95% of all market participants lose money in the stock market. And only 5% are successful. There is a reason why the stock market is wild and noisy, its because its not meant to be a place for investors like you and me.
Traders make money for the brokers. Brokers don’t want patient investors who only does once-in-a lifetime transaction with them. They want something with the attention span of a cockroach where every tick, they see signs that they must play, buying and selling stock like there’s no tomorrow. It keeps the lights on and it feeds people. Transaction is what makes them money and traders create transactions every second. They wouldn’t make money out of us investors so they cater their tools and marketing to attract traders.
Now, why am I saying this? What is the point of all this?
I want you to realize that you are playing in an environment that is not meant for you. An environment where investors are not welcome. They may use terms that investors use but in reality we are not welcome in this environment. Just notice how many investors are in the stock market versus the number of traders. And how many traders think Warren Buffett and other great investors are just old people whos times has passed. Quoting them only when convenient for them.
There’s an opportunity here though, the more traders there are in the market, the more inefficient the market becomes. So it means that investors participate in the price discovery and help makes the system efficient. Come to think of it, if all investors transact among themselves, wouldn’t the price of a stock be always efficient? Investors always demand a margin of safety and will never overpay for a stock. If they are the only participants, there won’t be any inefficiencies. All prices would be correct.
The opposite is true with traders. They would buy something high and sell something cheap. A cheap stock will become much cheaper because they have to sell to cut loss. And an overvalued stock would be bought and sold because they “broke out” for fear of missing out. An expensive stock can become even more expensive because they have NO eye for “value”.
Traders are the source of inefficiencies. As an investor, we must take advantage of their folly.
Going back to my first point that 95% of market participants lose and only 5% make money, and on top of that, the brokers skim off the top, there’s really only a few people who are making the money in the market if you believe that the market is a zero sum game. And the only way to beat the overwhelming majority and become the 5% is to think differently from the crowd. And what is the prevailing thinking of the crowd you say? Its easy to spot, just look around. The prevailing thinking is “trading”. So adapting an investor mindset would automatically springboard you to the 5% that makes money. All you have to do next is how investors do their investing.
What do I mean when I say adapting an investor mindset?
Being an investor means buying with a margin of safety. Never over paying for an investment. Looking at the business if its making money. And then looking at the management if they are trust worthy. In other words, being an investor means being a business owner. Adapting an investor mindset is adapting a business owner mindset.
If you think of stocks as ownership of business when you transact in the stock market, you are already ahead of everybody else. Because when you treat stocks as a businesses, you will do your research, you will buy with a margin of safety, and you will look at the management as if you’re trying to hand over a business that would ultimately be your family’s main asset and your children’s inheritance. In other words, you’ll take it seriously. You will never call it a “play”, “play the market”.
As Ben Graham said, you can never remove speculation in the stock market. But its a tragedy when an investor thinks he is investing when in fact he is speculating. And its a tragedy when people think that they can become one of the 5% when all they are doing is the same as the 95%. There’s a reason why the richest men in the world are either businessesmen or investors. Both are sides of the same coin.
So when you look at the stock market, remember this, it is not meant for us. Its a place for traders. But we already know how they think so we can use that to our advantage.
By the way, you can start learning how to become an investor with fundamental analysis a course I created for beginners.