Over 80% of all individual investors lose money in any given span of ten years. This figure is likely to be higher, given most people's reluctance to reveal their losses. This article provides a broad outline of this financial landscape. It reflects the author's personal views as an individual investor and author of a stock charting software with the experiences learned from the University of H.K. (hard knocks). Do not consider this article as any form of financial advice. Financial advice are available from licensed individuals and companies as required by law in your respective country.

Investment is a statistics game. You win sometimes and you lose most of the time. To stay ahead, all you have to do is to make sure that your gains are more than your losses. More importantly, how to limit losses and reduce the mistakes will be crucial in successful investing.

Take a typical fund manager. Out of ten positions, the fund manager may only win 40% of the time. Say, this manager makes an average return of 20% for each position. The rest are mistakes, but this manager capped the losses at 10% each. Do the simple math, and lo and behold, this manager is ahead with gains. This is a simple example – professional fund managers use complex variations of this simple theme.

Another example is the venture capitalist. Say, out of ten ventures, only one succeeded. The successful venture could yield returns of 2000%, perhaps more. The other nine ventures failed miserably and these investments are written off. Using this model, the venture capitalist is still ahead.

Headlines, the media, advertising hype.

Most of us are familiar with this typical headline: “Whiz kid makes stock picks that outperform the market than most fund managers”. When such stories becomes headline news on the popular media, it is likely that they appear towards the end of a great bull market. Stories like these typify the misconception that anyone can pick stocks at random and win all the time.

Perhaps, a more tantalizing advertisement with “How I make 2600% (annualized) on a winning trade” may make us interested. Any seasoned investor will be able to provide a handful of trades that has spectacular performance like 50% in a week. Annualize this and it works out to be 2600% a year. However such trades are few. There is no one in the world that has such a method or strategy that is consistent and sustainable.

It is prudent to treat media reports with a critical mind and skepticism. Rationalizing the possible reasons on why the story appears may provide some useful and not so obvious insights. For example, if you have a large position in a stock, then obviously you will only sing praises on why it will outperform its peers to encourage more buying momentum. The author remembers an analyst private statement: “I can write fantastic merits about a stock, conversely I can also write some damning things as well”.

Market gurus, financial astrology, divination.

Joseph Granville, a market technician, started his newsletter (Gransville Market Letter) in 1963 and is still going strong at age 80+. He was accurate to predict the market decline in 1976 but was wrong in 1982 and 1995. Given the statistical nature of investing, he had his successful calls and his fair share of blunders as well. The redeeming feature of this man must be his willingness to apologize for his mistakes.

Why do people continue to subscribe to his newsletter? This author suspects that his loyal customers are those who can form their own opinions and views on the market but, they are receptive to a different perspective or viewpoint they may have missed in their own analyzes.

It is the same with other reputable market gurus. It seemed the media and the public are intolerant of their success rates as being not good enough. The forecasts of these market gurus should be treated like a tsunami early warning system. Nine times out of ten, the warning turns out to be false and people accept it and go own with their normal lives. Every warning is taken seriously and the costs of taking precautions are minimal. When a warning turns out to be accurate, it will save lives. It should be the same with these market gurus' predictions of market crashes. Investors just have to prepare themselves as they would with an impending tsunami warning.

After seeing a BBC program on Membrane theory, 11-dimensional worlds and parallel universes, financial astrology, feng-shui and other methods of divination may have some merit. This author encourages investors to have open-minds and more importantly, understand the strengths and weaknesses of any method. By capitalizing on the strengths, one can indeed enjoy the benefits.

The concluding part 2 will provide an outline of fundamental analysis, technical analysis plus some tips on successful investing.