Thank you for all your replies. Each of you are lovely, but I dare say some more lovely than others…
The commission, stamp duty, and the spread, are maybe valid reasons for a negative bias, but these alone cannot be held as sole reason why it is people lose money as quickly as they do. In a lot of cases stamp duty and commissions are not even factors.
Quote: “If the market was generally trending up and you were going long then a purely random pick might favour the profitable side. If however you were going short it would favour the loss-making side.”
This trend line theory is flawed. Regardless of the trend on average you should still come out with a neutral bank by randomly picking stocks. For example during a raving bull market if we were to pick 100 stocks at random, and their direction at random, then on average we would be correct 50 times. Out of those 50 times we would on average be correct in hitting the rising trend 25 times, but would also be incorrect 25 times and as such would lose what we had gained resulting overall in neutrality. I agree that the above example isn’t taking into account any run of good or bad luck, but at the end of the day it is still somewhat mystifying why Joe Bloggs with his £10,000 start up fund loses it all within a remarkably short time.
Mystifying it maybe … but here is my view….
I believe the key reason is that people are primed right from the start to lose money owing to psychological reasons. Take a new trader coming to the market for the very first time. Many such traders entering the market will already have – maybe at a sub conscious level - a pre conceived notion of what a traders life entails, and as such they enter the market with their “greed is good” mentality truly believing that high risk and high anxiety are the only things that they must endure in order to become rich.
Let us take the new television adverts by CMC. The adverts show a nervy David hovering over his mouse button as he tries to make a killing on the stock market – it is again this very clichéd view that goes to reinforce the lifestyle of the successful trader – a lifestyle that tells all new traders that high leverage equates to big gains and that anxiety is by product of the business. To many new traders who watch such adverts the stress of it, the late night’s worrying about big investments, does not equate as a negative, but in fact more as a positive - the new trader sees the stressful lifestyle of a successful trader, and becomes excited by it, almost sexually, at the thoughts of a life on the roller coaster.
In addition to the above factors influencing how a new trader should act there are also inbuilt human traits which also prime him to lose – these are the human traits of greed, sloth, and impatience.
Considering that your new trader will have a high dose of all the above it is hardly surprising that when he does start investing he will right from day 1 act like the worst kind of stereotypical Hollywood Wall Street investor. I would not at all be surprised if your new investor’s first purchase isn’t a pair of red braces!
So, brainwashed is your new investor with the thoughts of “this time next year I’ll be a millionaire” that he will kiss goodbye to all reason and logic, and embrace the addictive high risk high leverage flashing light lifestyle of market trading. It is this high risk, high leverage attitude that he mistakenly thinks of as investing that will be his eventual downfall - in fact such investing is more akin to gambling than investing, but he is so brainwashed by the notion that he is an investor not a gambler that his gambling actions go unnoticed. It is only after he has lost a great deal of money will he begin to ask himself this question: I’ve had all the anxiety and sleepless nights but where’s all my money gone?
The leverage factor in my view is one of the worst instruments ever created as leverage only goes to add petrol to the instant wealth fire of thoughts that burn so strongly in the mind of most new traders. A new trader may open a trading account with say £5,000 which in affect gives him the power to buy say £100,000 worth of shares. This fact alone is enough to brainwash the strongest of characters into thinking they’re already in the fast lane let alone the new start up trader.
Taking all the above into account we may now understand more about the psychological state of your average trader when he first enters the market. Let us now see an example of it…
Day 1: your new investor finds himself sat in front of his computer with a brainwashed brain, and the power to buy £100,000 worth of assets at the touch of a button. Immediately, he sees a company’s share price go down and thinking it can’t go down anymore he buys more shares in the company than he really should, and then sits back with little in reserve watching the market see saw in its usual fashion. However, when he sees it sawing against him a sense he has never had before begins to creep into his very soul – anxiety.
He sees £100 gone … then £200, then **** £400 has gone in the blink of an eye! His heart starts pounding, and his imagination begins to work overtime as it tells him that he’s pick a bad ‘un here! Before long a further £1000 has gone, and at this a voice in his head tells him to sell up. He does so … eventually … but not before losing more money … and then he slinks off and eats biscuits for comfort.
Our new investor is now poorer, fatter, and has received a many negative strokes that will in time begin to eat away at his very being. He feels hard done by now, but still the optimist he invests even more money in the hope that he’ll hit on a winner and get his money back. This time he may see himself up £200, but that’s still nowhere near enough so he hangs onto his position, but then things swing against him again and before long not only does he see his profit disappear, but he now faces another loss. He’s only been trading a few days, and he’s lost a 5th of his account already!
Over the next few weeks he’ll invest more and more in a hope of getting back his money, but due to the leverage aspect of his investments he only has to see the market dip slightly against him, and his anxiety and self doubt return forcing him to sell. Before too long he either gives up, or takes to self analyses.
The trader example above is probably a version of many of us in here – especially during the early days?
It is my true belief that it is only after we have self analysed our own minds, and re-educated ourselves on how we should trade that we then stand a chance of becoming professional. I am by nature a keen observer of human behaviour, and I have for quite some time self analysed my own actions regarding trading. I have discovered a very interesting thing: it seems to be that when I invested a lot I lose, but when I invested a small amount I win.
The reason why eluded me for some time, but it is really is quite simple. It is the anxiety factor again - eliminate the anxiety factor, and your on your way to becoming successful. When you invest a small amount, and the market moves against you then the anxiety factor simply doesn't come into play as you don’t have that much at stake - so, you’ve lost a tenner – big deal! Instead of sitting there imagining that the world is against all that you do, you instead just potter off for a cup of tea, and when you come back the market has more often than not swung back more favourably and hey presto you've made a few quid. Even if the market carries on going down then instead of your imagination yelling at you, “QUIT NOW YOU USELESS ******” you instead feel more in control and see this whole situation more as a game of chess - instead of fear you buy a few more shares at the cheaper price which in affect lowers the average price your shares have to reach in order to profit.
It therefore seems to me that the key to success is not to buy red braces on day 1, but to treat the market more as a chess game than a shoot out. Use reason and logic, and eliminate the anxiety factor by reducing your leverage. If you daren't leave your computer just in case the FTSE loses 20 points then take this tip ... half your investment immediately. You should never feel anxious – if you are active in the market, and should you see the market fall then you should always be in a position that you view this as a good opportunity to buy cheap stock off panicking investors rather than be one of the panicking investors who are selling cheap stock.
God bless
