SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Buy High, Sell Low: Why Investors Fail


While investing in financial markets over the long-term is an excellent path to wealth, it’s not unusual to experience occasional losses as investment values go up and down. So if the markets go up over time, why is it that most investors lose money in the stock market?

There are many reasons to that. Barbara A. Friedberg mentions few of them:

  • People lose money in the markets because they don’t understand economic and investment market cycles.
  • People lose money in the markets because they let their emotions drive their investing.
  • People lose money in the markets because they think investing is a get-rich-quick scheme.

Some people will claim that it is related to lack of skills, poor risk management, poor selection of strategies etc. But the simple fact is that it is mostly related to human psychology and human emotions.

 

Still need a proof?

Fidelity Investments conducted a study on their Magellan fund from 1977-1990, during Peter Lynch’s tenure. His average annual return during this period was 29%. This is a remarkable return over the 13 year period. Given all that, you would expect that the investors in his fund made substantial returns over that period. However, what Fidelity Investments found in their study was shocking. The average investor in the fund actually lost money.

How is it possible?

Lynch himself pointed out a fly in the ointment. When he would have a setback, for example, the money would flow out of the fund through redemptions. Then when he got back on track it would flow back in, having missed the recovery.

This isn't about trading skills. The only skill those investors needed was to stick around. But what they did basically was "buy high sell low". If this is not about human emotions, then I don't know what is.

The main reasons for the poor performance of individual investors are:

  • Human Psychology: Individuals make decisions everyday with their emotions assisting their judgment.
  • Performance chasing: Investors who chase performance are highly likely to lose money over the long term.
  • Casino Investing: Many people think they can make money by winning the lottery.
  • The “me too” lemming investment strategy: This is a common strategy of people who don’t know what they are doing with their investments.
  • Fear and Greed Investing: Those are the most powerful motivations for investors. Unfortunately, investors tend to alternate between these potentially destructive emotions.

A recent Dalbar study showed how investors are their own worst enemy. From 1997 through 2016, the average active stock market investor earned 3.98 percent annually, while the S&P 500 index returned 10.16 percent in returns. The reasons are simple: Investors try to outsmart the markets by practicing frequent buying and selling in an attempt to make superior gains.

Again, if anybody still needed proof that 90% of success in investing comes from human psychology, Fidelity and Dalbar studies provided that proof.

Image result for stock market buy low sell high

Here is some advice from Barbara:

  • To avoid losing money during a market-wide drop, your best bet is to just sit tight and wait for your investments to rebound.  
  • To avoid losing money in the markets, don’t follow the crowd and don’t buy into overvalued assets. Instead, create a sensible investment plan, and follow it.
  • Don't follow the the outrageous claims of penny stock and day-trading strategies. 


Similar behavior applies to trading services as well. As soon as a few losing trades and/or a drawdown of any kind occurs, some members hit the eject button and continue in their search for the Holy Grail strategy that always wins. They often come back after the next winning streak, missing the recovery.

Isn't it the very definition of "Buy High, Sell Low"?

Barbara A. Friedberg's final advice:


To avoid losing money in the markets, tune out the outlandish investment pitches and the promises of riches. As in the fable of the Tortoise and the Hare, a “slow and steady” strategy will win out: Avoid the glamorous “can’t miss” pitches and strategies, and instead stick with proven investment approaches for the long term. Though you might lose a bit in the short-term, ultimately the slow-and-steady approach will win the financial race.

Drawdowns are a fact of life for a trader. They happen. Big Drawdowns Are Part Of The Game.
 

Apple, Amazon, Microsoft and Alphabet…

  • All among the largest and most revered companies in the world.
  • All have returned unfathomable amounts to their shareholders.
  • All have experienced periods of tremendous adversity with large drawdowns.

Apple investors from the IPO would experience two separate 82% drawdowns. Amazon experienced a 94% drawdown. Microsoft largest drawdown in history occurred over a 10 year period, a 70% decline from 1999 through 2009. Google had a 65% decline from 2007 through 2008.

