Saturday, October 07, 2006

How retail investors lose money

The reason is simple - a retail investor is driven by greed or fear. Never logic.

  • Retail investors are always the last to enter a bull run
  • "Smart money" enters markets long time back when markets are at its bottoms, there is frustration all around and no one wants to discuss markets
  • When markets start booming and indices make new peaks, the retail investor "wakes" up. At this stage, he is still not sure and is a fence sitter.
  • Lastly, there is optimism all around. Every one is bullish and talking markets. Stocks which were never traded in a year, suddenly start moving and start reaching "new highs"
  • At this time, the retail investor starts buying as he does not want to miss out the "action"
  • The retail investor will display a marked preference for "low priced" stocks because these are "cheap". He will stay clear of index stocks as these are "expensive"
  • This is also the time when "smart money" starts moving out
  • When a correction happens, it is usually quite severe
  • The retail investor does one of two things. He either decides to wait (the optimism is still there) or he starts "averaging" his costs. Averaging is nothing but trying to "catch a falling knife"
  • At some time or the other, panic sets in. The retail investor will then sell off all holdings as a distress sale.
  • Sometimes the retail investor will do nothing but wait for the markets to rise
  • When the markets do rise, he will sell off all his holdings at the first available opportunity and thus miss out on the new bull run

Interesting facts you may not be aware of

  • About 80% of retail investors in public issues sell their allotments within a week of listing. No one will wait and let their investment appreciate
  • In a bull run, the retail investor is usually the first to sell off his holding. This investor seldom waits for the bull run to continue
  • Those who have never participated when the rally started will invariably jump in towards the end of the bull run
  • Whenever a fall happens, the retail investor is the first to buy as he does not want to "miss this chance" to buy a stock
  • Retail investors hate to take a loss. Circumstances eventually force them to take a bigger loss sometime or other
  • Lastly, retail investors rely on tips or broker advise and sometimes, company research when buying. This never works because the market has already discounted this news


Follow the trend for profitable investing