Here’s why over 90% folks lose money in stocks

Summary

Introduction
Is investing long-term better than stock-picking in the short term?
What are the odds a stock achieved >15% CAGR in the last 10 years
What does a market crash mean to an SIP investor?
What are the disadvantages of stock picking?
Conclusion

Introduction

Investing is often considered a game, with investors trying to outsmart the market and beat the odds. However, this mindset can lead to impulsive decisions and a lack of long-term planning. A better approach is to view investing as a habit, something that is integrated into your daily routine and done consistently over time.

Imagine investing as planting a garden. If you plant a single seed and expect it to grow into a bountiful harvest overnight, you will likely be disappointed.

But if you consistently tend to the garden, watering and fertilizing the soil, and removing weeds, the fruits of your labor will eventually come to fruition. Similarly, investing requires consistency and patience.

Is investing long-term better than stock-picking in the short term?

One study that found that long-term SIPs (systematic investment plans) outperform active stock picking is "The Behavior of Individual Investors" by Brad M. Barber and Terrance Odean. The study analyzed the trading behavior and performance of 66,465 households with accounts at a large discount brokerage from 1991 to 1996 and found that those who traded most earned an annual return that was 3.2% less than the market. The study concluded that the underperformance was largely due to the investors' tendency to trade actively and to buy high and sell low.

In 1973 a Princeton University professor Burton Malkiel claimed in his bestselling book, A Random Walk Down Wall Street, that “A blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by experts.”

What are the odds a stock achieved >15% CAGR in the last 10 years

Let's see what are the odds a person actually picks up and holds a stock that achieved >15% CAGR in the last 10 years

Your odds as an individual investor of picking up a stock that generated >15% CAGR (or more than 2x average Inflation rates in India) were:

Roughly 28% over the last 15 Years
Roughly 40% over the last 10 Years
Roughly 27% over the last 5 Years

Investing in mutual fund portfolios through SIPs has several benefits that make it a strong case for long-term investment strategies. One of the main advantages is the ability to achieve consistent returns that closely track the broader market.

The performance of large and mid-cap funds over the last 10 years demonstrates this. Through a systematic investment plan (SIP) in large and mid-cap funds, the odds of achieving a return greater than 15% annually (XIRR) over the past five years was substantially higher at around 70%, with an average return of 17.17%.

This highlights the potential for strong returns through a SIP investment strategy, giving investors exposure to a diverse range of securities, and providing a smoother ride through market fluctuations.

Additionally, SIP investing allows investors to avoid the risks associated with trying to beat the market through active management, such as the potential for underperformance or high fees.

What does a market crash mean to an SIP investor?

You're investing in multiple mutual funds. You hear the news that the market is crashing. Should you stop investing in those funds to protect your money? That's a bad idea.

Discontinuing your SIP investments during a market downturn is a mistake as it negates the opportunity to accumulate more units when prices are low. A downturn is an ideal time for SIPs to work in your favour, as the market hits lows, resulting in a decline in a fund’s NAV, you end up buying more units at a lower price.

This is called Rupee Cost Averaging, and it is considered by some as the eighth wonder of the world. It is important not to panic sell, time the market, take on new debt, ignore investment plans, or redeem investments during a market downturn. Benjamin Graham, the ‘Father of Value Investing’, advises that successful investing is about managing the risks, not avoiding them.

What are the disadvantages of stock picking?

Picking stocks can be difficult because it's hard to predict which ones will perform well. This is because the stock market's gains are often due to a small number of "extreme winners," or stocks that perform very well.

From 1926–2016, only 1,092 out of 25,300 companies were responsible for the U.S. stock market’s gains. From 1980–2014, 40% of the stocks in the Russell 3000 Index provided negative returns, despite the index returning 2633.12%, and the median stock underperformed the market by -54%.

However, what is most interesting is that ~7% of these stocks may be classified as extreme winners. This means that many stocks will perform poorly, while a small number of stocks will do very well.

Besides this unpredictability of Stocks, there are a few other disadvantages that come with stock-picking.

Risks - Stocks can be risky because if a company isn't doing well, its stock price can drop and you could lose your initial investment. But owning a diversified portfolio can help reduce that risk.
Getting paid last - If a company goes bankrupt, bondholders and preferred stockholders get paid first. But this is only a concern if the company actually goes bankrupt.
Time-consuming - Buying stocks on your own means doing your own research on each company, reading financial statements, and keeping an eye on market fluctuations. It's a lot of work.
Taxes - Profits from stock sales are subject to capital gains taxes, but losses can provide a tax break.
Emotional - Stock prices fluctuate constantly, and it can be tough to not get caught up in the emotional roller coaster. It's best to check in on your investments regularly, instead of constantly watching the stock prices.
Professional competition - Professional traders and institutional investors have an advantage with more time and knowledge, as well as sophisticated tools and systems.

Conclusion

SIP investing is better than stock picking because it allows investors to consistently invest in a diversified portfolio over time, instead of trying to predict which individual stocks will perform well. This can reduce the risk of loss and increase the chances of achieving long-term investment goals.

Stack makes investing a habit easier and simpler. All you have to do is choose