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3 Mistakes Investors Keep Making In The Stock Market

Credit: Terrance Heath

Mistakes are unavoidable in the stock market. The legendary investor Peter Lynch once said that “To come out ahead you don’t have to be right all the time, or even a majority of the time.” In fact, he claimed that a 60% success rate is more than enough to be a good investor.

But, investing is also about continuous learning. Here are three mistakes I’ve seen investors constantly make in the stock market, in the hopes that we can learn from them. See if you have committed any of the mistakes here.

Buying into value traps

Many investors, myself included, start as “cigar-butt” investors. We look at companies trading at very cheap valuations, in the hopes that we can make money from them when the market wakes up to their values.

However, if you have invested in such companies long enough, you may realize that many of them are trading at low valuations for good reasons. These companies are called value traps. And investors need to understand that not every cheap-looking stock is a good investment. Cheap rubbish is still rubbish.

Not diversifying enough

As investors, we must remember that ego is a very dangerous thing in the financial markets. Every investment carries some degree of risk. Moreover, there are certain things that would always be out of either our control, or the control of a company’s management. Therefore, regardless of how confident we are in an investment idea, we should always consider diversification.

A study done in the 1960’s found that a portfolio of 16 randomly chosen stocks can give us up to 90% of the benefits of diversification while a 30-stock portfolio could give us 95% of the benefit.

Checking the stock price of a company prematurely

When we are first introduced to a stock, the first thing we would likely check is its price. However, this is a major investing mistake. This is because the price that we see at the beginning may become an anchor when we are analyzing the company and trying to determine its value.

We can potentially skew our valuation model toward the anchor to justify to ourselves that the stock is a good investment opportunity. Or, we may miss out on an opportunity to invest in a great company if its stock price happens to rally before we can invest due to us being anchored to the low price we first saw.

It would be a better practice if we simply research a company first. Once we are comfortable with its business and prospects, we can then run a valuation model on it with less bias .

Foolish Summary

Some mistakes are unavoidable in investing. But, there are some – like the three mentioned above – that we can certainly train ourselves to not commit in the future.

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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 Stanley Lim doesn’t own shares in any companies mentioned.