Friday, September 21, 2012

How NOT to Lose Money in the Stock Market: Mistakes People Make

This post was updated on August 19, 2016

Let's say 95% of traders in the stock market lose money.  This may sound as bad news to many but it should not be.  A vast majority fail to recognize that there is the remaining 5% who make tons of money in the stock market. Because money from the 95% losers is transferred to the 5% winners!

In the stock market you lose money when you are stressed! When prices are marching up and you already have a stock position, you are not stressed because you are making money. But when the value of your holdings is falling, now you feel the stress.  You now feel the pressure to sell your holdings at lower prices, which translates to losing money.  This pressure to sell is very very difficult to ignore.  You always fear that you will lose all your money.  And following that, your mind goes into overdrive, it now entertains several thoughts like "my retirement money is lost, or how can we pay for all this new stuff, or that was suppose to be for my son's college expenses, or how can we pay for the house mortgage"...The pressure, the stress, I'm telling you, will be unbearable.  You will likely have emotional selling at low prices.  Because these thoughts will not let you have a good night sleep.

So how do you avoid this Emotional Selling and NOT lose money in the stock market?Again, you lose money when you are stressed. Solution?-- Avoid stress altogether.This is done by investing ONLY what you can afford to set aside for 5 years.  This means you should first have a BUFFER FUND or some call it an EMERGENCY FUND, before you do any investing in the stock market. You do not put in ALL your retirement pay or your college fund for your son if he is going to college next year or all your savings or worse borrowed money. 

So, if for example the stock you bought did not go up in price as you expected and its price even dipped, you do not feel pressured to sell at low prices (and lose money) because you have available cash or liquid assets on hand.  And as you know prices in the stock market eventually go up. In the long term you will make money in the stock market.

The common mistake of a vast majority of people entering the stock market is that they want to make money fast.  This mind set will do the opposite!

Therefore, it is a good idea to buy stocks with the mindset that you are ready to hold it for many years. A better idea is that you should know if the stock you you are looking to buy is cheap, because cheap stocks become expensive eventually.

Want to learn more about how NOT to lose money in the stock market? My book can help



I hope this helps investors and would be investors.  
Until my next blog.


Disclaimer: The materials presented here are for educational purposes only. They do not in any way constitute any professional advice for any particular person or persons. Offer of the contents herein comes with an understanding that the author does not render professional advice. The reader has the sole responsibility for his or her actions. The author in no way guarantee any result that may be obtained from using the contents herein. The author specifically disclaims any and all liabilities, losses, direct or indirect that result from the application or use of any of the content of this book.  The author makes no warranties or representation on the completeness or accuracy of the contents herein and specifically disclaims all warranties, including but not limited to warranties of suitability for a specific purpose. The author assumes no responsibility for any contrary or differing interpretation of the topics presented herein. Any semblance of any person or organization is purely coincidental and totally unintentional.

Thursday, September 20, 2012

How to make Money in the Stock Market According to Warren Buffett

Updated on August 19, 2016



If you are going to invest in the stock market, then take advice from those that are successful in the stock market. Undoubtedly, one of the most successful stock investor in the world today is Warren Buffett. It would be good for us if we take his advice.

Warren Buffett is right when he said that sound investing can make you very rich if you are not in too much of a hurry and it does not make you poor either which even better. Why is it that the stock market can make you very rich? Well, because it is probably the biggest gold mine in the world. Billions of money change hands everyday! Let's say more than 90% of the traders in the stock market lose money. And guess where that mountain of money go? Yup to the remaining 10%. You can be with that 10% and build your wealth just like Buffett.

How can you be with the 10% that actually make money (not lose money )?  I think Warren Buffett gave us the answer..Buffett said rule no. 1 never lose money, rule no. 2. never forget rule number 1. To me that means to buy low and sell high and you don't sell on declining prices! But I'm losing money! You might say. No you are not! Those are unrealized losses, paper losses as we call them. You will only lose money when you SELL.

Then how can I make money in the stock market? 
The stock market is full of opposites. I know, the reason why you are in the stock market is because you are optimistic and want to make money fast. But the trick is, as Warren Buffett said, never attempt to make money in the stock market. Buffett buys on the assumption that the market will close the next day and not open for the next 5 years. This is a very good advice. Read on. I'll explain this irony.

Imagine if you are in the stock market to make money, and you bought a stock, then its price falls. Let's say you are down 5% two days after you bought the stock.. you might feel a bit concerned because in your mind you are in the stock market to make money, and with the 5 percent decline you feel you are slowly  losing your hard earned money. Let's say you decide to hold on with a bit of optimism. But the price kept falling... now you are down 15% then 20%..25% you kept holding on until you decide you cannot take the pain anymore and you would rather save 70% of your starting money and sell after a 30% decline. Only to find out that 6-10 months after you've sold at a loss, the stock surged and you would have made a 50% gain. If only you have not sold. 

Buying stocks with making money in mind will make you lose money, ironic as it sounds. Because you will experience stress and pain in seeing your stock holding go down in value on possibly a temporary decline and you will have emotional selling at low prices. 

The stock market does not go up in a straight line. 
If the stock price after you bought the stock, gradually marched to a 50% gain, without a day of decline, I know you would not sell. Because you won't be experiencing pain. But with a temporary decline before the same 50% gain, you would have sold at a loss. Instead of a 50% gain, you had a 30% loss. This is how the stock market works. It is deceiving most of the time. The stock market tend to fool the mind and make you lose money and transfer money from the fearful and impatient to the courageous and patient.  But once you move from being an impatient trader to a patient investor, the stock market will suddenly be your greatest friend as it will make you very rich!

Read on to know more.
Becoming successful in the stock market as Warren Buffett puts it in a quote requires only ordinary intelligence, what you need is to control your urges or emotions that get you in trouble.

Just like when you can't control your urge to sell because you see prices falling, fearing you will lose all your money. That also means control your urge to BUY HIGH and SELL LOW because it should be buy low and sell high. The crowd is attracted to rising prices (often at the top). 

That, means also to not sell too early on a meager gain, because you fear that prices may go down and you will lose your meager profit. If you give in to this, you will never be truly rich. As Jesse Livermore (a stock operator) puts it: you don't become poor by taking profits but you don't become rich either.

Buffett recommends to buy and hold. It's up to you of course if you want to buy and hold for a year, 2, 3, 4, 5 years. There is a good chance that many years (5 years or greater)  after you bought a good quality stock at the right price, that it will be trading at a much much higher prices. 
  
A big weakness of would be investors is as I would call it is Financial Impatience. I believe that Buffett has eliminated this human nature from himself. He even said "as to how long we'll wait, we will wait indefinitely". Waiting is always hard...very hard (for any average human)! But if you conquer this like Buffett, you may be rewarded with millions and even billions. I know, millions doesn't sound so bad either.

If you want to know more how you can be a successful stock investor please check out my book




May Warren Buffett’s wisdom on the stock market bring us wealth.
I hope this helps.



Disclaimer: The materials presented here are for educational purposes only. They do not in any way constitute any professional advice for any particular person or persons. Offer of the contents herein comes with an understanding that the author does not render professional advice. The reader has the sole responsibility for his or her actions. The author in no way guarantee any result that may be obtained from using the contents herein. The author specifically disclaims any and all liabilities, losses, direct or indirect that result from the application or use of any of the content of this book.  The author makes no warranties or representation on the completeness or accuracy of the contents herein and specifically disclaims all warranties, including but not limited to warranties of suitability for a specific purpose. The author assumes no responsibility for any contrary or differing interpretation of the topics presented herein. Any semblance of any person or organization is purely coincidental and totally unintentional.