What’s the one thing that’s free, found in ready abundance, doesn’t need to be mined or manufactured, and is happily lent and offered?
An opinion.
Opinions are omnipresent for traders. You can check out CNBC and Fox Business. You can read the Investor’s Business Daily or check out the Wall Street Journal.
Then there’s blogs… I write that hypocritically.
Being connected to so much information and opinion is a good thing, right? It’s part of the whole Singularity where everything will be composed of information, right?
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Internet, Investing, Money, Online Investing AI
abundance, CNBC, finance, Investing, Investor's Business Daily, mistakes, Money, opinions, talking heads, traders, trading, Wall Street Journal, wealth
Did you know that Warren Buffett, currently worth $37 billion, lives in the same house he bought 50 years ago for $40,000? Or that Jeff Bezos, also one of the richest men in the world, drives a Honda Accord? Why would someone who can live in any kind of house, and drive any car, be so average? Could successful investing be linked to frugal spending habits?
What is the one habit that can undermine even the most successful investor?
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Investing, Money, Success
financial future, Investing, jeff bezos, mistakes, Money, Success, Warren Buffett
People wonder how trillions of dollars can plummet from the stock market in a few months.
Other people wonder where their life savings vanished to.
How could professional money managers lose money?
I want you to watch this video:
The Triple That Never Was
Here’s Ryan Church, of the Mets, a professional baseball player and by all accounts a great player. He hit a triple. And he missed third base! It cost the Mets the game. (If there are any Mets fans out there, I feel your pain. I’m a Pirates fan.)
Maybe he was so happy to hit the potential game winner that he missed the bag. Maybe he grew fearful that he wouldn’t make it home. Maybe he just had a mental error.
So, how does a professional lose money?
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Accelerating Technology, Automated Trading, Investing, Money, Online Investing AI, Success
baseball, crash, mental errors, mistakes, technology, trading
As people gain investing experience, they will have some wins and some losses. If they are buying stocks, they will have some trades that made money and others that lost money. If they bought real estate, they have some properties that are profitable and problem-free, and others that have little cash flow but provide an endless supply of headaches and problems.
Once people have some wins on their record they tend to do something very strange. Often they choose not to do what has worked for them in the past. Sound crazy? It is. But it is also part of human nature. We tend to get bored easily, and doing the same thing over and over, eating the same food each meal, and cooking the same recipe each day is a great way to become incredibly bored. So, people like to experiment and try new ideas and strategies.
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Business Strategy, Investing, Money, Success
do what works, Investing, mistakes, Money, real estate, stocks, Success
Whenever we start a new project or course of action, it is important that the people who are closest to us understand and accept what we are doing. In fact, it’s best if they are so enthusiastic that they actually help us make the project succeed. This is true for many aspects of life, and it is especially true for investing.
The #1 reason that couples fight and get divorced is because they have major disagreements about money. And, if one spouse buys into an investment and the other spouse feels that it is too risky (which is usually the case), then the whole family is going to have serious problems. If the investment does not work out and the family loses money, the situation could become worse still.
How do we solve this major potential problem, before it occurs?
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Investing, Money, Success
accepting risk, buy-in, children, Investing, mistakes, Money, risk, spouse
If you ask people about improving their financial situation, they usually say something like,
I wish I had a little more money.
Have you ever heard anyone say this? They think their financial goal is “a little more money.” But this is not a goal at all. This is just an impotent wish.
Wishes and hopes and desires are faint yearnings that come and go like a breeze. We feel like we want something, and then we never seem to get it. Goals are made of very special and different stuff. Goals are something that we are certain about. Goals have a specific number that we attach to them. Goals create a concrete crystal clear vision inside our mind. When we have a goal defined with precision, we can think of specific steps that we will take to achieve it.
How does this apply to money?
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Investing, Money, Success
goals, Investing, lawyers, mistakes, Money, retirement, wage slaves
When people start investing, they typically have no idea about what they are doing. Some people lose money at the beginning, and others make money right away. Making money is very encouraging, but it can also be a problem.
New investors typically have no idea how to measure the risk of an investment (see Top Investing Mistake #5). When they make money right from the start, it is easy to conclude that there is no risk. And so they start making large investments that can cause massive losses. They think that they can’t lose, so they start trading their entire account on a single stock or option.
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Investing, Success
beginner, going big, Investing, leverage, mistakes, risk
Some people just love to try things, and don’t need a lot of information before getting started. This can happen to people who just start out investing. They want to see what happens, and like to learn by experience.
