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10 Investment Mistakes to Avoid in the Stock Market

Credit: Terrance Heath

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 – click here

Mistake No. 9: Misjudging risk – click here

Mistake No. 10: Bias bias

Bias bias is a term my US colleague Morgan Housel had coined:

“The most important and powerful bias of them all, “bias bias” is the belief that you are less biased than you really are. If you read this article without realizing I’m talking about you, you’re suffering from bias bias.

Everyone is prone to cognitive errors. Some more than others, but no one is exempt. Coming to terms with the idea that you are your own worst enemy is the single most important thing you can do to become a better investor.

Daniel Kahneman, who won the Nobel Prize for his work studying cognitive psychology, once said, “I never felt I was studying the stupidity of mankind in the third person. I always felt I was studying my own mistakes.” When you realize you are as biased as everyone else, you’ve won the game.”

As we round up on ten different psychological mistakes investors are prone to commit, we may want to recognize one incredibly important lesson. The detection of investor mistakes may be found in someone familiar – ourselves.

Investing successfully over the long-term may require us to identify our psychological biases and act on them to minimize our chance of making losses.

A Fool’s take

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

The dectet 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 companies mentioned.