Why are most private investors destined to lose money?

Last week the Daily Mail's stock market reporter, Geoff Foster, recently posed the following question: "Cancer cell company Angle soared 16.75p to 94p after chief executive Andrew Newland transferred 69,204 shares to his personal pension fund at 72.25p a share and he retains a 19.65% stake. What does that tell you?"

I'll field that one: it tells you almost nothing.

The fact that Andrew Newland has chosen to transfer some shares from one account to another and retains a 19.65% stake in the business tells us nothing of any significance, and certainly does not account for Friday's 23% jump in the share price.

Try 6 free issues of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

Last week I described in simple terms why a new product from Angle's Parsortix subsidiary could help in the fight against cancer. And the fact is that Parsortix looks a great stock.

But after reading the Daily Mail article, I wondered how any private investor who follows the mainstream press can hope to pick up on great companies like this. And that raises an even bigger question.

Are private investors destined to lose money?

The more I observe the habits of the typical private investor the more I am convinced that he is destined to lose money. Prodded by an endless supply of business news, he finds it difficult to simply hold on to positions. How many, I wonder, sold out before last week's Euro-rescue inspired rally, and now bitterly regret it? And he is not helped by the quality of the tittle-tattle that fills the stock market pages of the daily newspapers. Most of that is planted by PR men.

If you want to make real money on the stock market, you need to do the research. You need to trawl annual reports and corporate websites. You need to gather up as much background information as you can find. You need to talk to people in the company and in the industry. To do this properly takes days, and even then many investors are unable to draw the right conclusion. Having established what a business actually consists of, he then has to accurately value it.

This isn't easy. The research work takes a bit of effort, and valuing shares is far from an exact science. You need to understand things like P/E ratios, dividend yields, debt/equity ratios, and free cash flow. And even if you get all of that right, your calculations might be overtaken by that great imponderable, market sentiment. But if you are really going to succeed at investment you need to get your head around plenty of information and some essential valuation methodologies.

Let me do the hard yards for you

The alternative, of course, is to let me do it for you. I don't pretend to get everything right, but I do put in the 'hard yards.' The last time I was in the assembled company of the UK's small company journalists they were guzzling as much wine as they could get their hands on. I think I was the only one in the room drinking water. I am pretty dull, I know. I hate parties and I don't like staying up late. While the others were nursing their Sunday morning hangovers I was doing my research.

I do it because I am passionate about investment. I do it because I want to understand what these small companies are really about. I do it because I want to make some money without getting my hands dirty. And I do it because I reckon my readers deserve something better than a bit of lazy Friday afternoon journalism that takes two unrelated events and draws a totally erroneous association between them.

If you really want to know what is going on in the world of penny shares, you need to read Penny Sleuth and Red Hot Penny Shares. You see I may be dull but I am not modest!

This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by MoneyWeek Ltd.

Red Hot Penny Shares is a regulated product issued by MoneyWeek Ltd. Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Penny shares can be volatile, relatively illiquid and hard to trade. There can be a large bid/offer spread so if you need to sell soon after you've bought, you might get less back than you paid. This can make them riskier than other investments. Please seek advice if necessary. 0207 633 3780.