. They are investing time and effort in order to find great companies worth investing. In short, they do peso cost averaging.

I+Am+The+Winner+%3BP
https://www.flickr.com/photos/26614375@N00/381941233?rb=1
Peso cost averaging is buying stocks on a regular schedule whether the price is high or low. Normally, the interval is monthly. For example, you have P5,000 disposable income every month and you decide to invest it in the stock market. Ayala Land is a great company and you think it will grow in the next few years and will last in your lifetime. You bought Ayala Land shares last March whose price is P29/share with your P5,000 and it netted you 172 shares. Then last April, Ayala Land share price is 30/share and you bought the stock with your P5,000 giving you 166 shares. This May, Ayala Land share price is 31/share and your P5,000 gave you 161 shares.