Last Updated on 11 September, 2023 by Samuelsson
The stock market is a huge market, with hundreds of billions of dollars changing hands every day. It attracts all kinds of investors — big and small, professionals and amateurs, as well as traders who try to make a living from their daily gains.
While there are countless stories of people who have made good fortunes from the stock market, a great majority of traders and some investors lose money in the market. Those who know how to play the game try to keep their losses small so that they become part of the investing game. But amateur traders often lose so heavily that they don’t recover easily after a loss.
In this article, we will look at a few stock market loss stories, common mistakes that traders make, and then give some advice on how you can avoid becoming a loser in the market!
Stock Market Loss Stories – People Who Lost Their Money In the Stock Market!
Jesse Lauriston Livermore
Jesse Lauriston Livermore definitely is one of the most fascinating traders of all times. He made and lost millions of dollars several times during his trading career. The stories about his trading losses were as spectacular as the stories about the fortunes he made in the market. And with a lot of personal problems, he ended up committing suicide.
Born in 1877 to a very poor family, Jesse Livermore traded his way to success in the Wall Street. He made more than $100 million during the 1929 bear market. He anticipated the great bear market and took huge short positions before the market crash. Because of his success during the bear market, he was nicknamed the Great Bear of Wall Street.
But by 1934, he had lost all the money and went bankrupt. In fact, he was suspended as a member of the Chicago Board of Trade in March 1934. It was believed that his second divorce and the accidental shooting of his son by his former wife affected him psychologically, and his trading abilities declined.
Joe Campbell was a stock day trader who was trading his personal account as his only means of livelihood. He was doing fairly well with his small account, which had about $37,000 before he made the worst mistake of his trading career and ended up not just losing everything but also owing to his broker.
The stock of KaloBios, a biotech startup company, fell to $0.97 when the company announced that it was planning to wind up. When the stock rose to about $2.07, Joe went short on the stock, with so much conviction that the stock was going to fall again. However, his decision not to set a stop loss, would soon prove one of his greatest mistakes!
Joe was in a two-hour meeting when the news broke out that an investor group had bought a controlling stake in the company. The news ignited huge interest in the stock, and the price jumped by more than 600% during the after-hours session. By the time he returned to his desk, his account was showing a deficit of more than $106,000.
He couldn’t believe his eyes, but he had himself to blame. Joe obviously made a lot of mistakes in that trade. Going short on a stock is dangerous on its own, but doing that without a stop loss and taking the trade beyond the day’s close was a recipe for a disaster.
Steven Donovan interned at Lehman Brothers when he was in college and had a sort of emotional attachment to the firm, even though he thought that the financial giant was in a good financial state. So when he opened his first Roth IRA in the period leading up to the 2007 financial crisis, he had only Lehman Brothers stock in his stock portfolio.
As you already know, the mighty financial giant went bankrupt, and its stock fell all the way down to zero.
Currently working as a money coach, Steven realizes he made a huge mistake investing all his capital in one stock. According to him, the fall of Lehman Brothers opened his eyes to the possibility of a stock going down to zero — something he never thought could happen.
He now preaches diversification and the dangers of putting all of one’s eggs in one basket. Obviously, no one can prevent a stock from going down, but an investor can reduce his risk by spreading his investments across several stocks and other asset classes so that only a small percentage of the capital is in each individual stock.
Steven is currently a fan of broad-based index funds.
Now a personal finance expert and the owner of a personal finance blog, Jon Dulin started investing during the peak of the Dotcom Bubble in the late ‘90s. Then, the market was in a steep uptrend, and tech stocks, in particular, were doing exceedingly great — there was so much enthusiasm about the prospects of the new technological innovations.
Jon bought the stock of a telecommunication company called WorldCom and thought he had hit a gold mine when the news of a possible merger with the telecom giant MCI broke out. Following the news of the merger, the stock price went up, and Jon, an 18-year-old lad then, couldn’t contain his joy.
Unfortunately, the merger didn’t work out, and the stock price fell. But as it was falling, Jon kept acquiring more shares of the stock, without trying to find out what was happening with the stock. The stock dropped from $40 per share down to $5, and Jon was still buying the stock.
Later, it was reported that the company had been falsifying its financial statements, and when the company filed for bankruptcy, the stock fell flat. Jon lost more than $6,000. The experience gave him a vital lesson though — be watchful and have an exit plan!
Todd Tresidder often talks about how he learned from his first investment, which was a complete loss. To him, losses are a natural result of investment decisions, and they can become a valuable experience to learn from. There is a vital lesson in every investment mistake, and the real loss is not learning from the loss.
Shortly after graduating from college, Todd was hired by Hewlett-Packard and was doing pretty well for himself. A friend, who was working in the credit department of the company, told him about a hot new tech company that bought a lot of HP mainframe computers to run its business.
According to him, the stock was listed on the NASDAQ pink sheets, and his friend had inside information about the company — owing to his job as a credit analyst for the computer supplies. Being a naive investor, Todd used all his savings to buy the ‘hot’ stock.
