Why Do People Lose Money & Why They Will Continue Losing More Money?

November 6th, 2012

JonQ

Very often, what sets a successful investor different from the rest is their mindset and philosophy when it comes to the world of investing. Although it is arguable as every investor has different strategies and investment tools that contradict each other, you will tend to find that successful investors have similar mindset that sets them different from mediocres.

In this post, I would like to touch on mindset that all investors must avoid & how successful investors think:

Loser Mindset No.1 – Buy on Emotions & Sell on Logic

Over the years, I’ve met many investors who have little or no confidence on their investment portfolios. When probed further, I realized that most of them buy based on their gut feelings and relied little on facts and figures. They have little or no knowledge on how value is created to make profits on their investments. They base their investment purchase on pure emotions, nothing logical. They buy and sell based on the opinions and advice from their friends and families (who are usually lousy investors as well). Their decisions are usually driven by fear and greed.

Successful investors never allow their decisions to be swayed by their emotions or by the advice of other novices. They buy and sell their investments based on well-defined criteria. However, this doesn’t mean that they will make money all the time. The moment they lose money, they sell without letting their fear, pride and ego get in the way.

Loser Mindset No.2 – “It is not my fault!”

In the latest raid by Bank Negara Malaysia on several ‘Innovative Gold Trading Firms’ in Malaysia, a Facebook Group was even set up to bring together ‘Supporters Group’. When I saw some of their comments, I understood clearly why these people lose their money:

“If this is a scam company, why is Tun Dr.M officiating a scam company’s event?”
“Bank Negara Malaysia does not know what they are doing when they raid the most innovative gold trading company in the world!”
“We are victim of government’s stupidity!”
“Why is the Deputy Finance Minister lying?”

As you can see.. Most average investors hate to admit that they made a bad decision. They will start blaming the government, the Central Bank, the Deputy Finance Minister and even a retired ex-Prime Minister. They blame everyone in the world except themselves! As a result of not admitting that they made a wrong decision, these investors do not learn from their mistakes and they will never become a better investor.

Successful investors know that no matter how great their investment strategies are, they are never 100% accurate. The billionaire investor George Soros once said, “It’s not whether you are right or wrong that’s important, but how much money you make when you are right and how much you lose when you are wrong.”

Successful investors learn from their mistakes, become smarter investors and make good decisions in their next investment.

Loser Mindset No.3 – Rely for ‘Sure-Make-Money-Tips’

Recently a personal friend asked me on the investments that I am exploring. I started sharing the companies that I’m studying such as Jaya Tiasa (Malaysia), Prestariang (Malaysia), Vicom (Singapore) and Breadtalk (Singapore). When he asked if I’ve bought any of these companies, I said; “Not yet because I’m still in midst of understand these companies better before I put in my investment dollar.”

The response that I’ve got was “Why are you giving tips when you have not bought the stocks yourself?”

Honestly speaking, I hate it when people start asking me for tips when it comes to investing. Because like it or not, when your tip is right, people will never remember you. But when your tip is wrong, people will never stop cursing you. Therefore, rather than giving tips, I rather share pointers to look out for when it comes to investing. Even for the investments that I put my money into, I can take from 1 month to 1 year plus of research before putting my investment dollar in. For example, for my latest investment in Crude Oil, it took us 11 months of thorough research & understanding the industry, business and management before putting our money in.

Successful investors do not rely on experts for tips but they seek to be an expert themselves. Look at Warren Buffett, arguably the best investor in the world…. Buffett spends hours reading a company’s annual reports and dissect every piece of information before making a decision. He only puts in his money in businesses that he understands inside out. I love it when he once said, “The market, like the lord, helps those who help themselves. Unlike the lord, the market does not forgive those who know not what they do.”

Increase Your Financial Intelligence

If you want to be a good investor, it is highly important for you to increase your financial intelligence and you have gotta be passionate about the world of investing. There are few good books that I would personally recommend when it comes to the psychology of investing. Do grab these books at bookstores near you and I wish you all the best to be a Smart & Successful Investor.

Recommended Book 1 – The Winning Habits by Mark Tier

I particularly love this book because Warren Buffett and George Soros are investors in totally different school of thoughts when it comes to investment strategies. In this book, Mark Tier identifies the winning investment habits that led Warren Buffett and George Soros to phenomenal success and to be the World’s Masters Investors.

Recommended Book 2 - Your Money & Your Brain by Jason Zweig

While most books describe mistakes investors make, this book draw on the latest scientific research to explain why smart people with High IQ can be stupid when it comes to investing. In this book, Jason Zweig talks about Neuroeconomics and highlights practical steps we can follow to be better investors.