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#353 - The 10 Ways People Go Broke Investing In Shares · Money Grows on Trees

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The stock market does not make people broke. People make
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themselves broke in the stock market. Most people think losing money
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in shares is just bad luck or a bad market, but the reality is there
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are 10 specific mistakes that cause almost every
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single investing loss, and every one of them is
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completely avoidable once you know what they are. I'm
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Lloyd J. Ross, seven figure investor entrepreneur, and I've helped thousands of
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everyday Aussies, Kiwis, Canadians, Americans, people
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from the UK, get out of debt and build real wealth. And in this video,
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I'm going to walk you through the 10 ways people destroy their wealth in
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the share market so you never have to make any of those mistakes yourself.
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So buckle up, let's go. One to 10 in no particular order.
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One. They don't understand fundamentals, like what
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a share is. They have no idea. The
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mistake here is they think it's a candle, a
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green or red candle on a chart that goes up and down. That's
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what they think a share is. And they think looking at charts and
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getting in and out of the market like that is what share investing is.
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That's actually what they think, most people. And the reason they think that is
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because they've seen too many movies where you're looking at traders high
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leverage positions, boiler room type stuff, like the wall for wall
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street type stuff, boiler room type stuff. There
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are traders, like prop traders in banks and so forth. It's a legitimate thing.
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But most people, the layman is not cut out
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to sit in front of a chart and play stop loss orders and go
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through what's called technical analysis, which is where you're watching charting patterns
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to move in and out of the market. It's not a sustainable pattern and
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I know that because there's no people in the Forbes top 100 or
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400 who are traders. It's where you go to die. So they don't
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understand the fundamentals. They don't understand that a share is actually a
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share in a business and it's actually better to be a business picker than a
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stock picker. So a business owner
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is how you approach share investing. So if you don't like owning
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businesses, shares is not for you. That's where the wheels fall off straight
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away for most people. They think they're speculating, right? So that leads us into number
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two, which is they speculate on price movements on
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that chart. And of course that forces them to dive in
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and out of the market. And nobody, even some
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of those, I'm sure you've been hit up before, some sort of algorithmic
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trading, automatic trader. You get hit up on Instagram all the time for it.
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No one's going to make money doing that. You're going to lose. So, because
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eventually people lose. And this happened to a lot of friends of mine recently. They got
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into, they don't listen to my show, so they got into crypto trading
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and they all lost money. The whole thing caved in when there
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was that blip in the markets way back when and they all lost their money. and
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they haven't done it since. They only do it once and they never do it again. But trading
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is not a sustainable strategy. Have there been people
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make money for a period of time in that strategy? Yes. But
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is it really sustainable long term? No. That's
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why they get out forever and don't do it again if they get ahead. So
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don't speculate on price movements. It's not what it's about. It's
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about buying a piece of a business and letting the business do all the work for
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you. Three, they use leverage, which
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includes options. Now options is where you're buying an option
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to then own or sell a share. If you're buying
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an option to own in the future, it's a call option. If you're buying an
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option to sell in the future, it's called a put option. And Whether
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it's options or you're borrowing money on margin, which is margin lending,
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you're borrowing money on margin to
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buy shares, where if the shares fall by a certain amount, you are required to post
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extra cash to restore the margin that you've borrowed.
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It can go pear-shaped very quickly because if you buy call
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options, And you say, I wanna buy a call option. And you
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pay a very small option premium to buy call options. And
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you say, well, I'm gonna buy these options with the expectation the share is gonna rise.
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And when it does, I can buy them at the prevailing price that I bought the options
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at. It's like putting your foot on the share at today's price. So if it cranks,
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you can still buy it at that price that you have an option. You have the option to buy it at the
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prevailing price on the day, right? The exercise price. You
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exercise your purchase of the shares at the strike
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price that you have prearranged. It's like a forward contract on a stock. So
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when you're doing that, you are playing with leverage. You're
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more or less using money that's not yours. Now, where that can go bad,
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for call options, it can go bad when the strike price is not met.
