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Is losing money on stocks actually simpler than gaining money?

Personal Finance & Money Asked on July 20, 2021

Suppose that I want to invest X amount of cash in stocks, with the goal of doubling the value of my portfolio inside a given time period.
This is notoriously hard, in particular there is no full-proof (100% certain) way of doing it. One could perhaps do some statistics to evaluate the probability of this event actually happening, averaging over all the possible stock investment in the past.

Suppose now that I’m interested in the reverse process, that is investing in stock to lose half of my portfolio value inside a given time period.

Is losing value actually simpler than gaining money or is the process symmetric?

I’m only allowed to use publicly available informations on the stock market.

4 Answers

Is it easier? Sure. Is it absolutely, positively 100% guaranteed? No.

For any security, there is a spread between the bid and the ask price. So if you buy and sell a stock and the price hasn't moved, you end up with slightly less money than you had when you started. If you look for stocks with relatively high spreads because they are relatively illiquid and rapidly bought and sold shares in order to not impact the price, you'd expect to lose money with each cycle. Now, you might get unlucky and the price might increase by more than the spread in the time between your two trades getting executed. But the vast majority of the time you'd lose money. Assuming the time span you have is long enough to allow you to have millions of these buy-sell cycles, the odds that you'd be able to lose half your money are very high.

But since we're talking about odds, it is, of course, possible that you'd get unlucky and end up holding a stock that shoots up in price in the fraction of a second you're holding it and you end up losing much less than expected. Just as it's possible that you walk into a 7-11, buy a single lottery ticket, and end up winning the billion dollar jackpot.

Answered by Justin Cave on July 20, 2021

Yes, it is easier to lose money in the stock market, if you are trying to. This has less to do with 'the odds being stacked against you', or something like that, it just has more to do with probability and how 'risk' is defined in finance.

Let's assume first of all that every stock has an even chance of moving up vs moving down, on average [in reality, the stock market over time goes up, as long as the general economy moves forward, and a rule of thumb for western markets is about 7% annually on average, per year, over a large amount of time, which includes some years of big losses and some years of big gains]. In finance, 'risk' is defined as the variance in possible returns, and actually isn't the same as 'overall how bad of an investment it is'; 2 investments can have the same return on average, but have different risk levels. Let's take a look at how financial risk impacts 3 companies which, on average, have the same expected 'flat' return:

  1. One company might have a 50% chance of moving up 1%, and 50% chance of moving down 1%. That is not very risky - because no matter what happens, the stock price will be very close to where it started.

  2. Another company might have a 50% chance of moving down 30%, and a 50% chance of moving up 30%. This is quite risky, even though, on average, it is 'expected to have a net return of 0%', because the probability of an increase exactly matches the probability of a decrease. The math on this is: Expected return = 50% * 1.3 + 50% * 0.7 = 100% [100% meaning you return exactly the same as you put in, on average, even though sometimes you go up and sometimes you go down]. So this is quite a bit riskier than the 1% up / down company example above.

  3. A final company might have a 10% chance of going up 5x, a 50% chance of staying the same, and a 40% chance of going completely bust. The expected return would be 10% * 500% + 50% * 100% + 40% * 0 = 100%. So the average return would be the same, but the risk would be massive. Every year, you have a 40% chance of losing everything, a 50% chance of having no gains or losses, and a 10% chance of going up 5x. The only way to make money at this would be if you 'strike it rich', for example a junior biotech company finding a major medical breakthrough, which would only happen 1 year out of 10.

If the above hypothetical holds true, you could very easily lose all your money (you would do so 4 years out of every 10, if you invested in example #3). Yet, you would only double your money [and then some] 1 year out of every ten. Far harder to do so, because you have chosen an investment where the most likely outcome is failure, even though success looks really really good.

Now, in reality, the riskier the company, the higher you should expect to earn from it. If you have to risk losing everything, you should earn more on average than a riskless investment, right? That does impact things in real life, but there are still 'moonshot' investments that have a very high chance of failure, even though the small chance of success means that some people happily take that risk to earn more money on average.

As a side note to answering the question directly, I'll add that the simplest way to mitigate risk in the stock market is to broadly invest in a diversified portfolio, meaning for example to simply buy an index fund that covers the return of the whole stock market, with minimal management fees. This would, on average, give you the return of the whole market, which again as a rule of thumb might average out to 7% over, say, a 20 year period.

In that sense, as long as the economy doesn't completely collapse, and you leave your investments in for long enough, it is actually quite simple [though not guaranteed] to earn money in the stock market. And by the way, with compounding, 7% / year works out to just about doubling your money every 10 years, and when you start investing young, this is the best tool you have to saving for retirement - simply letting compounding on average returns do its thing.

Answered by Grade 'Eh' Bacon on July 20, 2021

One related issue.

Stocks (indeed, all markets) move downwards faster than they move upwards.

Maybe this is relevant to what you're wondering about.

Answered by Fattie on July 20, 2021

You don't have to make asks and bids at the market price, you can ask or bid whatever you want. The problem is that if you make a bid for half the market price (which would make you lots of money), nobody will agree to sell at that price, but if you make a bid for twice the market price (which will lose you tons of money), people will sell their shares to you in a heartbeat.

So if you act completely unreasonable, it is very easy to lose any amount of money.

Answered by gnasher729 on July 20, 2021

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