Why Investors Lose Money With Stocks

During my (RAH) thirty years of investing, I’ve had my share of losing as well as winning investments. Fortunately, the net result of hundreds of trades and longer-term investments has been profitable. But I know of lots of investors with unprofitable investing records.

For instance, one friend was unable to sell stocks for a lose, even a small one, so he held his losers, running up very large losses when the tech bubble burst in 2000. He never again invested in stocks. In fact, he won’t talk about stocks or the stock market.

A relative held most of her portfolio in one regional bank stock that was the the descendant of a family-owned bank started by her grandfather. Because of emotional ties to the stock, she was unwilling to diversify her holdings. She wanted to leave a bit of grandfather to her kids. Unfortunately, the stock is down 80 percent in the recent meltdown of bank stocks.

A colleague at the now defunct Digital Equipment Corporation rode DEC shares for $180 to $18, thinking all along that he could make a difference in DEC’s fortunes by working hard. He not only lost most of his savings, but he lost his job as well when DEC downsized.

I once lost a few thousand dollar after I bought a tech stock on a “tip” from my boss who had gotten the “tip” from a friend. Anecdotal information usually is not reliable.

Another relative lost money after she bought a bond fund when interest rates were low, not understanding the inverse relationship of bond price and interest rates. Not understanding basic relationships among investments can lead to money-losing decisions.

A broker told me of a client who called and asked what stocks he could buy to make $5,000 to pay for an upcoming summer vacation. The broker had no recommendations. Investing is investing, not gambling.

Making money with stocks is difficult, particularly in a down market. Successful investors treat investing as a serious pursuit, eliminate emotion from decision making, conduct through research, know how interpret price patterns, understand diversification, limit losses, avoid buying on the price downside and take profits.

Posted July 19, 2008.