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Like for example, you say, well, I want to buy Alibaba shares at
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$100 and the strike price is a hundred and ten to when it hits a hundred and
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ten, I can still buy it a hundred and you're buying. So
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there's a chance in call options that it never hits the strike price. So which
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means the premiums you've paid for the option, they expire. And
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that means they're worthless. So you can just literally just lose money waiting for a
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call option to hit the strike price. Similarly, with put options, it's
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the same thing. You lose money through the option premium. And
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with leverage or margin, the danger of that is
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when the shares, like if there's a market collapse, and the shares fall by
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20 or 30%, and you're required to post margin of 30% of
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a million dollar portfolio, it's not a small number, it's 300 grand. And
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it's like, where do I get that from? So you want to avoid leverage.
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Just own the shares, even options like Warren Buffett, they
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may have at some point sold put
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options to fill a position to make some extra cash. But
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the reality is just keep it simple. You just own the shares,
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even with real estate. Like, if people would
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do better if they just went in with a bigger deposit and they just had
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one instead of multiple, like just one, just less leverage, okay?
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Number four, they don't diversify at all.
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Now, there's such a thing as what's called diversification, where
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you have too much diversification, and you've got like,
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you know, I've got shares, I've got crypto, and I've got this, I've got art, I've got Pokemon cards,
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and I've got houses, I've got this, I've got blah, blah, blah, and you've got like 47 different thousand
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assets. That's not gonna work. to provide outperforming
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returns. There's no alpha in that. But there's
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also real risk in just having a concentrated bet only.
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You do see this in people's houses. Most people
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are not actually diversified. They've got all of their wealth in
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one direct residential real estate asset in one town
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and one street. All of their nest egg is in one
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thing. Now, to be fair, they might have super innovation, which is diversification, which is
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great, but you've got to diversify. So people that make huge mistakes, they don't diversify.
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Now, what I mean by that is they might put all of their portfolio in one stock. Now,
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has there been situations where that's worked out really well? Yes.
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If you had to put all your money into Amazon or all your money into Google or all your
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money into Costco or whatever, you'd have done really well.
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You would have beat the market. But how do you know that company is not going to go broke or
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do the wrong thing or whatever? But there is some power
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in going all in on a company. like those ones, but
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there's a thing in investing called business risk. It's
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like non-systematic risk. It's where the business owner, like
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the leader of the business or the business model can be killed and
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you lose your money or the business goes broke in hard times. Like Virgin Blue
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in Australia was a public company. We had COVID, it went broke. And
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if the shareholder, you had a share, you'd have lost all your money. So that's business
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risk and you diversify to avoid
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business risk. But you can never diversify, well
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not never, but it's harder to diversify away from market
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risk. So there's business risk, which is the risk in the fundamentals of
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the business, you lose money. And market risk is where the
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broader market sells off massively over a 10 or 15 year period, like in Japan,
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where you don't make any money for a long time. That can happen too. So
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I'm talking about diversifying against business risk. And how you
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do that is you own at least three stocks. Now if you wanna
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diversify, you may as well just diversify properly and you just own one index fund, or
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two, where you fully diversify across multiple companies. And
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that's sensible, but what you do find people do the mistake
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for is they'll take some cash and they'll put it all
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in crypto. And then what if that disappears? Gone.
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Or they'll put it all in some junior mining stock that their cousin taught
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them to buy, because he's an inside scoop guy, and
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all of a sudden they lose their entire amount. Or they put it all into a
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pre-IPO private small operating business that's going to list on
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the stock exchange soon, imminently, going to be listed on the NASDAQ. And
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it never does, and all of a sudden the business goes broke and they lose their money. That happens
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too. So make sure you diversify. across asset classes is
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helpful. And certainly within asset classes, at least three stocks, for
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example, would be diversified in quality companies.
