5 Reasons Average Investors Lose Money In The Stock Market

The stock market is at all time-highs and investors are giddy. Big investors like Warren Buffet understand the game as do the big hedge fund heavy-weights. Average investors are more excited than anytime since 2007. Considering what happened in 2008 and 2009, that is not a good sign.

The more excited average investors get, the more capital they commit to the stock market. Instead of averaging down on quality stocks with solid earnings and growth they chase high valuation on fear of missing out (FOMO). This is a recipe for disaster as it was in 2007.

However, since investors are ruled by emotion and the CNBC-type media, this is an issue repeated every cycle. Warren Buffet is sitting on $123 Billion in cash and he is not putting it to work. He realizes we are near a cycle top with inflated valuations. Remember, Warren Buffet saved Goldman Sachs in September 2008 by investing $5 Billion. This was one of the greatest investments in history. He did this by being smart and patient, waiting for the markets to collapse from their 2007 highs. Mom and pops are chasing stocks at these levels, using margin to buy thinking they can make a quick buck. Broker stats show the use of margin is near its highest since 2007.

Below I will lay out the reasons stock market investors always lose money in the stock market.

1. Emotion: Investors do not have the training to understand valuation and market cycles. This leads them to seeing a market making new all-time highs. Unable to avoid the FOMO they push money into the stock market at levels that should never see investment Dollars.
2. Media: The media is all about ratings. That is VERY important to remember. Therefore they are going to pump excitement when markets are making new highs and fear when they are making new lows. The more people tune in to see all-time highs, the more money they make selling advertising spots on their networks. To think the talking heads are non-biased is just fooling yourself. Their excitement makes average investors get excited and leads to making the WRONG decision.
3. Analysts: It is important to realize analysts want to keep their job. This means they will be pushed to do things they should not. Mainly, if stocks are running higher and they have a neutral or a low price target, even if they don’t think the stock should be so high, they will likely raise their target and issue a strong buy to be part of the ‘right’ crowd. In addition, institutions have shady motives. ‘Friends’ of the institution may want to unload 5 million shares of XYZ. The only way they can do that is to increase the buy volume. How do they do that? Upgrade the stock at all-time highs getting a whole new group of buyers to jump in allowing the big player to sell. Lastly, analysts are ruled by emotion as well. They are human and when everyone else is uber bullish, they will likely go that way too. Remember, it is always more fun to be part of the crowd.
4. The Gambler: We all like to gamble. While investing should not be gambling we all hope to do it and make a big score. This gives us the urge to jump in even when we should not.
5. Always Believe: Average investors always believe in the good until its too late. In 2008, investors may have been up on many stocks initially, but they did not sell. They believed the market would turn around and head higher. The problem is, they did eventually sell when the media and analysts got deathly bearish. This was near the lows in 2009. Essentially, when they should have been buying, they were selling. This rounds out the issue of average investors with fear taking over and them selling. Again, blame goes around to analysts, the media but ulimtately resides within the average investor to understand the game and make the decision.