Why Retail Investors ALWAYS Lose…[PART 1]
I recently wrote an article which covered why Confirmation Bias is one of the leading reasons why retail traders / investors lose money… This article will be taking a deeper dive into WHY the average Joe is very likely to lose money in any financial market and how YOU can position yourself to shift these probabilities and actually make money.
First of all, I want to quickly summarise the difference between a ‘Trader’ and an ‘Investor’.
A Trader is actively buying and selling an asset in a period that is relatively short for that asset class. This could mean a few properties per year (flipping), or it could mean day trading stocks / cryptos. Most successful traders in any asset class are full time, and invest a significant amount of time on an ongoing basis researching, developing and trading that asset.
An Investor has a longer term approach, normally over the course of many years. This obviously varies based on the asset class, but 5 years is normally the average period that an investor is looking at.
So, what are you?
The average person hasn’t the skill to be a trader, not the patience to be an investor. So, they fall into the middle of the two, seeking short term advice from ‘traders’ yet shifting to a ‘investor’ mentality when exposed to losses (see my previous article).
The issue is, that the average person does not have the time to know intricate details about the market they are investing in, and often rely on expert advice to accelerate their learning curve. Which is fine, and can be very beneficial, but this leads me to my first point as to why retail investors always lose…
- Herd mentality. Retail investors often lose (unknowingly) their own opinion and are blinded by confirmation bias because of the group mentality.
It is not just the crypto market that we’ve seen this in, it has also been during the tech bubble, the real estate bubble and arguably right now in many over-leveraged, overvalued assets.
Lets break this down further…
Market cycles
Retail Investors ALWAYS enter at the peak of any market cycle, and that’s exactly when the ‘smart money’ exits.
I’ve created an illustration to show adoption in relation to price of an asset class (I’m not very good at art lol).
In the cryptocurrency market, 2017 was a great example of this snowball effect, we had a few minor rallies which gained momentum each time and finally lead to the ‘peak’, which is where the public started jumping in.
This happens time and time again, in every asset class. Stocks and real estate are currently in the retail phase, and are ripe to ‘burst’ within the next couple of years.
Which leads me to the second biggest reason why retail investors ALWAYS lose money…
2) Entry… The majority of retail investors enter an asset class when it is at all time highs, or near peaks. Why? The fear of missing out. Say your mate Dave just made 10K trading Bitcoin, you’re going to want to get into Bitcoin, right?
Retail investors are not interested in asset classes when they are undervalued, in times of fear. Instead, they jump in at peaks, in times of greed. *sigh*
Warren Buffet famously said “Be fearful when others are greedy, and greedy when others are fearful.” Which is easy in theory, but harder in practice.
Let me explain why?
3) Treating your investments as a hobby.
Most retail investors have full time jobs, and are simply part time investors. They do not do sufficient research on a macro or a micro level, instead they follow the ‘News’ , Follow a selection of ‘Experts’ and dabble in the latest money making asset class.
I’ve spoken to many ‘investors’ who completely neglect macro monetary /economic policies, such as interest rates, inflation, QE etc. How are you going to win the war if you do not know the battlefield? You MUST understand the bigger picture before diving into the micro level. This is how the top 1% remain at the top, they understand market cycles, and which assets to be in based on Macro Economic / Monetary policies.
‘Experts’ can be very useful in an individual asset class, but when it comes to the macro scale and with market cycles, they are far too attached emotionally to protect and preserve capital.
First, understand the terminology in the financial markets. Quantitative Easing and Fractional Reserve Banking seem like overwhelming terms, which is deliberately done to deter the average person from understanding that they mean... It makes the reality of the situation far more complex, which leads retail investors to seek ‘advice’ and give their hard earned money to institutional investors.
Henry Ford once said “ It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
Side note: In the peak of the financial crisis of 2008, the top executives at Wall St paid themselves bonuses of over 35 Billion dollars, their rational is because of their ‘expertise’ in a difficult field. This is outrageous, along side their fraudulent manipulation in various asset classes (including the crypto market).
At that hasn’t changed…https://qz.com/1238462/twelve-years-later-wall-street-bonuses-are-back-to-pre-crisis-levels/
Retail investors NEED to take control of their finances. No-one cares about your money more than you.
4. News Investing…
I’ve copied an extract from my book “21 Crypto Secrets” where I mention this in far greater detail.
In summary, when an event has hit the news, it is too late. Retail investors often buy at this point, while institutional investors sell.
‘Here’s why…
Company X announces the event. Almost instantly, the active investors have acted on this announcement and have placed trades in this token. The price has likely increased a fair amount.
Then, the wider market starts to pick up on this event, and the blogs and small news sites pick up on it too. This normally lasts a couple weeks before the bigger media sites decide to comment on this event.
By this point, the price has increased a significant amount compared to a few weeks back and the event is right around the corner. Newer investors in the market are now both aware and excited about this event, while the investors who have been in this trade since the beginning are planning their exit. The event is further hyped by the token’s community and team, drawing in more short-term speculators, who are all eager to buy the token on the day of the event.
* The day of the event occurs. *
Most investors who got in early on are now entirely out of this token, ready to buy the dip when it happens. The newer investor has just bought in, waiting for the event and thinking about which Lambo he’s going to buy after the event pushes the price to the moon.
* The event happens. *
And the price plummets. The smart investor’s order fills at the low levels. But the newer investor is left confused, wondering why the price fell even though the event was good.
Here’s why…
The market has already priced in the event.
This is so important I need to repeat it. If something is expected to happen, don’t assume that the market will react when that event will happen. The market has likely already priced in that event and therefore, the expected outcome will not increase the price any further. People who are “in the know” about this sell to capitalise on profits and then the public panic-sells, and loses a significant amount of their investment. The market has already priced in the expected.’ — 21 Crypto Secrets (Secret 14: Event Based Trading)
So, that’s part one of “Why Retail Investors ALWAYS Lose…” I’ll be publishing part 2 in a couple of days time, which focuses on why retail traders lose money and dives deeper into this subject.
If you enjoyed this article, let me know in the comments below or by emailing me.
All the best,
Devin
P.S. Find out the 7 Crypto Investing Mistakes That YOU need to Avoid! (Completely free, just click the link).