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Five, they have a short time horizon, very popular. And
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I see this a lot, and I talk to a lot of people when it comes to money and finance, and they
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say, Lloyd, I love your show, I'm gonna invest in stocks, and I
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wanna buy a house, but I've got this 100 grand for my
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deposit for my house, and I don't wanna buy yet, I wanna buy in about two years time. So
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I'm gonna invest the money in the stock market for the next year or
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so, or two years. I'm like, oh, that's a bad idea. That's like
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investing in a house for one to two years, or buying a private small
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business like a gym, just gonna get this gym just for one or two
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years. No, what? You don't know what's going to happen in the next one or
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two years. What the hell? The stock market could go
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through successive 20% drawdowns in the next two years. You
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could put in $100K and all of a sudden, 20% down. Oh, my
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God. I've only got $60,000 left. I wanted to buy that house with this deposit. Oh,
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my God. The stock market's the worst thing ever. People lose
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money. I knew I shouldn't have done this. Because You didn't listen
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to this episode where you should never, ever go into any investment. If
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you are investing for one, two years, you're not investing, you're speculating. That's
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the difference. You're gambling. It's short termism. This
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is where a lot of people lose money because they go in for one or two years. They
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have no patience for 10 years plus, but you should have
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an approach for five, 10, 15, 20. Look, the longer you are
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invested, the more likely statistically you're gonna make money. In
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fact, they did a study. where they looked at the length of time
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investing in the stock market specifically, and they found that
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after 20 years, the likelihood of
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you making money is 100%. Isn't that amazing? What
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a statistic. So the longer you can hold your shares or
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your assets or your real estate, whatever asset you're buying, the
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more likely you are to make money. which is why good
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investing is more like good farming or growing trees. It's the
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harvest that pays later. It's the fruit that you pick much later. But
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people don't have the patience to watch their tree germinate and grow and
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you know, there's no patience. You can tell. So
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that's a big mistake. Just quickly, if you're ready to take control of your finances but
10:40
feel stuck on where to start, I have a solution. My
10:44
book, Money Bias Happiness, simplifies investing and
10:47
wealth building with practical steps to help you achieve financial peace.
10:51
Get your copy via the link in the show notes and let's get your money working for
10:54
you. Now back to the episode. So number six, moving on from number
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five. Number six, they trade a lot. They trade in and out
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of the market. Very easy done. They're not traders, so to speak, in and out, like
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hours, but they're moving things around a lot. Like
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they'll buy and sell maybe five or six, seven stocks
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a year and then get more and then... So it doesn't feel like a lot,
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but if they look back at their trading statement for the last 12 months, it's like, holy shit, there's a lot. And
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you can get carried away. So the activity is
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not commensurate or correlated to your success in
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investing. So activity does not correlate to
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success and outperformance in investing. They're not correlated. In
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fact, I'd say that, if anything, they're inversely correlated. They're
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inversely correlated, meaning the less activity, the
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higher the performance, which is weird. Because almost anything we
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do in this world, the more we do it, the better we get at it. But investing is
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one of those things where the more you do it, the
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worse it gets. It's a strange thing. So they trade too
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much. That's a huge mistake. Not only do you lock in losses and
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you can't turn the market, you end up making the wrong move, but every time you sell a
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position less than 12 months old for a gain, you're getting hit
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with a full 30% capital gains tax or more, depending on your
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tax rate. So it's very, very expensive
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to trade stocks. It is, or anything for
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that matter. But trading, same thing can be said for property, right? Number
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seven, they listen to stock tips. I
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know this can be painful because you're looking for the jackpot and I talked about in money buys
12:24
happiness This is six months in that book. I talked about the six Ineffective
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money mindsets that people carry one of them is this it's called
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the jackpot money mindset, by the way They are my they are
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original ideas in that book. They're not I'm didn't get them off someone else the
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six minute. They're mine Okay, so with
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stock tips that you get it's triggers the jackpot money
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mindset You know, I mean like so it's like oh my uncle works
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in this mine in Australia and they just discovered all this gold and
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he said that if you get in now it's going to be this and the shares are 20 cents
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and oh my god and you put in like 50 grand and then oh
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yeah that junior oh yeah they weren't broke there sorry about that you
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do get the same thing with teslas and the space i bet the
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spacex stock tip was pretty big and you do get these stock tips
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and the motley fools are really good at this Now I'm not gonna disparage
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them, but they have a very clever and unique clickbait
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subscription, that's free I believe, that goes out. And it's very
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good at hooking you in to this particular stock.