There are a few problems with this approach. What can sometimes happen is that people lose so much money so quickly that they decide that “investing is too risky”. They become traumatized from their losses, and never invest again. All investors make money at times and lose money other times. It’s part of the investing game. The challenge is that if people lose a lot of money at the beginning, they might choose to never invest again.
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Investing, Success
books, experience, information, Investing, mistakes, Money, stocks
Many people are absolutely terrified of taking any risks. They stay in a job that they hate, settle for relationships that don’t fulfill them, and take the same route to work each day. It’s easy to become a creature of habit. And it’s very safe.
This kind of thinking does not work when it comes to investing. There is always risk involved in any investment. Even putting money in the bank is risky. The bank can default. They can just steal your money and say that your balance is zero or your account doesn’t exist. And, besides that, there is the reality of inflation. People think money in the bank is risk-free, but I am not sure if that is really true.
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Investing, Money, Success
analysis, fear, information, Investing, mistakes, Money, paralysis, risk
As the financial markets continue to crumble, people are looking for a better way to invest. Buy and hold investors, as well as mutual fund and index fund owners have lost half of their portfolios. After losing that much money, many people are looking for other solutions.
Thanks to the Internet, trading stocks has come to the masses. Many online stock brokerages have grown and flourished, such as E*TRADE and TD Ameritrade. But notice that these companies make money when you buy and sell stock, regardless of whether you win or lose. They’re not called the E*Profit or TD Ameriprofit. If these online brokerages lost as much money as their clients do, they would surely disappear.
Here are the top reasons that new traders lose money in the markets:
- They are Totally Uneducated
Many people think they can just start buying and selling stocks and make money in the process. I know because I was one of them! However, nothing could be further from the truth. Buying and selling stocks is one of the most difficult ways of making money. It requires serious study and learning from successful traders. This learning can take the form of books, CDs, seminars, or even online training.
- They Let Fear Limit Profits
When a novice trader buys a stock and it starts to make money, they will be very happy. Now that their emotions have distorted their judgment, they are completely screwed. As soon as the stock starts to falter, they are faced with the realization that their profit has declined. This will cause an emotional reaction and they will typically quickly sell. They allow fear of reduced profit to limit their upside.
- They Let Greed Consume Them
As soon as a stock start going up, everybody wants to buy. This causes the stock to go up even further. The inexperienced investor sees how far the stock has gone up, and concludes that it will continue to go up. This is exactly what happened during the tech bubble of 2000. Many companies that had zero intrinsic value started going higher and higher. Greed spread throughout the world and people chased the stocks as they soared to new heights. Thousands of new investors (and many experienced ones) thought that they would continue to up. This is how easy it is for greed to cloud our better judgment.
- Their Ego Takes Over
This typically happens when an inexperienced trader starts to lose money on a stock. They say, “Well, it’s only gone down a little bit, but I am sure it will go up.” The stock continues to go down. Now they say, “I’m sure it’s going to come back.” By the time it’s gone down 40% or 50%, they know they’re screwed. Now they lament, “Hopefully it’ll come back!” The root of this behavior pattern is the desire to be right. Even though the market has told them clearly that they were wrong to buy the stock, they insist that they are right, and hold on to a losing position.
- Risk Management and Position Sizing
Most new traders arbitrarily choose position size based on how they feel. If they’re a good mood, they might take a large position. If they’re not feeling confident in the moment, they might take a small position. Sometimes they’re sure about a stock, and they bet their whole account on one trade. These are all great strategies to lose money. Successful traders do not let their mood determine their position size, and have a very specific system they use to determine the number of shares for each trade.
- Not Having Written Trading Rules
Most successful traders keep very clear written rules that determine when they open a position, when they close it, and when they stay on the sidelines. Human beings are dominated by emotions, so it’s nearly impossible to make trading decisions without our feelings getting involved. Regardless of how hard we try, it’s pretty much impossible to make a decision using only cold, hard facts. Written trading rules make it much easier to follow the system without letting emotions get involved.
- Not Having a Specific Goal
As with anything in life, it’s important to know exactly what the outcome of our trading is going to be. Many people say, “I just want more money.” Unfortunately, this does not work well with trading. A specific, measurable financial goal makes it much easier to succeed in the markets. It could be a certain amount of money, or a certain percentage return on the account.
Although this is not a comprehensive list of the mistakes new traders make, I sincerely hope it gives you an idea of some of the common errors. The point of this post is not to discourage people from trading. Trading the markets is a great way to make money, and it does require specific skill learning. Anyone can become a successful trader, if they learn how to do it properly.
Investing, Success
ego, fear, greed, Investing, markets, mistakes, stocks, trading
is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
