PMT Forum
How do you want to make money today?

Investing vs Trading and why traders loses money

kingstriker · 13 · 9028

kingstriker

  • Junior Member
  • **
    • Posts: 35
    • Likes Received: +0/-0
sir newbie here. alam ko ung investing pang long time while trading short time. Bakit traders lose money? Enlighten me please


TSO

  • PMT Idol 1500
  • ****
    • Posts: 1,639
    • Likes Received: +1/-0
Reply #1 on: Jul 26, 2014, 02:36 AM
sir newbie here. alam ko ung investing pang long time while trading short time. Bakit traders lose money? Enlighten me please

1. Significantly higher activity compared to investors -- very high transaction costs
2. Behavioral biases, especially herding and action bias (investors have their own too)
3. Leverage employed to generate material ROE for the trader's actual capital
4. Price volatility and impact on stop-losses, margin calls, or capital drawdowns
5. Informational disadvantage versus investors
6. Fickle market sentiments


kingstriker

  • Junior Member
  • **
    • Posts: 35
    • Likes Received: +0/-0
Reply #2 on: Jul 26, 2014, 10:35 AM
@TSO idol laymans term po tau muna medyo nd q pa gets ung stock market. Mag cite aq example based sa alam ko for example dba ang trader bibili ng stocks then he gains losses due to price of stocks going down dba pde naman hintayin nya tumaas ung value ng stocks na binili nya para gumain siya bakit nya po ibebenta ung stocks na alam nya loss siya?


Wills

  • PMT Jedi 2500
  • ****
    • Posts: 2,766
    • Likes Received: +3/-0
Reply #3 on: Jul 26, 2014, 12:26 PM
Investor = motivated by facts

Trader = motivated by probabilities


Wills

  • PMT Jedi 2500
  • ****
    • Posts: 2,766
    • Likes Received: +3/-0
Reply #4 on: Jul 26, 2014, 12:52 PM
@TSO idol laymans term po tau muna medyo nd q pa gets ung stock market. Mag cite aq example based sa alam ko for example dba ang trader bibili ng stocks then he gains losses due to price of stocks going down dba pde naman hintayin nya tumaas ung value ng stocks na binili nya para gumain siya bakit nya po ibebenta ung stocks na alam nya loss siya?


If you know the intrinsic value of the stock then cut loss is not an option. Look at AGI, price went down recently because of someone else's transaction, if you think about it you'd ask why did people panic? Did that transaction has anything to do with the value of the stock? Did the business performance hurt by that transaction? The answer is simple, they took the price movement seriously (that weakens your stomach) and they don't know the intrinsic value of the stock. Instead of focusing on what's happening on the business, they opt in focusing more on what's happening inside the auction house.


If you're confident with what you know, paper loss will never persuade you to make irrational decision.
« Last Edit: Jul 26, 2014, 02:56 PM by Wills »


JohanVIA

  • Junior Member
  • **
    • Posts: 43
    • Likes Received: +0/-0
Reply #5 on: Jul 26, 2014, 02:40 PM
"If you're confident with what you know, paper loss will never persuade you to make irrational decision"

very well said.


kingstriker

  • Junior Member
  • **
    • Posts: 35
    • Likes Received: +0/-0
Reply #6 on: Jul 26, 2014, 07:00 PM

If you know the intrinsic value of the stock then cut loss is not an option. Look at AGI, price went down recently because of someone else's transaction, if you think about it you'd ask why did people panic? Did that transaction has anything to do with the value of the stock? Did the business performance hurt by that transaction? The answer is simple, they took the price movement seriously (that weakens your stomach) and they don't know the intrinsic value of the stock. Instead of focusing on what's happening on the business, they opt in focusing more on what's happening inside the auction house.


If you're confident with what you know, paper loss will never persuade you to make irrational decision.

Thank you very much. My light bulb in my head turns on.  :yoohoo:


wilch23

  • VIP 6500
  • *****
    • Posts: 6,544
    • Likes Received: +8/-0
Reply #7 on: Jul 27, 2014, 11:16 AM

If you know the intrinsic value of the stock then cut loss is not an option. Look at AGI, price went down recently because of someone else's transaction, if you think about it you'd ask why did people panic? Did that transaction has anything to do with the value of the stock? Did the business performance hurt by that transaction? The answer is simple, they took the price movement seriously (that weakens your stomach) and they don't know the intrinsic value of the stock. Instead of focusing on what's happening on the business, they opt in focusing more on what's happening inside the auction house.