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And at the very end they say, that's not the best stock though, it's
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this one that we have on the inside when you start paying. Very,
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very clever copy. But a lot of people will see the Motley Fool and they'll
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treat it as a stock tip and they don't do any research and of course, They
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don't know what they own and then the wheels fall off it. So people
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who lose money in stock market listen to stock tips. So the rule would be do
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not listen to stock tips and do your own research. Know what
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you own and why you own it. All right,
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number eight, they look for cheap instead of good. And I have
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fallen for this myself in the past before. I've lost money doing this.
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Have I lost money? I don't know if I've lost, but I haven't made much. Maybe I
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lost some money on STLA. I bought some stocks in Stellantis,
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which is a merged automaker, and a juicy
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dividend. They had cash on the bank at like 40 billion
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euro, and the stock was 60 billion. They almost had the same amount of
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stock. They could have bought back the whole company. So there was a lot of downside protection, but
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not enough. Anyway, I think I may have taken a small
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loss, because I was like, this is not a quality business.
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So it took me a long time because I'm
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a bargain hunter. I look for value no matter what I'm doing. It's what got
14:35
me into podcasting, frankly. So here's a cool little side track.
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I always wondered why people did podcasting. I was like, do people
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listen to that? I don't know. I never listened to them, so I didn't know. And
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then I saw some people I knew doing podcasts. And this
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one lady in particular, back then, you're like, oh my gosh, this is like
14:54
semi-movie style if you had a podcast. And I remember she
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kind of came into one of my businesses and she was very flaky. Like she
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wouldn't come to appointments. She didn't show up. It was just, just not
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all, just flaky, just not, not bad, but flaky. And
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she said to me, I've got this top rated podcast in the top 1%. I'm like, huh? I
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was like, you've got a top 1% podcast? You're flaky as
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hell, how? And then I started noticing the same thing. I'm like, oh my
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God, this competition here must be so weak. I'm going to get in there. If
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you can do 1%, I'm going to do 1%, right? So that's
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what can be again. So I guess I saw that there was a lot of
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attention in podcasting and it was easy to get the
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attention. It was very undervalued attention. And I saw, cause I was like, this
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lady's getting attention. I also see that recently we have, uh, I
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don't know if I've mentioned this, but I'm collaborating with
15:45
an accounting business, and it's fascinating. Accounting is
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interesting. In my experience with accounting and
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accountants, it's not been good. Not that the accounting
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has been bad, but the quality of the communication has
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been poor. It's an interesting industry, and
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so I'm noticing that there's weak competition in
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accounting, similar to what I found in the podcasting space.
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It's done so badly that I feel like there's a massive opportunity there.