If you sold those amazing stocks during the drawdowns, you would miss their incredible gains.

Conclusion

There will be bad days and bad weeks and bad months, and periodically even a bad year. Focus on following your trading plan not the short term results of it. Robust strategies are profitable in the long term time frame.

Please do not become part of the next Dalbar statistics. If you found a solid strategy, try to stick around.


Related articles:

Edited by Kim

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • 4 Directional Options Trading Strategies

    Some Option traders prefer to trade mostly non directional strategies, while other option traders prefer to trade directional strategies.  Well, in the world of Options trading, there is no right or wrong answer. You can create a host of strategies based on your preferences and outlook.

    By Kim,

    • 0 comments
    • 85 views
  • Digging Deeper into the Inflation Threat

    Stoking the Embers of Inflation is one of the more important articles we have written. The Monetary Equation Identity discussed in the article provides a counterintuitive way to think about inflation. It took us a long time to accept that this identity lays out a real case for stagflation.

    By Michael Lebowitz,

    • 3 comments
    • 426 views
  • Does Option Selling Have Positive Expected Returns?

    Academic research refers to the persistent phenomenon of ex-post implied volatility (IV) exceeding realized volatility (HV) as the Volatility Risk Premium (VRP). As it applies to option premiums, this leads to a positive expected return for being a systematic option seller.

    By Jesse,

    • 0 comments
    • 203 views
  • Newton Technical Perspective 6/18/2018

    As we enter the third week of June, sentiment has steadily gotten more optimistic, with sentiment polls like Investors Intelligence having risen now for the 5th straight week, while Bears have dropped down under 18%.  The net plurality now stands at 35%, which is worrisome given that Equity put/call data has also dipped down to levels last seen in late January when equities peaked.

    By Mark Newton,

    • 0 comments
    • 631 views
  • Top 10 Things To Know About VIX Options

    VIX options use the CBOE Volatility Index (VIX) as its underlying asset. VIX options were the first exchange-traded options that allowed investors to trade the market volatility. VIX options can be used as a hedge against sudden market decline, but also as speculation on future moves in volatility.

    By Kim,

    • 4 comments
    • 206 views
  • How Hedge Funds Use Options

    Hedge funds and institutions have been using options to get market leverage for years. Warren Buffett has been known to buy calls and sell puts to get bullish exposure, and so has Carl Icahn. And recently I told my subscribers about a massive options trades that shows just how these big investors use options.

    By Jacob Mintz,

    • 2 comments
    • 304 views
  • Synthetic Short Stock – Higher Risk

    The synthetic long stock is a low-risk, highly leverage strategy. But for synthetic short stock, the risk profile is completely different. For the synthetic long, the combination consists of a long call and a short put, at the same strike, and at the same expiration.

    By Michael C. Thomsett,

    • 0 comments
    • 179 views
  • Trade Decisions: Risk or Profits?

    When trading, I believe very strongly that the best method for accumulating profits over the years is to ignore whether a specific position is currently profitable or is losing money.  When looking at any position, it's always necessary to make a buy/hold/sell decision.  Of course, for most option traders 'hold' wins most of the time. 

    By Mark Wolfinger,

    • 0 comments
    • 166 views
  • How To Protect Your Blind Side

    “The price of protecting quarterbacks was driven by the same forces that drove the price of other kinds of insurance: it rose with the value of the asset insured, with the risk posed to that asset.”  -Michael Lewis, The Blind Side. Counter-intuitively, that is often not the case in the capital markets.

    By Michael Lebowitz,

    • 0 comments
    • 823 views
  • How To Evaluate Options Trading Service

    I'm getting a lot of emails asking me to recommend an options advisory service. If you currently subscribe to an option trading service, or if you’re considering doing so, here are some tips how to select one. Those tips will help you to avoid some costly mistakes. 

    By Kim,

    • 0 comments
    • 242 views

  Report Article

We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoticons maximum are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs