Why Do 90% of People Lose Money in the Stock Market? (With a Simple Strategy to Be in the Top 10%)

Ishan Pandey

Disclaimer: This is an opinion piece. The author takes full credit and responsibility for the views presented in this article. 

We've all heard the infamous claim that "90% of people lose money in the stock market."

Why does this happen? Is the stock market a glorified form of gambling or is there more to it? To answer this, we need to understand how the stock market works both in the short and long run.

Let's start at the bottom of a bear market where stocks are very cheap. There is widespread fear among investors and everyone seems to be selling. A few smart investors, who understand how undervalued the stocks are, start buying in. Few others start seeing the momentum and jump in, gradually starting a bull market. Now, some people with no knowledge start to speculate and even make some money. Their confidence starts to build up as they trade with more and more money, sometimes even using debt.

This domino effect of accumulation creates a huge demand, fueling the bull market, and making a lot of people rich. This is the point where mass FOMO (Fear of Missing Out) hits. People see their friends and neighbors get rich by the day and want to desperately get in. Most people enter the market at this time and push stock prices even higher. The smart investors who know how overvalued the market has become start selling.

Now, there is a problem. There are very few buyers left in the market. The smart investors, who bought at the beginning, know the stocks are overpriced and wait for a market crash. No new people are entering the market. So what happens now? Basic economics tells us that when there are few buyers and a lot of sellers, the price goes down. When the price goes down, most investors start to panic-sell which creates a snowball effect of a downward spiral. Since most people had entered the market during its peak, they lose money.

So, is buying low and selling high the way to get in the top 10%?

Yes, it really is that simple.

If you can do this consistently for a long time, you'll get huge returns and probably be in the top 1%. But doing this is very tough and requires absolute discipline and a contrarian mindset. Stocks are undervalued does not mean they are at their lowest and will go up tomorrow. Even if you buy the stocks at an undervalued price, they may go down for months or even years until they eventually bounce back.

Will you be able to see your portfolio drop every day and not sell?

Most people can't.

On the opposite extreme, can you sell your stocks when they are going up every day?

Even if you could sell, the market may continue to go up. Can you control your own FOMO and resist investing at this point? For most people, the answer is no. Studies have shown that about 99% of people who try this, aren't disciplined enough to succeed and underperform the market or even lose money.

To give you an idea of how hard the "Buy low, sell high" strategy is, let's talk about a million-dollar bet that Warren Buffet placed in 2007. He believed that in 10 years from now, the S&P 500 ( a market index like NEPSE) would beat any selection of hedge funds. It was a bold move as he was implying that, over a long time, most active investors underperform the market. A fund manager named Ted Seides eventually agreed to the bet and chose his "winning" hedge funds. 10 years later, in 2017, Warren Buffet won the bet. The market (the S&P 500) had averaged about 8% while Ted's choice of "best hedge funds" only averaged 4.2%. So, if most investing professionals, who dedicate their lives to beat the market can't do it consistently, most of us are unlikely to beat it either.

If following the hype and investing almost guarantees losses and "buying high, selling low" can't be done by most people, is there a better strategy?

There is.

Despite all the volatility, the stock market has always gone up in the long run (and NEPSE, on average, has gone up by 11.5% p.a, assuming dividends reinvested). You can get around 11.5% p.a just buying the market and not picking individual stocks. If you pick stocks actively, you will most likely get lower or even negative returns.

To give you an idea of how far Rs 6000/month can get you if you just invested in the market, here's quick math. If you invested Rs 6000 every month for the next 30 years, you would end up with almost 2 crores. If you start just 5 years early and invest for 35 years, you would end up with around 3.6 crores. That's the power of compounding as the saying "Time in the market beats timing the market." Investing is a long-term game. It probably won't make you rich very quickly but will make you rich if you are patient.

The only skill you need for this approach is being consistent. Don't wait for a few months because you think the market is "overvalued". Just because it's overvalued doesn't mean it will go down soon. Don't panic when your portfolio goes down by a lot. Just invest consistently. In 30 years, these small fluctuations won’t matter much.

However, there is a problem. "Buying the market" is a tricky thing here in Nepal. In countries like the USA, there are broad index funds like the S&P 500. You can buy a diversified portfolio of the largest 500 companies, matching your returns to the market. In Nepal, there are no such funds. So you might have to do some work but it's not that hard. Benjamin Graham, in his book "The Intelligent Investor", has suggested a few ways to match your portfolio with the market. He suggests buying big companies selling at a low P/E ratio, low current ratio, those that have consistently generated profits for a long time (8-10 years), those that have paid dividends regularly during that time, and to diversify the portfolio with such companies from many sectors. Remember, your goal is to match the market and not beat it so diversify as much as you can. (As a rough guide, don’t keep more than 5% of your portfolio in a single stock).

Therefore, investing in the market without an active selection of stocks works best for 99% of people. In the future, if we get an index fund like the S&P 500, all we would need to do is buy the index consistently. For now, however, we need to do some work in selecting the companies. No matter what the market does in the short term, invest consistently because the stock market always moves up in the long run. I repeat: "Time in the market beats timing the market" and countless studies have proven that. If you follow the hype and invest, you'll almost always lose money. If you try to time the market, you'll almost always lose money. So, if you can't beat the market and have the option to join it, why not?