Losing money on an investment is never pleasant.
Typically, losing money on investments come from a couple of common issues. The first step is to ask some questions to think about what happened exactly.
The first questions I would ask you are: What did you invest in? How did you come about those investment ideas? Did you do any research? Did you hear some ideas from a friend or in the news? How did you come up with the investment?
The second set of questions I would ask is about the type of investment. Was it a stock? If it was a stock, what type of company was it? Was it more of a startup company, something that had just come into fruition, a fresh kind of upstart company? Was it a more established company?
Let’s dig deeper into the main reasons investments tank, and how to best respond and react to those kinds of losses.
Investing In More Speculative Companies
Oftentimes when I see investors who have had the experience of losing money in the stock market, it’s because one of two things happened.
The first common issue is that the investment was in a more speculative, newer company that just went to zero. Maybe it was a penny stock. By penny stock, I mean stocks that are worth less than a dollar to buy, which typically indicates those are higher-risk stocks that aren’t from companies that are very established. Even if the stock wasn’t a penny stock, no matter what the purchase price of the stock was, it was a more speculative company and that company actually did not perform. They were not able to establish themselves as a viable competitor. They were not able to generate profit and therefore their stock valuations were significantly dropped because of their performance. And if that company does not have a way to recover, then that stock will remain very low, maybe even close to zero. And with little chance of recovery, that is more or less now a permanent loss on your book.
Trying to Time the Market
I have also seen investors who try to time the market. So maybe they have some smaller stocks like penny stocks or bigger stocks. But ultimately, they try to get in and out at what they think is a good time for the market or when there’s too much risk in the market. Typically, those decisions go wrong when, instead of being driven by research and facts and objectivity, they’re driven by emotion.
It’s important to understand that by the time someone’s talking about a particular stock, especially if there’s a lot of hype in the news about a particular stock, the cost of the stock has started to rise because more and more people are getting into it. Word of mouth is spreading, and more people want in on the action.
Inevitably, things change. Maybe the news comes around that the company didn’t perform, or isn’t performing. As a result, the same thing happens–one person starts to panic or be disappointed even, and they sell, and they’re willing to sell for a bit lower just to get out because they think it’s going to keep going down. And then that creates a spiral of more and more people selling, which then creates downward pressure on the stock itself.
At the end of the day, what you want to avoid is being the investor who makes the decision based on emotion, based on what are other people saying at work, or what you read in a form online. Because by the time people are talking, it’s too late. So lots of people have lost money because they try to time when to get in and when to get out–and their decisions were mostly based on the emotion of it–not based on any kind of research of how much that stock price should be, or what the intrinsic value is.
Decision-Making Based on Value
If you don’t have a particular way of investing that is methodical and data-driven–you’re doing it based on news or based on emotion–that can result in losses.
If you want to learn more about investing, there’s a type of investing called value investing. In that approach, you essentially calculate the value of a particular stock. Now, that works better if you’re investing in larger, well-established companies. There are many other methodologies for evaluating formally an investment. There are all kinds of charting that are available.
A Learning Opportunity
Going back to the question of how to feel about investment losses, the bottom line is–it’s always going to suck to have a loss. However, the best question to ask in that situation is, what do we need to learn from that experience about our own propensity for risk and our willingness and ability to dive in and become a professional investor?
A great first line of questioning is “Did I enjoy that? Does it make me want to learn more, or do I feel this is becoming too much, and it’s not an area that I want to become an expert in?”
And if it’s the latter, then the lesson is that maybe it’s worth delegating that responsibility to an investment management firm. That’s what they do all day long. So interview a few–there are steps you can take to find a good investment management firm–so do that. And then delegate the responsibility of managing your investments.
The other result or conclusion you might draw is “Okay, I hated losing money, but I’m actually motivated, and I have time to learn about how to invest.” In that case, take a course on how to invest in the stock market. There are lots of courses on Udemy and all these other online platforms. There are also lots of coaches–if you’re willing to spend $20 or $20,000, you’ll find there’s a program for you to learn how to do it. So if that calls your name, then take more ownership of it and go into actively learning a particular approach for investing.
While it is always unpleasant to lose money, as long as you learn from it, you can make better decisions next time. And because you’ve learned from it, you should feel great that you’re using that experience positively.
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