Why Retail Investors Lose Money | Value Investing

August 16, 2021 Angel Investing Education No Comments

Why retail investors lose money and is retail investing worth it?

Losing money at retail investing is not new. For example, George Soros's Quantum Fund had a portfolio value of $10 billion in 1986 when it launched. By 1998, the fund was down to $400 million.

Why did it lose 90% of its value?

Because Soros had made much bad investment picks at that point and many managers following his strategy, including one he hired, also made bad investment picks.

Why Retail Investors Lose Money

What makes retail investing unique is the high risk and big losses that are part of the package. Also, the low returns. That's one reason why retail investors lose money.

When it comes to why retail investors lose money, According to investment newsletters, retail investors make many bad decisions per year compared to what a professional manager would make.

The Great Recession

For example, in May 2005, the Voorhies Fund lost 41% of its value in one day. During the Great Recession, the Fairfield Value fund lost 46% of its value in 6 months.

In 2008, the Fairfield Midcap fund lost 80% of its value in less than a year. These are just a few examples of why retail investors lose money and the huge losses that retail investors have taken during and after the 2008 financial crisis.

Value Investing

Now again why retail investors lose money, there is a new retail investing trend that is making some people very rich. It's a new form of investing known as “value investing“. In value investing, managers are looking for value. When we are talking about why retail investors lose money this is another avenue that will look at.

That is, they are looking for investments that are near their intrinsic value.

Value investing is, in essence, trying to find businesses whose performance is better than what it is being worth. This is very important because, over time, stocks tend to move up in value (higher prices).

The new trend for value investors is to look for businesses whose value is lower than their current price. This is where the name “value investing” comes from, because “investing” is taking things apart to see what is inside.

It's basically an “investigation” that takes place at the stock valuation stage.

What is inside a company?

What is its worth?

At this point, I should explain what is intrinsic value. Intrinsic value is the price that a stock should be selling for, had it been an asset that someone else, namely, the company, decided to purchase. Companies can be valued differently.

Market Value Method

The most commonly used method is Market Value Method. The method is simple and straightforward. Calculate the market capitalization of the company, add up all of the individual company's shares, and determine what it would cost to purchase all of the shares.

The result is the intrinsic value of the company. The thing that makes the Market Value Method a little tricky is that it does not take into account potential future profits for the company. This is where the Discounted Cash Flow Method comes in.

It would take into account what the company can produce through the next five years, and then discount it to present dollars to arrive at intrinsic value.

In short, it tells us what it would cost to buy the company today, in today's money, without considering what the company can make in the future.

The Intrinsic Value

It's important to understand that intrinsic value is something that you can look at today, and see what a bargain stock is. That value is not going to last forever. Over time, the intrinsic value of a company diminishes.

The value of a company is what it is worth in today's money, and it's not going to stay that way forever. A company's intrinsic value diminishes because it has old, expensive equipment that it should sell. Also, the market value of the company has not kept up with the real value of the business.

That's what the Discounted Cash Flow Method is designed to identify. This is important to remember when you are investing in a company.

Discounted Cash Flow

As a stock investor, you need to understand the value of your company as soon as you buy it. Otherwise, you will be tempted to keep it forever. The problem with this is the discounted cash flow of the business does not keep up with the growth of the business.

If the growth of the company is slow, the growth of the discounted cash flow of the business will be slow as well. This may cause you to sell your company before it achieves its full potential.

If you want to analyze a company, look for a business that produces lots of value for its investors. I did some quick research on oil and gas companies, one of which was already in my portfolio as of last week.

This is what I looked for, (among others) return on invested capital, return on equity, return on assets, return on investments, profitability and the return on investment.

This is what I found,

* The return on invested capital, was not good, at least for this type of company.

Return On Equity

The return on equity was also not good. This means that for every dollar invested in this company, the company raised only 59 cents in revenue. If this company's return on equity were much better, then perhaps I would consider buying it.

Otherwise, I probably will sell it for a slight loss.

The return on investments was also not that great, if it was better, it means that the company has lower costs of doing business, perhaps it's not using expensive equipment or facilities, and it may not be spending so much on advertising.

The company seems to have lots of overhead, and some expenses that it should really cut back on, like paying an amazing amount of interest on the debt.

Still, I am very happy with the risk and reward I got on this one, even if the numbers are not great.

I think that this information may be helpful to you in deciding whether to buy a stock or not. I hope it helps you make your decisions easier.

Is Retail Investing Worth It For Beginner Investors?

For starters, I would like to point out that retail stock investing is not the same as the market trading of stocks. Market investing involves buying and selling stock shares after having been screened for quality, without any help from brokers. For beginner investors I would recommend you read this post as this is the easy and done for way

The retail investors do not have any sort of screening test and are usually advised by brokers when to buy and sell the shares. Market investing is done for an individual share, not for the entire market.

How do we know the shares are quality?

The answer is simple. We do not ask any one's opinion, we just go out and buy them and keep them until the day we sell them out.

How often should we sell them out?

How often should we buy the same share?

These are questions that can be very important. Because a smart investor will be diversified and make good decisions with different stocks in the market.

Here are some of the problems with market investing:

1. We buy without any help.

That is, we buy from brokers who take a commission. We would have to buy from them anyway because online trading is not selling without commission.

2. We are not buying according to the market.

But we do not know what the market is doing. A smart investor is aware of the market and the stocks that are rising and falling. But we are buying what is going to rise and fall without any guidance.

Build A Portfolio

It is like guessing when the market will change. There is no point guessing because the market knows nothing and will change nothing. It is much better to follow the market and build a portfolio through compounding.

With these ideas in mind, we are looking for the ideal way to invest.

The easiest and best way would be the bond market. It is very easy to invest and is very efficient in making money. The investment returns are not very high and so we are still willing to risk and invest our hard-earned money.

Bond investing is the best way for investing because it does not take a lot of time to work. The money earns is fixed and there are not no other risks.

With this kind of investing, we do not have to guess the market. We just follow the market and build a diversified portfolio with just a few stocks.

There are fixed returns and the amount earned is less, but with these stocks, we are still willing to risk it. With these bonds, we are able to risk and invest even if we are not earning much.

Jump Into The Market

But with online stock investing, we are able to just jump into the market at any time and start investing and earn on our investment.

I think Bond investing is the best way to build a diversified portfolio and earn at the same time. It is easy to learn and easy to use, but if we face a problem, we can easily refer the help of the Internet.

I hope you found this post on Why Retail Investors Lose Money informative, if you like you can check some of my other posts below that might be of interest to you. Thanks.