Why even experienced and rational lose money on the stock market
The market as a pendulum and people as its driving force
Benjamin Graham-an economist and investor, often referred to as the ‘father of value investing’-described the stock market as a pendulum: it constantly swings from one extreme to the other, from unwarranted optimism (when shares are overvalued) to unjustified pessimism (when shares are undervalued).
Graham argued that a sensible investor is a realist who does not try to predict the market’s direction. He exploits its extremes. He buys shares from pessimists - when the market is panicked - and sells them at bargain prices to optimists, for twice their real value.
This is someone who does not act like everyone else, who goes against the prevailing sentiment. He buys shares when the market is falling and does not buy when it is rising. It is precisely here that all three classic investor traps arise.
Benjamin Graham-an economist and investor, often referred to as the ‘father of value investing’-described the stock market as a pendulum: it constantly swings from one extreme to the other, from unwarranted optimism (when shares are overvalued) to unjustified pessimism (when shares are undervalued).
Graham argued that a sensible investor is a realist who does not try to predict the market’s direction. He exploits its extremes. He buys shares from pessimists - when the market is panicked - and sells them at bargain prices to optimists, for twice their real value.
This is someone who does not act like everyone else, who goes against the prevailing sentiment. He buys shares when the market is falling and does not buy when it is rising. It is precisely here that all three classic investor traps arise.
The first trap: hindsight bias
After any event, the market seems predictable. A fall is explained in hindsight, just as a rise is. The illusion arises that ‘it was all obvious’ and predictable.
This is the hindsight bias described by Daniel Kahneman: the tendency of human thinking to find logic in hindsight where none existed. An investor who sees an asset rising begins to believe that they are in control of the situation and know the market well. This confidence carries over into their subsequent decisions. And this is precisely where it becomes dangerous: the individual acts not on the basis of analysis, but on the basis of the illusion that they can read the market better than they actually can.
The second trap: peak optimism
A growing market does not appear dangerous. That is its defining characteristic. Share prices are rising, and portfolios are expanding. It seems perfectly reasonable: businesses are growing, industries are transforming, and technology is opening up new opportunities. All of this may well be true.
But in reality, this is the moment when expectations begin to diverge from the value of the business. Graham called this the phase when the pendulum swings towards excessive optimism. From the inside, this process is almost imperceptible: growth looks not like overheating, but like a normal and justified course of events.
That is precisely why the most costly mistakes are made not during a crisis, but during a period of growth. An investor enters a position at the peak — at the moment of maximum confidence and maximum risk simultaneously. The share price already incorporates all expectations. There is no room left for growth, and any deviation from the scenario hits the portfolio hard.
After any event, the market seems predictable. A fall is explained in hindsight, just as a rise is. The illusion arises that ‘it was all obvious’ and predictable.
This is the hindsight bias described by Daniel Kahneman: the tendency of human thinking to find logic in hindsight where none existed. An investor who sees an asset rising begins to believe that they are in control of the situation and know the market well. This confidence carries over into their subsequent decisions. And this is precisely where it becomes dangerous: the individual acts not on the basis of analysis, but on the basis of the illusion that they can read the market better than they actually can.
The second trap: peak optimism
A growing market does not appear dangerous. That is its defining characteristic. Share prices are rising, and portfolios are expanding. It seems perfectly reasonable: businesses are growing, industries are transforming, and technology is opening up new opportunities. All of this may well be true.
But in reality, this is the moment when expectations begin to diverge from the value of the business. Graham called this the phase when the pendulum swings towards excessive optimism. From the inside, this process is almost imperceptible: growth looks not like overheating, but like a normal and justified course of events.
That is precisely why the most costly mistakes are made not during a crisis, but during a period of growth. An investor enters a position at the peak — at the moment of maximum confidence and maximum risk simultaneously. The share price already incorporates all expectations. There is no room left for growth, and any deviation from the scenario hits the portfolio hard.
If you invest in shares, you’ve no doubt encountered situations where an obvious decision has led to an unexpected opposite outcome. The problem is that most costly investment mistakes aren’t made by novices. Experienced, rational investors lose money on the stock market more often than is commonly thought.
The market regularly punishes those who confidently construct a convincing rationale. It is at this very moment that most investors start to lose money - not because of a lack of information, but because of the peculiarities of human thinking in conditions of uncertainty.
Nobel laureate Daniel Kahneman spent decades proving that people constantly seek patterns and systematically find or invent cause-and-effect relationships where none exist. Even the most rational decisions are regularly distorted by psychology. The stock market is an environment in which this mechanism is particularly destructive. Read about the pitfalls of investing and market volatility in today’s article on Eifos Hub.
The market regularly punishes those who confidently construct a convincing rationale. It is at this very moment that most investors start to lose money - not because of a lack of information, but because of the peculiarities of human thinking in conditions of uncertainty.
Nobel laureate Daniel Kahneman spent decades proving that people constantly seek patterns and systematically find or invent cause-and-effect relationships where none exist. Even the most rational decisions are regularly distorted by psychology. The stock market is an environment in which this mechanism is particularly destructive. Read about the pitfalls of investing and market volatility in today’s article on Eifos Hub.
The third trap: panic at the bottom
When the market falls, the opposite happens. Investors start looking for evidence of the worst-case scenario. And they find it. The news becomes more alarming, forecasts more cautious, interpretations more definitive. It seems that the rational move is to reduce positions or exit the market entirely. But more often than not, this is not a rational decision, but a reaction to external pressure.
It is at this very moment that a shift in perspective occurs. The investor stops thinking about what lies behind the shares they have bought - they look at the falling prices on their broker’s app. Shares that were previously seen as a stake in a real business with revenue, customers and assets are transformed into a source of risk.
