A retired stockbroker reveals why most retail investors lose money

Originally published on Jul 26, 2022

I like to chat with retirees, particularly those who used to work in a job where they need to be a bit of a snake oil salesman. It is after they retire that they can be completely honest about their past.

A few years ago, a retired stockbroker revealed to me that most of his retail customers lost money. I asked him why. He was in a good position to know the answer since he had access to the buy/sell transactions of his clients.

This was what he told me.

They patiently held on to losing stocks and impatiently sold winning stocks.

If you have several years of experience in the stock market and are still a loser, please check your own past transactions and verify for yourself if this is true. 😁

Years ago, I spoke out against contra-trading because I suspected this practice was harming most Singapore stock investors. Someone was not happy and said something like "you don't know, don't talk so much and misinform".

In contra trading (a special feature in Singapore and Malaysia stock markets), stock punters buy and then sell the same stock before settlement day. Punters do not have to pay in full for the stocks they bought but settle only the difference in losses, or take the profit. It is similar to taking zero-interest, zero-collateral, ultra-short-term loans from the broker to buy stocks. The credit risk taken by brokers caused some remisiers to suffer massive losses during market crashes when their contra-trading clients could not pay up.

Contra traders used to contribute greatly to the liquidity of the Singapore stock market but it is no longer popular today thanks to the shorter settlement time (T+2).

I learnt from the retired stockbroker that many of his clients who lost money were active in contra trading. I commented about the self-destructive behaviour of customers who contra-trade and that they should have been better advised. The stock broker honestly replied, "I made most of my money from contra traders".

Thank you so much for your honesty. Now, I understand the strong reaction from the person when I spoke out against contra-trading. Contra-trading was probably one of his primary sources of profits during bull markets.

Don't expect the casino to advise their customers on the evils of gambling.