As you would expect, the investment ended in one huge loss. Looking back, Todd realized that he made an obvious mistake by investing based on a hot tip from a friend without researching the stock well. He also admitted that it was very wrong to have invested more than he could afford to lose. And worst of all, he made the investment without an exit strategy or risk management plan.
Now that we have told you a couple of stock market loss stories, we’ll look at the top mistakes that stock traders and investors make in the stock market!
Common Mistakes that Lead to Losses In the Stock Market
Retail investors, especially the ones who are new to the market, tend to make some avoidable mistakes that could make irreparable damage to their trading account.
While there are many of those mistakes, here are some of the common ones. Several of them were made by the traders and investors that we’ve just covered.
1. Aiming for Short-Term Returns
Most retail investors/traders think that the stock market is a place to make a lot of money in a very short time. They come to the market with this get-rich-quick mentality and throw away their money trying to beat the market.
In order to do money in the stock market, you need to invest or trade with a longer time horizon in mind! We’ll talk more about this soon!
2. Lack of Plan
Many of the retail investors don’t have an investment plan. Even when the stocks in their portfolios appreciate, they don’t know whether to sell or to buy more of the stock.
3. Investing More Than One Can Afford to Lose
Some people invest all their life savings in stocks, so when the normal market fluctuation hits their trading accounts, they become overwhelmed by fear of losing everything.
4. Lack of Risk Management Strategies
Stocks are risky investments, so anyone investing in stocks should have a plan for managing the risks involved. Some professional traders put stop loss orders, while others try to hedge their positions. But most retail investors don’t even know what risk management is, let alone have a strategy for it.
5. No Trade Management Plan
A trader should know how he intends to manage a trade once he enters into one — whether to put a profit target or to trail the profit — but most retail traders just enter their trades without knowing what to do next.
6. Taking Risky Positions
Certain trades or investments are riskier than others. Taking a short position in stocks is riskier than taking a long position. For example, with a 1x leverage, a trader can lose more than what he has in his trading account if a short position goes wrong, but in a long position, the maximum one can lose is the amount invested.
7. Inadequate Diversification
Betting on a single stock or a few stocks in the same industry can be very dangerous. If something unexpected happens to the industry, the investor can lose everything, or a big chunk of the account.
Adequate diversification helps to minimize risk.
8. Not Researching Stocks Before Buying
It is very dangerous for an investor to buy a stock he knows nothing about. But some retail investors buy stocks based on tips from someone else.
Of all the mistakes listed here, there is one that’s more prevalent among investors and traders, and we believe that it is one worth having a closer look at.
We’re talking about thinking long term, and not treating the stock market as a “get rich quick game”.
Why You Need to Think Long Term
Thinking long term is key if you want to be successful in the markets. The reasons why that is, are many. Let’s have a look at some of them!
1. Short Term Price Fluctuations
Over the short term, stock prices fluctuate a lot, and trying to predict all the market turns is almost an impossible task. But the long-term direction is easier to identify and follow. The market has been climbing steadily over the years, and will continue to climb for the foreseeable future!
2. Less Transactional Costs
When you think long term, there will be no need for frequent buying and selling, so you will spend less in commission charges.
3. The Power of Compounding
The longer your investment in stocks lasts, the more time it has to compound the returns. The power of compound interest is one of the greatest secrets about building wealth!
Traders Also Need to Be Long Term!
Trading never means that you’re going to have an equity curve that goes straight from the lower left corner to the upper right corner. You’re going to experience drawdowns on your way to riches, and have to be perseverant and endure them to experience new equity highs.
How to Recover From Your Losses and Become a Winner
There is no doubt that losing a large portion of your investment capital can have an effect on your trading confidence. But almost all successful investors have had to deal with losses at some point in their investing journey. The following tips can help you rise above your losses and become the winner you desire to be.
1. Learn From Your Mistakes
It is almost impossible to succeed in trading/investing without experiencing some losses. The best thing you can do after having a loss is to look for the mistakes you made and learn from them — there is always one or two lessons you can get from every loss.
2. Don’t Get Too Greedy
Greed is probably one of the reasons you lost money in the first place. So if you wish to recover, you have to control greed. Don’t borrow money and rush back to the market to recover your losses; you will end up losing more. Instead, start small and build gradually. A slow-and-steady approach wins the race.
3. Invest In What You Know
Make sure you research a stock before putting your money in it. Invest only in companies you how they make money.
To reduce your risk, you must diversify across different industry sectors. The easiest way to do this is to buy an index ETF or index fund.
5. Look For an Edge
If you want to trade the markets, having an edge is a requirement! You cannot be profitable without one!
The stock market is a great place to invest and build wealth over a long period. There are countless stories of people who have made good fortunes from the market, but a great majority of traders and investors lose money. If you don’t play your game well, you can lose everything and even more.