And the decision to sell shares is made not because something has changed in the business behind those shares, but because market sentiment has shifted. And the investor mistakes this sentiment for a signal, even though it is really just noise. Graham calls this the time when pessimists sell quality shares at bargain prices.
Margin of safety: a buffer against your own mistakes
Graham formulated a principle that sounds trite until you test it on your own brokerage account: the future return on an investment depends on the entry price. The more you pay for a share today, the less you earn tomorrow.
No matter how careful you are, there is a risk that no investor can calculate: mistakes. This risk can only be minimised by having, in Graham’s words, a margin of safety. Nassim Taleb described the same principle in terms of anti-fragility: systems without buffers collapse at the first sign of stress. A fragile portfolio performs well in calm conditions but breaks down precisely when stability is needed - during market corrections, crises, or unexpected news. A margin of safety is not about caution. It is about mathematics.
Four questions to ask before making a decision
Most losses on the stock market stem not from a lack of analysis, but from asking the wrong questions before a trade. Three specific questions-based on figures, not rhetorical-help avoid the main pitfalls.
First: is your decision driven by a change in the business or a change in price? If the main argument is a rise or fall in share prices, you need to pause and understand what the current share price reflects in terms of the business’s real value, and how much this differs from what can be verified in the financial statements.
Second: what figures does your calculation rely on? Specifically - what data has been used, how recent is it, and what assumptions underpin the calculation? If your confidence is based on analyst consensus or on the fact that ‘everyone says so’, that is a signal to pause. If the main argument is whether the price is rising or falling, you need to understand what real value the price reflects and how much it differs from what can be verified in the financial statements.
Third: what will happen if the calculation is off by 20–30%? If the answer is ‘I’ll lose a significant portion of my capital’, you need to stop. This is not a reason to abandon the trade, but a reason to reconsider the entry price or the size of the position.
Fourth: are you acting according to a plan, or is it emotion? The difference between strategy and impulse often determines the outcome.
The market hasn’t changed
Even the most thorough analysis offers no guarantee against ‘black swans’. Graham described the mechanisms behind stock market losses seventy years ago. Kahneman proved their nature experimentally. Since then, the stock market has become faster, more algorithmic and more global.
To avoid losing money, you need to accept the fact that the market is not obliged to be logical. Prices fall for no apparent reason and recover despite gloomy forecasts. An investor’s task is not to time the market, but to devise a strategy that works in both scenarios. This is precisely what Eifos Hub does: financial advisers develop investment strategies tailored to specific goals and risk levels, without illusions and without relying on luck.
When the market falls, the opposite happens. Investors start looking for evidence of the worst-case scenario. And they find it. The news becomes more alarming, forecasts more cautious, interpretations more definitive. It seems that the rational move is to reduce positions or exit the market entirely. But more often than not, this is not a rational decision, but a reaction to external pressure.
It is at this very moment that a shift in perspective occurs. The investor stops thinking about what lies behind the shares they have bought - they look at the falling prices on their broker’s app. Shares that were previously seen as a stake in a real business with revenue, customers and assets are transformed into a source of risk.
And the decision to sell shares is made not because something has changed in the business behind those shares, but because market sentiment has shifted. And the investor mistakes this sentiment for a signal, even though it is really just noise. Graham calls this the time when pessimists sell quality shares at bargain prices.
Margin of safety: a buffer against your own mistakes
Graham formulated a principle that sounds trite until you test it on your own brokerage account: the future return on an investment depends on the entry price. The more you pay for a share today, the less you earn tomorrow.
No matter how careful you are, there is a risk that no investor can calculate: mistakes. This risk can only be minimised by having, in Graham’s words, a margin of safety. Nassim Taleb described the same principle in terms of anti-fragility: systems without buffers collapse at the first sign of stress. A fragile portfolio performs well in calm conditions but breaks down precisely when stability is needed - during market corrections, crises, or unexpected news. A margin of safety is not about caution. It is about mathematics.
Four questions to ask before making a decision
Most losses on the stock market stem not from a lack of analysis, but from asking the wrong questions before a trade. Three specific questions-based on figures, not rhetorical-help avoid the main pitfalls.
First: is your decision driven by a change in the business or a change in price? If the main argument is a rise or fall in share prices, you need to pause and understand what the current share price reflects in terms of the business’s real value, and how much this differs from what can be verified in the financial statements.
Second: what figures does your calculation rely on? Specifically - what data has been used, how recent is it, and what assumptions underpin the calculation? If your confidence is based on analyst consensus or on the fact that ‘everyone says so’, that is a signal to pause. If the main argument is whether the price is rising or falling, you need to understand what real value the price reflects and how much it differs from what can be verified in the financial statements.
Third: what will happen if the calculation is off by 20–30%? If the answer is ‘I’ll lose a significant portion of my capital’, you need to stop. This is not a reason to abandon the trade, but a reason to reconsider the entry price or the size of the position.
Fourth: are you acting according to a plan, or is it emotion? The difference between strategy and impulse often determines the outcome.
The market hasn’t changed
Even the most thorough analysis offers no guarantee against ‘black swans’. Graham described the mechanisms behind stock market losses seventy years ago. Kahneman proved their nature experimentally. Since then, the stock market has become faster, more algorithmic and more global.
To avoid losing money, you need to accept the fact that the market is not obliged to be logical. Prices fall for no apparent reason and recover despite gloomy forecasts. An investor’s task is not to time the market, but to devise a strategy that works in both scenarios. This is precisely what Eifos Hub does: financial advisers develop investment strategies tailored to specific goals and risk levels, without illusions and without relying on luck.
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