If you're confident with what you know, paper loss will never persuade you to make irrational decision.

In this example, the investor will either sit tight or buy some more during the downturn.

The trader on the other hand may have cashed in during the high and pocketed some gain. If the trader bought during the high, he will have to be patient and sit tight or cut loss and buy another day (same stock or otherwise). In both cases, he can also buy during the downturn if he thinks the downturn is just a minor correction.

Now for someone who knows what's happening in the business, whether investor or trader, he would have known to sell during the high, and possibly buy back later.

He may be accused of insider trading though. Nah, this is the Philippines.
« Last Edit: Jul 27, 2014, 11:19 AM by wilch23 »


kingstriker

  • Junior Member
  • **
    • Posts: 35
    • Likes Received: +0/-0
Reply #8 on: Jul 28, 2014, 12:26 PM
Masters is there a book about stock market trading here in philippines? I want to know if the stock is just in correction, etc or going bankrupt.  :thankyou:


TSO

  • PMT Idol 1500
  • ****
    • Posts: 1,639
    • Likes Received: +1/-0
Reply #9 on: Jul 29, 2014, 04:27 AM
@TSO idol laymans term po tau muna medyo nd q pa gets ung stock market. Mag cite aq example based sa alam ko for example dba ang trader bibili ng stocks then he gains losses due to price of stocks going down dba pde naman hintayin nya tumaas ung value ng stocks na binili nya para gumain siya bakit nya po ibebenta ung stocks na alam nya loss siya?

K. See below.

1. Significantly higher activity compared to investors -- very high transaction costs
2. Behavioral biases, especially herding and action bias (investors have their own too)
3. Leverage employed to generate material ROE for the trader's actual capital
4. Price volatility and impact on stop-losses, margin calls, or capital drawdowns
5. Informational disadvantage versus investors
6. Fickle market sentiments

1. Consider this. "Transaction costs" consist of three intangible costs in addition to the brokerage fees you spend on every trade: delay, price impact, and opportunity costs.
    Price impact = how much the market moves away from your decision price (the price at which you want to buy the stock) because of your trade.
    Delay = the potential gain (loss) you missed due to delays in execution (equal to the difference between most recent close and your decision price.); and,
    Costs of unfilled orders = difference between closing price for the day your trade has been completely priced out and became non-executable. The sum of these four items will equal the gap between your paper and real portfolios.

Obviously, the more you trade, the more you will have to exceed the sum of these costs. Let's say your trading costs—BOTH implicit (delay, price impact, opportunity) and explicit (brokerage fees and taxes)—sum up to 4% of your portfolio per trade. Let's also assume you run a PHP 1 million portfolio with the average holding period of three months (portfolio turnover rate of 400%). You're a trader. If your average trading cost runs up to 4% per trade, that means you have to make a compounded average rate of 17% a year minimum just to meet those trading costs alone. FOR EACH TRADE. Every time you make a trade with a stock, it must make 4% within the next three months or you'll miss those benchmarks.

The PSEi averaged 25% a year, if I recall correctly. So, if you net out your trading costs alone, you'll be making 8% a year total. That's not a very good performance, is it?

Now let's consider you're a value investor. You make trades once a year. This means every trade you make must exceed 4% a year. It's not 17% a year because you only do it once a year. If you have a longer-term horizon—3 years—then your compounded annual benchmark rate drops to 1.32% per trade. If the PSEi averages 25% a year, then on a 1-year basis, the investor would've made 21% total. On a three-year basis, 23.68% per year or 89% cumulative, versus a trader who'd have accumulated 26% during the entire period. To match the value investor on the 3-year basis, the trader has to CONSISTENTLY generate 40.7% in profits for three straight years, with virtually no allowance for loss. In other words, the investor is sitting there doing nothing and chillaxing while the trader is constantly under pressure to overcome the intangible costs of trading. (And let's take note, the 4% mark is realistic in the USA, where delay costs = 2.95% of investment returns.)

