6 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. Here are some to be aware of.

Mistake No. 1: Confirmation bias – click here

Mistake No. 2: Anchoring bias – click here

Mistake No. 3: Hindsight bias – click here

Mistake No. 4: Survivorship bias – click here

Mistake No. 5: Home bias – click here

Mistake No. 6: Recency bias

Recency bias can be described as the act of placing more emphasis on recent incidents or experiences while ignoring longer-term history.

A relevant example may be the current woes of Sarine Technologies Ltd (SGX: U77). Shares of the diamond manufacturing systems maker have been cut in half over the past year, reflecting the decline in the company’s earnings per share (EPS).

Current industry challenges plaguing Sarine Technologies include disproportionately high rough diamond prices to polished diamond prices. This dynamic squeezes the profit margin of diamond manufacturers, who are Sarine Technologies’ customers, leading to lowered demand for the company’s systems.

Long-term Foolish investors though, may look beyond the past year and note that drastic falls in revenue and earnings are not new for Sarine Technologies.

During the Global Financial Crisis, its EPS fell from 3.6 cents per share at the end of 2007 to 0.65 cents in 2009. Today, even after the recent fall in profitability, Sarine Technologies’ EPS still stands at 4.8 cents per share.

A Fool’s take

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

The sextet of biases above 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 doesn't own shares in any company mentioned.