2 big lessons from investing in the stock market
What I have observed from investing, and how to not lose money as most investors have.
Here is my take on investing in the stock market: if you are not here for the long run, you are most likely going to lose. This is because if you are not educated in technical analysis and practicing it, you are simply gambling. Many people are buying and selling stocks based on hype and hearsay, and it had become more prevalent now than ever since the stock market rebounded from the COVID-19 crash.
An investor holds a stock for a long period of time because of the conviction in the business and knowing time averages out the noise of short-term price movements of stocks. An investor chose to be a shareholder of a company because he knows people will be willing to pay a higher price for his share of the company in the future.
With that said, I’ll jump into the 2 big reasons why people lose money in the stock market:
Fear of missing out.
Imagine yourself seeing this stock keeps going up in price in the market. It keeps going up for the last 3 days now and you are thinking: surely it will stay that way for a while more? Feeling confident that it will keep going up, you buy into that stock. You go to sleep, wake up the next day, and you see red on that stock. You panic, understandably, because it was supposed to stay on trend! You waited 3 days to make sure the trend kept going up and yet, it did not.
The lesson here is that no one knows which way the prices of any stock will trend. The market (consisting of traders, which are human beings) is irrational. Everyone wants to buy low and sell high. How are you to know when others are deciding to buy or sell at any moment? This happens all the time in the short term. It is because there will always be people who want to get rich quick on the stock market.
The longer you stay in the market, the minute-to-minute fluctuations in prices will become insignificant. What happens to the changes in prices within 5 minutes will not affect the stock when you have been holding it for 20 years. Stay rational. Why did you buy the stock in the first place? Has anything changed that made you dislike the fundamentals of the stock? Yes, you will be looking at those who are bragging about their wins from their most recent trades in envy. You will be wondering why you were not part of those winners in the short term.
But if you can’t stand the risk of playing with fire, then you made the right choice by staying out of it.
Humans are made to fight or flight.
If you have not heard of the fight or flight response, it is how your body naturally reacts to danger. For example, you see a bear coming towards you, you either fight or run. Adrenaline is what drives this phenomenon: where your heart races, you start sweating and you are ready to get into action. When traders and investors see prices on their stock dropping, it triggers this response. The danger is losing their hard-earned money as the prices start dropping, so they want to run. This makes them sell their position on the stock and get back their money to stop “bleeding”. This is exactly how people lose money. When they sell a stock, you realize the profit or loss compared to the initial price paid for the stock. It is the emotions that led to realizing the loss.
What is the right thing to do? Be rational. Making money in the stock market is simple. As with any trade: buy low and sell higher. But why would hold on to a stock that is losing its value? This is where you come in. Ask yourself, why did you buy the stock in the first place? What made you believe that people will be willing to buy your stock at a higher price, and has that fundamental reason changed? Prices will move up and down all the time because there will always be people who want to earn quick cash. The only remedy to earning money in these situations is being patient, and your own conviction in the stocks you own.
In both cases, I say the same thing: be rational, and remember why you bought into the stock in the first place. What to consider before buying into a stock? There are many tools to learn about a business, and hence what goes into the stock. You need fundamental analysis, where you analyze the fundamentals of the business. It involves knowing the balance sheets, cash flows, the outlook of the sector that the company is in, and more. If you want to make money off stocks without all the mumbo jumbo, then you are probably better off putting money in mutual funds or invest regularly in index funds like VTI.
I believe that money comes whenever you have an interest or are passionate about something. I guess I am fortunate to be boring enough to like researching and analyzing businesses to buy stocks on the market. Let investing be a passive tool to compound your wealth over time instead of chasing the dream of getting rich overnight. In the short term, you are better off working on your passions and monetizing them.