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How Beating 90% Of the Market Doesn’t Really Involve Much Skill

“The house always wins.”

The stock market is not a casino, but the process was not designed for smaller retail investors to get rich. It was built for the founders and people who got in early to take the gains on the backs of laggards buying on the hype of an upswing.  This is part of the reason why Benjamin Graham estimated that around 90% of people lose money in the stock market in his monumental investment book The Intelligent Investor.

3 Reasons Why People Usually Lose In the Market

1.False Pattern Recognition

The mentality of most people is to buy a stock on the way up because it’s human nature to believe that patterns continue. This is what Warren Buffett’s business partner Charlie Munger describes as one of the major errors in human misjudgment. In the gambling world this is called the gambler’s fallacy, basing future events on past ones.

If a coin lands on heads five times in a row its natural to think tails is probable next, however, no matter what sequence of events has happened in the past, the flip is always 50/50. Lucky streaks don’t exist and over a significant period of time things have a way of balancing themselves out.

 

2. FOMO

Another losing mindset is FOMO (fear of missing out). Someone may watch the market for months with plans to buy in on stocks. They watch their picks rising and kick themselves for not buying when they originally planned on it. Instead of being factual, they get emotional and buy the next stock based on not wanting to miss out on it. This doesn’t mean that new stock won’t take off, but its a destructive pattern than in the end will almost always lead to losses over any considerable period of time.

3. Timing

Lastly, and most importantly is timing.

Let’s say someone purchased stock in company that has existed for 20 years. In Q1 of year 21 the investor buys into the company and is now watching its every move. The stock begins to dip a few weeks in and drops to a 52 week low. The investor becomes angry at the companies performance, not realizing that in the past five years the stock is up nearly 100%.

It’s human nature to only care about the company after the buy in happens. The same goes for human relationships, many people try to disregard a person’s past and mold them into what they desire. When buying a stock it’s important to think of yourself as buying into the entire companies history and story, this will put drops in perspective, averting investors from panic selling.

 

The Math Behind Getting In Early

‘It’s good to be in something from the ground floor. I came too late for that and I know. But lately, I’m getting the feeling that I came in at the end. The best is over.’ – Tony Soprano

But what if there was a way to just get in on the ground floor and only have to worry about an exit point?

There is, it’s called private placements, a luxury usually reserved only for the rich. Accredited investors who earn more than $200 thousand a year or have millions in assets are deemed stable enough to lose money are let in first. The way the system is setup is to protect the small retail investor from losing on a risky venture, but what it really does it block the small time investor from getting in on early gains.

In an IPO situation, a company would raise money through a private placement at $0.10, then do another round at $0.30 and eventually IPO at $0.50 where the general public buys in at 5x the original private placement price.

Here’s a scenario.

Imagine having $10,000 to invest in a company. Two years after your investment the stock hits $2.00. If you sold at $2.00, here’s the profit behind a series of entry points.

Buying Price Shares Investment Selling Price Profit
$0.50 20,000 $10,000.00 $2.00 $30,000
$0.75 13,333 $10,000.00 $2.00 $16,666
$1.00 10,000 $10,000.00 $2.00 $10,000
$1.50 6,666 $10,000.00 $2.00 $3,332

Timing is everything, but trying to time the market is a losers game, if anyone tells you they have a crystal ball and can predict the future, run. The only way to win at the timing game is by getting in first. After something has started, waiting for that perfect entry point is something day traders froth over and brag about being gifted at (usually only in bull markets like crypto & cannabis).

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