2 Investment Mistakes to Avoid in the Stock Market

For most people, investing is simply about making money in the stock market.

However, avoiding losses can be just as important as making gains. If we can reduce the frequency and severity of our investing mistakes, we may just set the stage for us to generate good returns in the stock market.

Mistakes can come in many forms. The hardest ones to avoid may be psychological in nature.

1. Confirmation bias

I wrote about this bias in an earlier article here.

2. Anchoring bias

Say you had bought Super Group Ltd (SGX: S10) on 24 August 2014 at $1.35.

Yesterday, its stock price closed at $0.78, a full 42% lower than what you paid for in August last year. For many, the question becomes whether you should “double down” on the company. But the term “double down” or “average down” implies that you are taking into consideration the price that you paid for the stock before – that is, $1.35 per share.

This consideration of an anchoring number – in this case the stock price of Super Group – is often referred to as the anchoring bias.

As hard as it sounds, we will be better off distancing our minds from what we paid for a company and consider the business as if we are looking at it for the first time. In the case of Super Group, its earnings per share has declined by 19.1% since 24 August 2014.

The performance and future prospects of the company should be considered again to judge whether the instant coffee purveyor represents a good investment from this point forward.

A Fool’s take

Some mistakes can be obvious, and some may not be as obvious.

Both confirmation bias and anchoring may fall in the latter form of mistakes. If we can be aware of our own biases, we may save ourselves from mistakes in the future that may have been avoidable.

Learn more about investing through a FREE subscription to Take Stock Singapore. Sign up here for The Motley Fool's weekly investing newsletter that will teach you how you can GROW your wealth in the years ahead.

Like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Super Group Ltd.