Is it true that the main reason people lose money in the stock market is because they freak out and sell when their stock prices drop?

That’s one of the reasons but not the main reason.

The major reason why people lose money in the stock market is due to the absence of a sound investment process.

When I think about the word process, the first thing that comes to my mind is the below scene in the movie, M. S. Dhoni: The Untold Story.

I have picked this from the middle of the wonderful conversation[1] between Dhoni and his Railways boss, AK Ganguly:

AK: Tell me one thing. What do you do when you get a full toss?

MS: I hit the ball.

AK: Juicy half-volley?

MS: I drive the ball.

AK: If it is a good out-swinger?

MS: I leave the ball.

AK: If it is a good in-swinger?

MS: I defend the ball.

AK: And, what if you get an unplayable bouncer? How would you play?

MS: I would duck under the ball.

We can learn a great deal from this conversation. Look at Dhoni’s clarity when it comes to playing different types of deliveries. He follows a process. His technique might not be orthodox, but sticking to a process made him successful.


Now coming back to the stock market, retail investors generally don’t follow a process. They go by emotions.

We all have made the below mistakes and keep making them again and again:

  • Selling stocks when they make new highs only to see them making new highs time and again
  • Holding on to losers with the hope they would recover one day
  • Buying stocks at 52-week lows only to see those making fresh lows in future
  • Purchasing low-priced or penny stocks thinking they would become multi-baggers quickly

The root cause for such mistakes is the absence of an investment process.

To be successful in the stock market, one needs to have an investment mechanism in place that answers the below questions:

  • What to buy?
  • How much to buy?
  • When to buy?
  • When to sell?

Once you have a process that takes care of the above questions, I’m sure you will do well in the market.

And as AK Ganguly ended the conversation, I conclude my answer in a similar manner:

Play on merit and keep going. The scoreboard will keep moving.

Related: I have explained my investing strategy in this answer.

Happy Investing!

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