It seems all too simple in theory: wait for the price of an asset to dip, buy it on the cheap, and then wait for the price to go up, sell it and then take the profits.

But if making money through investments was that simple, then why isn’t everyone doing it? And more importantly, why aren’t they all making mountains of money?

It turns out that more than 90 percent of retail investors lose money on the stock market. Rather than investing for the long-term, as recommended by Graham in “The Intelligent Investor,” retail investors get suckered into the idea that they can make a quick buck by buying low and selling high. In general, they can’t.

The Information Problem: AKA, Why You Can’t Make Money On The Stock Market

The reason it’s so hard to make money on the stock market as a lowly amateur has to do with information. Although data on company performance is publicly available, retail investors are usually not in a position to model it in such a way that will beat the market. Retail investors pit themselves against professional investors and, because of their limited skill, almost always end up losing.

The market is continuously seeking what investors call “fair value.” The idea is that, over time, people will generally come to a sensible conclusion about how much a particular company is worth. The market can get pricing wrong in the short term, but eventually, in the full light of complete information, prices will reflect the real value of the underlying asset. If they didn’t, then the price of a valuable and successful company could fall forever, while the share price of a failed company could rise indefinitely. We know that this isn’t possible.

Other People Are Highly Sophisticated, And Becoming More so

There’s another problem for why you can’t “time the market” – market participants are all becoming a lot more proficient at what they do. Competition to eke out returns in the stock market is forcing a general increase in the quality of investing: you have to be good to make any money at all. It’s akin to what’s happening in sports: the difference between the skills of a major and minor league football player (or even between players in the major league) is becoming narrower over time as the sport evolves. It’s becoming more and more challenging to be utterly dominant. Because of this process, amateur retail investors struggle.

What Should Retail Investors Do Instead?

The first thing is to follow a particular school of thought: proven strategies that have earned people good returns in the past. Mark Matson reviews and reviews of other gurus can help you decide on a philosophy to follow. But the important thing is that you DO follow some kind of approach; otherwise you risk succumbing to fear or greed.

The next step is to choose companies that you think will be successful over the long-term and mostly ignore the short term fluctuations. The market gets things wrong from time to time, but real value will always reveal itself in the long-term.

Greg Kononenko
Greg Kononenko

My name is Greg Kononenko and I am a full-time online blogger and owner of Dad's Hustle. I'm a dad, and my passion is to help other mums and dads to start their own "hustle" and improve the financial future of their families.

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