Understanding Stocks

WHY INVESTORS LOSE MONEY 161
nies were losing money. (Many made their millions through stock
options, which although legal, did not seem fair to shareholders
who lost money.)
• Thousands of people were quitting their jobs to become day
traders.
• Stock prices in companies that had no earnings were doubling and
tripling each day.
• Many mutual funds were going up by over 100 percent a year.
• Books with titles like Dow 36,000 and Dow 100,000 were bestsellers,
along with many books on day trading.
• Stock analysts and CEOs were treated like rock stars.
• Car dealers couldn’t sell SUVs fast enough, it seemed as though
everyone was going to Europe, Starbucks was filled with people
starting investment clubs, and people couldn’t keep their eyes off
financial television programs like CNBC, Bloomberg, and CNNfn.
As the Dow and the Nasdaq plummeted, greed was replaced by hope.
In the award-winning movie The Shawshank Redemption, the movie
character Red (played by Morgan Freeman) said, “Hope is a dangerous
thing.” In love as in life, there is always hope that things will work out in
the end, but in the stock market, hope can destroy your portfolio. If the
only reason you are holding onto a stock is because of hope (and not for
fundamental or technical reasons), you are going to lose money.
The famous speculator Jesse Livermore once said, “People are
hopeful when they should be afraid and are afraid when they should be
hopeful.” Livermore understood the short-term psychology of the markets
about as well as anyone.
The most profitable traders and investors are unemotional about
the stocks they buy. They don’t rely on fear, greed, or hope when they
make trading decisions; they look only at technical and fundamental
data. In 1929 and 1987, there was real fear in the stock market. People
thought that their stocks were going to zero, and they wanted to get out
of the market at any price. Just when people thought that all was lost,
1987 turned out to be the start of a particularly strong market. In 2000,
on the other hand, people were much too hopeful when they really
should have been afraid.