Why do retail investors lose money?

Some of the reasons are:

• Investors buy shares at relatively high prices and sell them at lower prices.
• Active trading results in high commissions, which eat into any profits that are realized.
• Investors hold shares bought at high prices during euphoric, bullish periods hold on even with big unrealized losses and take small profits from other shares.
• Investors buy ' in-fashion funds' promoted by financial institutions during a particular time window, on the strength of the good past performance of the funds.

Why do retail investors tend to buy and sell in this manner?

• Not knowing who you are in relation to the marketplace.
• Not knowing what the marketplace is about.
• Not understanding the basic human weaknesses of greed, fear, impatience, pride and laziness.
• Listening to the counsel of those who do not have the skills to help you make money.
• Not applying common sense but being confused by an information overload.

Rule 1: Know who you are in relation to the marketplace.

Successful investing starts with knowing your limitations and strengths. The limitations, which affect most retail investors, are:

TIME: Limited time available to track and learn the markets without affecting other responsibilities adversely.

RESOURCES: Limited financial resources that most can afford to lose without jeopardizing the fulfillment of family responsibilities.

KNOWLEDGE: Ignorance of the intricacies of the dynamics of the markets.

COST: Highest per unit cost of transactions for retail players.

What are the strengths of retail investors?

• Investing is not your job, therefore you are under no compulsion to trade.
• You can afford to wait.
• You need not be leveraged. Your trades will not affect market prices (except perhaps for very thinly traded stocks) therefore there is little slippage in execution.
• Honesty is required to arrive at this understanding and to accept your strengths and weaknesses. The key is to focus on minimizing the adverse effects of your limitations and maximizing your strengths to your advantage.
• Devising an investment strategy along this line is essential. A good fisherman must first know that he is a fisherman; his job is to catch fish and not be the fish.

• You must also realistically know what type of successful fisherman you are or can be, and concentrate on being that types of fisherman till you attain proficiency. Practice makes perfect.
• The retail investor cannot be a successful and apply the methods of an institutional player.
• You should concentrate on being ' that profitable retail investor' and with this clear self-identity,
• You can then cut out 95% of investment literature, which realistically is not applicable to a retail investor. This eliminates confusion. A clear mind improves your ability to focus on learning what matters. The learning costs involved in perfecting the art of investing, within the science of probability can then be kept to a minimum.