2. Behavioral biases. This is basically human nature, and it boils down to one of two things: people can be STUPID/CARELESS or they can be EMOTIONAL. Here's a comprehensive list. It's not everything, but it's a lot to take in and absorb.

Stupidity / Carelessness
    > Conservatism bias: unwillingness to let go of a prior view/opinion in light of new information
    > Confirmation bias: mental filter that ignores information contradicting one's beliefs
    > Representativeness bias: overreliance on pre-established classifications and experiences to categorize new information—framing new experience through the past. (Example: "your most recent ex-girlfriend cheated on you so your next girlfriend is likely to be a cheater too")
    > Illusion of Control bias: delusion that people believe they have more control over something than they actually do
    > Hindsight bias: tendency for people to believe a historical event is more predictable than it had been before it happened, due to bias created by the knowledge of what had happened. (Example: "Noynoy won the Presidency against Manny Villar in 2010 because it was so obvious what the people wanted")
    > Anchoring: inability to move far from a given "benchmark" number, aka an anchor. (Example: storekeepers in the tiangge generally overcharge you by 3× to 5× the cost of the product because they know you'll demand something like a 20% discount)
    > Mental accounting: mentally separating accounts of any sort, rather than considering something as a whole (e.g. correlations or excessive focus on one aspect of risk, etc.)
    > Framing: an influencing factor to how people can make decisions, based on how they are framed
    > Availability bias: misestimation of an outcome's probability due to ease of recall (easy to retrieve from memory, fits within a certain category you are well-versed in, comes from your personal career/experience, or resonates with one's own beliefs) (Example: the reason why people tend to buy losers and sell winners is because they think buying past winners will continue to grow when the price movement could've been exhausted and it hit a resistance level)

Emotional
    > Loss aversion: avoidance of loss, as opposed to gains. Can be amplified by a short-term time horizon
    > Overconfidence: overestimation of own reasoning, judgment, or skills, and can be reflected in "self-attribution" (person takes credit for successes and blames others for failures)
    > Self-control: lack of discipline
    > Endowment: emotional attachments
    > Regret aversion: avoiding the pain of making poor decisions, which can be from actions taken (commission) or not taken (omission). Can result in overconservatism, decision paralysis, or recklessness
    > Status quo bias: fear of the unknown
    > Social proof: herding, false sense of security because a lot of other people made a similar decision when all of you were wrong to begin with

3. Leverage. Self-explanatory. Let's say you have a P1 million portfolio. 70% of that came from someone else (a bank, for example) and you put up 30%. If the portfolio makes 8% return net of trading costs (see above), you actually made 26.67% (80k ÷ 300k). However, if you lose money, like a 15% loss, that 150k loss is equivalent to a 50% hit on whatever you put up with. It amplifies both returns and losses.

4. Price volatility and impact on stop-losses, margin calls, capital drawdowns. Let's say you have a stock trading at P100. You have a stop-loss set at P90. For one day, the company's price suddenly drops to P88 because of an algorithmic error involving foreign money managers or because of market manipulation. The next day, it rises to P95. Instead of a P5 paper loss, you have a P10 real loss because your stop-loss wasn't set adequately to account for the volatility of the market price.

5. Informational disadvantage. Again, self-explanatory. Example: I didn't vote for Noynoy in 2010 and, in fact, didn't vote at all. Why? Because I knew it wouldn't change a damn thing and the country would still be the same no matter who became Philippine President. But voters didn't care. They thought voting Noynoy would solve everything or push the country forward towards where it should've been decades ago, rather than considering just who Noynoy would be surrounded by and the political culture he has been immersed in for so long. Investing example: the financial crisis of 2008. So many people sold their stocks because of the immense losses their portfolio took and their inability to endure more losses (loss aversion, regret aversion, conservatism), as well as their failure to realize they could've been holding stocks of high quality due to mass panic and constant streams of the talking heads claiming "investing in stocks is dead" (social proof, availability bias, confirmatory, framing), while the investors who had more information that is valuable in the long-run bought at bargain prices and made a killing two, three years later.

