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One of the problems when we are investing or trading shares is that we’re always trying to hit the ball out of the park. We want massive winners in double-quick time. We want to get rich and we want it to happen tomorrow.
The drawback is that if we’re trying to hit a massive winner every time, the only way we can do this is if we take on board equally massive risk. So if we don’t target the correct trade or investment, before we know it, we’ve wiped out and it’s game over for us.
This is equally true for both short-term traders (often using derivatives) as well as longer-term investors. Ultimately the desire to get rich quick almost always results in us getting very much poorer in double-quick time. Further, after we fail, it’s not just that we now have no money left to invest or trade, but now there’s also a huge hole in our confidence.
This hole in our confidence is more damaging than we think, because it might cause us to avoid the stock market for maybe a year or two, or perhaps we never go back. The issue is that we know the best place to create wealth over time is the stock market. So by wiping out and exiting the market, we ser-?iously set back our ability to create wealth.
It is this time aspect that’s very important. Stock markets create wealth, of that we are absolutely certain, but they do not as a rule create wealth instantly. Sure, there are always stories about somebody’s friend who bought some stock that soared higher, making them a pile of money. But firstly those stories (if true) are infrequent and actually irrelevant.
Why I say they are irrelevant is because one massive winning trade in double-quick time is not going to enable you to retire immediately afterwards. Sure, if you already had a large pile of money and bet it all on this one trade, then maybe your overall personal wealth situation would be much better.
But assuming you hadn’t sold your car, remortgaged your house and even pawned the lounge suite, the amount you’d have invested would not have been life-changing. So yes, you did great, but no, you did not make enough to retire, and now you have to find such a massive winner again and again and again.
How likely is it that you will be able to cash in repeatedly on every stock you invest in without eventually hitting a dud?
This is an excerpt from an article that originally appeared in the 15 October 2015 edition of finweek. Buy and download the magazine here.
