Updated: Jun 19, 2021
The Standard & Poor 500, which represents 500 of America's best companies have an average gains of around 10% per year. However, If you look at investment returns on stocks published by research companies, it just don't makes sense.
In a stock market that is constantly rising:
70% people loss money
20% people break even
ONLY, 10% people makes money
On the other hand, the real estate investment field almost 99% of the people who invested make some sort of return.
how come 90% of the people don't make money in the stock market that rises 10% every year?
Let's look at why we make money on real estate first.
In real estate market that rise 3-4% each year, most of us know how to invest. If we buy a property for $1 million, we would not sell it for $990k, unless we needed the money urgently.
So we hardly lose any money investing in real estate.
Then, why do we lose money in a stock market that is growing at a rate of 10% per year?
The culprit is Mr. Market.
Many of us have forgotten a share of a stocks in it's basic form represents a piece of a company, it represent a small ownership of the whole company.
We see stocks rise today, and falls tomorrow. We can see the change in stock price, but what makes a stock rise or fall?
Did we care to find out? or we just follow whatever explanation offered on the stock exchange news letter today?
When we believe a stock is going to go up, we purchase a stock. At the same time, if someone from the other corner of the world think that the same stock is going to fall, they would sell their stock. When the combined action of thousands of people thinking the stock price is going up or down, the orders to buy and sell averages out to produce the final price of one company. That, is how we get the market price of a company's stock.
"We can call the collective emotions of investors that drives the price to go up or down, Mr. Market."
-Benjamin Graham (in the book The intelligent investor)
Imagine one day, someone offers to sell you a house that is worth $1 million at a discounted price of $500,000. do you think that's possible?
You would think, there must be a catch. However, there is no catch.
Then, a few months later, you can sell this same house back to this same person for $1.5 million, and he'll gladly take it back, no questions asked.
No way in hell good things like that is going to happen!
Well, it happens everyday. This is Mr. Market, and this is what he do.
Although most of the time, Mr. Market wants to sell you something cheap at a very expensive price. He would come and tell you:" this stock has already risen 50%, and it's going to go up 50% more. It would be too late if you don't buy in today!" This is also Mr. Market.
Mr. Market can sell you something really overpriced, or he can sell you something at a discount! It is your job to figure out the value.
That is why, we're called "Value Investors"
The problem with Mr. Market is that most people only look at his emotions. Is he Happy(Bullish) or is he sad(Bearish).
Don't be most people...
For value investors, we make friend with Mr. Market. We care little about he is happy or if he's sad.
We care about if he is short, or tall, or slim, or big.
We know Mr. Market just like we know our friends or neighbors, so we never try to chase his emotions.
We figure out what he look like, and invite him into our lives.
People are afraid of Mr. Market, and when he visit, they always act very cautiously. They use various tools and machines to predict when and where his emotions is going.
For us, Mr. Market often visit us, but we're never scared or even nervous.
He often bring us gifts! and very often, he sell stocks to us at a very very cheap price. And other time, he buy our cheap stocks at a very high price. He even go as far as paying the rent for me, and put food on the table for my family.
We're always so grateful to him.
Whenever he visits, we always welcome him with an open arm!