8 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 – click here

Mistake No. 8: The gambler’s fallacy  

Indulge me on a short experiment.

Say I flipped a coin eight times. Heads is recorded as H and tails as T. After eight coin flips, I had recorded the following sequence: H-T-T-T-T-T-T-T. Here’s a question: If I flipped the coin again, do you think it will be a H or a T?

It would be tempting to think that the next coin flip would be a H, doesn’t it? After all, it seems like we are “due” for a H after going through seven consecutive Ts.

But thinking that way would mean that we have fallen for the gambler’s fallacy. The reality is that there is a 50-50 chance for the next coin flip to be either a H or a T.

There are similarities when it comes to investing. Sometimes, we may feel that a stock has fallen so much that it is ‘due for a rise.’ Unfortunately, things don’t work this way.

The history of classifieds-advertising firm Global Yellow Pages Ltd (SGX: AWS) may be instructive. Shares of the company closed at a split-adjusted price of $17.80 at the start of 2005. By the end of 2008, those shares had tanked by 90% and were trading at just $2.00 each.

But if you thought that was bad and that a ‘rise is due,’ more pain actually followed with shares of Global Yellow Pages closing at $0.18 each last Friday (18 September 2015).

This comes after the company’s profit of S$13 million in the 12 months ended 31 March 2004 had turned into a loss of S$50 million in the 12 months ended 30 June 2015. Over the same period, Global Yellow Pages’ revenue had also shrank considerably from S$66 million to just S$26 million.

Global Yellow Pages’ experience delivers an important lesson: Making decisions based on how much a stock has fallen can be a terrible mistake. We may want to keep our eyes on the business behind the ticker instead.

A Fool’s take

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

The octet 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.

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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.