7 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 – click here

Mistake No. 7: The “house money” fallacy

In his book Your Money and Your Brain, author and financial journalist Jason Zweig described this fallacy:

“First of all, a streak of gains makes you feel that you are playing with “house money”. That’s the term gamblers use when they mentally divide their bucks into different buckets: the cash they started out with (which remains their “own money”) and any winnings they’ve made on top of that (“the house money”).

Somehow, losing the house money hurts less than losing your “own” – even though, strictly speaking, all the dollars are the same.”

As an example, let’s say that you had the great fortune of investing $1,900 in tourism asset owner Straco Corporation Ltd  (SGX: S85) at the beginning of 2012 when its shares were priced at S$0.19 each. To date, your investment would have grown to a nice $8,500 with Straco’s shares closing at S$0.85 yesterday. Following Zweig’s definition, some may see the initial $1,900 invested as their “own money” and the net gains (in this case, $6,600) as “house money.”

Inexplicably, some folks may even cash out on the initial $1,900 to “take money off the table” in an attempt to only play with “house money”.

The problem is, the entire $8,500 belongs to you. It’s an investment choice on whether you keep the $8,500 invested in Straco or invest it somewhere else.

A Fool’s take

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

The septet 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.