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It's interesting too, even our launch amount that we bought, the previous
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owner that was running it, I don't think they understood what they owned. I think
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they liked it because of some cash, they have a bit of a punt, and it was just, Guess
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it was not untapped under an area and and I was like, I mean if
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this person can run it And as a result, you know, we're running it like 30% up
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40% off what they did only within two years. So my
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point of this sidetrack for number eight is it's easy to
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The topic of this one is cheap. Look people look for cheap instead
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of good and And I think that part of
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the process is I am an explorer or
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seeker of value, and it has led me to wonderful business
16:55
success in all of our businesses. We have had success in
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all five of our companies and businesses because we have
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spotted untapped value that we've
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been able to extract. and provide. You
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want to find the same in shares, but the biggest challenge I
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faced was what I found was, and Warren Buffett
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says this a million times, and I didn't understand what he meant, but now I do. I'm going to impart it
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to you. It's better to buy a great
17:25
company for a fair and reasonable price
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than it is to buy a fair and reasonable company at
17:32
a great price. It's better to buy a great company at a fair price
17:36
than it is to buy a fair company at a great price. So when you're looking for
17:40
cheap instead of good, you have to
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then make a decision later to sell, because it sucks so much. But you may have made some
17:46
money, but then it's not scalable. Whereas if you buy a company like Google, for
17:50
example, that just had 82% blood earnings, and it can print like
17:53
that for the next 30 years, all you've got to do is buy one stock and sit on your
17:56
ass and let it do its thing. But
18:00
it's not cheap. It's like 25, 30 times that. It's not cheap, but it's good. So
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the opposite of where people lose money is they go for cheap instead of good. That's
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the whole one here that I want to get. This is the point I'm trying to
18:11
make. So that's where they lose money. So I'll flip it. Good
18:15
is better than cheap, as long as the good's not totally priced out
18:18
of this world, because no matter how good a company is, it's
18:22
not worth an infinite price. Once you get past 30 times any, you gotta consider
18:25
it a bit more closely. Number nine, they don't even think about
18:28
investing. They just watch, they just wanna
18:32
get rich fast. So if you go in my home
18:35
office there, I don't know if you've ever seen, I've got all above
18:38
me there, all the books that I've read on investing, there's tons. And I've read
18:41
The Intelligent Investor three times and I'm like, I'm interested in
18:45
it. And I think about it deeply. Like
18:48
as I said on another episode I just did, I was laying in bed listening to the Moody's
18:52
earnings call. And so they
18:55
don't read or think about investing, but they want to invest. And I've said
18:58
this before, I've got a buddy of mine and he said to me the other day, you know what man, I
19:02
don't think this individual stock thing is for me, because we talk about it all the time. Because
19:06
he said, you know, just don't put the effort in. And that's a really good wise deduction
19:10
he's made. He's wise. Because he said, this is my circle of competence. I'm
19:13
operating outside of it. I need to go back in. And he did. So that's good. But if
19:16
you think about and you read about investing at a
19:20
reasonable level, then you're operating probably inside your zone of competence. But
19:23
most people aren't. That's why they buy stocks, individual
19:26
ones. and they don't understand what they own, and they don't think about it, and
19:30
all of a sudden that falls, oh my God, what's going on? They
19:33
don't know. So you shouldn't be owning things that make you do that. So
19:36
I think if you're gonna own stocks, invest and read about them, even just
19:40
understand what you own. And number 10, which is the very
19:44
common too, we haven't probably experienced that much lately because
19:47
we haven't had a massive collapse since COVID. in
19:50
the stock market. But when a collapse happens, it feels like the
19:53
whole world's ending because the way that the news operates is that it makes you
19:57
want to think that because it sells news. And it just puts the
20:00
fear of God into people. And so number 10 is when they panic,
20:04
when the stock market falls, and they lock in massive losses. And you saw it during the
20:07
GFC, people do this with their super like, if we're going through a
20:11
very deep bear market or stock market collapse, Do
20:14
not sell. Just hold all the way through,
20:18
as long as it takes, okay? Because this is how you lock
20:21
in losses, and then you'll say to yourself, oh, I'll get back in when it goes up, and you don't get back in.
20:25
And then all of a sudden, we go through the biggest bull market of all time, and you miss out on 400% gains.
20:29
And that's how you, you lose twice. You lose because you're locking your losses, and
20:33
you lose because you don't get back in, you lose all the upside. So it's
20:36
an error of commission by selling and error of omission
20:40
by not participating. And of course that's created massive losses
20:44
in stock market investing. So they're the 10 ways that
20:49
people lose money in the stock market and the
20:52
10 things to avoid if you wanna make money. So how do you make
20:55
money? Just do the opposite of those 10 things and you'll be okay. All right,
20:58
if you enjoyed the episode, hit the subscribe button, share this with a friend, leave us a question in
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