6. Fickle market sentiment. Any news can sway the stock price, even if unrelated to the company and its businesses. The market can and will change their minds about a company at any given time, sometimes for no reason at all, and is inherently unpredictable... schizoprenic even. Look up "Mr. Market" and you'll see what I mean.



Does that help?
« Last Edit: Jul 29, 2014, 04:29 AM by TSO »


wilch23

  • VIP 6500
  • *****
    • Posts: 6,544
    • Likes Received: +8/-0
Reply #10 on: Jul 29, 2014, 09:39 AM
Sir, did you consider the cost of money in the leverage example?


TSO

  • PMT Idol 1500
  • ****
    • Posts: 1,639
    • Likes Received: +1/-0
Reply #11 on: Jul 29, 2014, 10:44 PM
No, I didn't. Because sometimes the cost is not interest expense but the required return of an investor who entrusted his capital with your skills..


scorpions84

  • Senior Member
  • **
    • Posts: 71
    • Likes Received: +0/-0
Reply #12 on: Aug 01, 2014, 03:38 PM
Ouch naman ang topic...hehehe...
Eto sa tingin ko kung bakit.

1. Sa tingin ko isa rin yung adaptability. Di ko maipaliwanag 'to.lol

2. Hindi makatotohanang objective. Sabi ng mga pro-traders, kadalasan 3-5 years bago maging consistent ang isang trader na maging profitable. Hindi tatlong taon na 30 mins bawat araw, kundi, 3 taon na 8 oras bawat araw na ang ginagawa ay tungkol sa pagbuo ng skills sa trading. Siguro, may mga traders ang iniisip ay pwede yung super accelerated learning.

3. If you don't use it, you'll lose it. Tama ba?

Marami pa, antay pa tayo ng ibang inputs. :)



 


