Why Most Investors Lose Their Money
Investors seem to love stories, give them a exciting story about the computer revolution (1987), the internet revolution (1999), the real estate boom (2006) or silver replacing the dollar (2011) and individual investors come piling in with fistfuls of dollars. Don’t get me wrong, all investors buy into stories but the small investor tends to take it “hook, line and sinker” and never changes their view.
The latest Silver Bubble is a perfect example. Back when I started buying silver at $12.50 no one was paying much attention to it. In fact, I’ve been trading silver since 1988 and until the past few months I never knew anyone who invested in silver except for a couple clients. In fact, over the past few years since the advent of the silver ETF I had been telling friends of mine they should add a little silver to their portfolios.
It wasn’t until the recent parabolic move however that I began hearing about people putting large chunks of their IRAs into silver. Stories of people doubling their money in a matter of months tend to get everyone excited. As silver moved from $38 to $50 in 2-3 weeks I knew it was going to end badly. Parabolic moves like that are not caused by professional investors or hedge fund managers, they are caused by a stampede by the general public.
So many people had seen the “End Of America” type videos or fell victim to the hype in the Blogosphere and had to get into silver because it was going to $100 or even $250 per ounce! This is all fine as silver is such a small market that it could go to $100 or $250 if the dollar ever collapses for real. Right now however, there are an endless number of newbie silver investors “sweating it out” because they bought at 31 year highs only to watch it fall off a cliff.
Even when we were in the high $40s and people were saying things looked toppy, the silver fanatics were commenting on every article talking about how only idiots would sell silver. Well, I sold silver at $48+ and right now I’m not feeling at all like an idiot.
In order to make money in the markets, you need to learn a couple basic lessons. You can be involved in any market and have belief in a trade but NEVER fall in love with an idea. When the market presents you with a huge profit, take your original investment off the table and play with the profits.
Greed is your enemy, most people tend to buy more when they have made money but this is exactly opposite of what you should do. When a trade has moved your way there is often a higher degree of risk, using your paper profits to buy more is a prescription for disaster.