PMT Shoutbox

Refresh History
  • Post only questions or comments here. Advertisements NOT ALLOWED.
  • oragon: :applause:
    May 20, 2019, 03:53 PM
  • FutureGizmo: Thank you for reporting those spam posts, oragon! Spam posts now deleted.
    May 20, 2019, 01:59 PM
  • oragon: Admin kindly monitor some peps! posting and sharing inappropriate nude photos and website links
    May 20, 2019, 01:52 PM
  • @culinary10: Hello I am new here! Regarding sa bdo life insurance for 8 years, pwede pa kaya ma refund yung binayad ko na 50k last year? Gusto ko sana icancel kasi lack of financial na, last may 15 2018 po un nag start ako ng life insurance, pinili ko annually kaso etong may 15 2019 wala nako ma ipay so gusto ko sana icash out, may alam ba kayo kung pano marerefund?
    May 17, 2019, 07:56 PM
  • FutureGizmo: Hi Sonny, the posting issue is now resolved. Thanks for informing us! We're currently testing a new, mobile-ready theme so let us us know kung may problema pa sa Forum. :)
    Apr 04, 2019, 10:40 AM
  • sonny.wapak: Nakaka receive din ba kayo nito pag gawa ng new post? "Please try again. If you come back to this error screen, report the error to an administrator."
    Apr 03, 2019, 10:56 PM
  • leonine_zafiro: what product nun?
    Apr 01, 2019, 10:25 PM
  • dhondiex27: hi
    Mar 30, 2019, 10:55 PM
  • lusart: jayrob i agree 200%. hulog ng langit organico. legit na legit
    Mar 29, 2019, 09:08 AM
  • palemelch: Hi
    Mar 28, 2019, 04:08 PM
  • O.C.W._AK: Magandang Araw sa Lahat! Blessings! (",)
    Mar 28, 2019, 08:42 AM
  • thor15: hello everyone, newbie here
    Mar 25, 2019, 01:47 AM
  • captjaylo: present newbie here
    Mar 22, 2019, 10:06 AM
  • balboagilbert26: hello Guys .. Newbie here
    Mar 21, 2019, 10:55 PM
  • businesswoman2019: @jefsanity nag inquire na po ako pero di sila nagdidisclose. Yung branch po kasi na target ko, currently building pa.
    Mar 21, 2019, 04:27 PM
  • jefsanity: @businesswoman2019, much better inquire ka na lang sa admin nila.
    Mar 21, 2019, 01:51 PM
  • businesswoman2019: Hello! Any idea how much ang stall sa waltermart. 2m x 2m
    Mar 21, 2019, 08:28 AM
  • John Neil: Looking for an accredited iron foundry
    Mar 17, 2019, 03:19 PM
  • jayrob: Mark_Lee ung organico legit po yan..  Member din AQ..
    Mar 17, 2019, 12:57 AM
  • perlymelad: Hello po! Need advice, why my new MLM leaders failing?
    Mar 14, 2019, 08:51 PM
  • perlymelad: Present
    Mar 12, 2019, 07:53 PM
  • kennethmauricio: Hi saan po dito pwede mag post ng for sale properties?
    Mar 11, 2019, 07:58 PM
  • jefsanity: @mark_lee isipin mo anu passion mo at skills mo...
    Mar 11, 2019, 06:52 PM
  • sniperaj09: BAGO LANG
    Mar 10, 2019, 11:16 AM
  • mark_Lee: magandang investnent ngayon sa 30k suggest naman keo mga boss
    Mar 10, 2019, 03:07 AM
  • perlymelad: E-BOOK PO SIR @JEFSANITY
    Mar 09, 2019, 05:40 PM
  • perlymelad: @jefsanity Good Morning Po
    Mar 09, 2019, 05:39 PM
  • perlymelad: Good Day everyone
    Mar 04, 2019, 06:24 PM
  • jefsanity: anu ang small business na yan?
    Feb 28, 2019, 07:40 PM
  • perlymelad: Good Day Everyone
    Feb 28, 2019, 03:31 PM
  • perlymelad: Hello everyone, CAN ANYONE HELP ME SUGGEST ANY SIDE TOPIC  / PROBLEM OF  STARTING SMALL BUSINESS?
    Feb 28, 2019, 06:58 AM
  • perlymelad: Present, 1st time po
    Feb 25, 2019, 06:17 PM
  • jd2281: newbie po
    Feb 25, 2019, 12:26 PM
  • ejllantino: present... 1st time
    Feb 24, 2019, 07:14 PM
  • rheiel: present. first time
    Feb 24, 2019, 11:04 AM
  • MELVIE: thanks po
    Feb 24, 2019, 12:50 AM
  • steph123: hello po, ask lang po, ilang months po ba ang hihintayin after mo ma process ang mga documents para maitama ang mali sa NSO?
    Feb 11, 2019, 03:13 PM
  • Deborah: newbie here.thanks
    Feb 08, 2019, 02:17 PM
  • marj0503: hello im newbie here
    Jan 31, 2019, 10:53 AM
  • yan24: any one here planning to start a tesda skill training center
    Jan 26, 2019, 12:07 PM
  • manzjon: Forex trading forum
    Jan 25, 2019, 02:16 PM
  • Lizette Ramos: Pwede po bang patulong... Maganda po ba ang gasul retailing business?
    Jan 24, 2019, 09:14 PM
  • Imnobody: Hi sino naghahanap ng casino financer dito?
    Jan 16, 2019, 09:59 PM
  • Odlanyer22: Good day!
    Jan 16, 2019, 09:55 PM
  • maryen: at kung sakaling may somobra sa food na nailuto.. dapat po bang bayaran ng client un .. or ipapa take mo na sakanila?...
    Jan 16, 2019, 03:52 PM
  • maryen: HI! GOOD DAY! newbiz lang po... question lang po regarding sa catering.. if may 50pax po ako dapat lang po ba na sakto ang serving ng food?
    Jan 16, 2019, 03:50 PM
  • mark_Lee: cno na nag organico dito scam po ba yun or legit
    Jan 09, 2019, 03:04 AM
  • kuray08: Have a Prosperous New Year to all..
    Jan 06, 2019, 09:27 PM
  • ethan: Sino po may auto supply business dito? How profitable po ba ito in terms of monthly income? Lalo na kung meron na one or two na competition.
    Jan 04, 2019, 11:34 AM
  • Niel Jhacoubs: HAPPY NEW YEAR!
    Jan 02, 2019, 04:37 PM