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The Two Biggest Investing Mistakes I Have Made

Mistakes are an inevitable part of learning. Learning to invest is no different. When I first started investing, the stock market was experiencing a mini bull run. Every day that I looked, the Straits Times Index  (SGX: ^STI) and S&P 500 were reaching new 52-week highs. Being new and eager, I was desperate to get in on the action.

But as luck would have it, the minute I decided to buy my first share, the stocks that I bought fell, and I made paper losses on my investment. In hindsight, these stocks that I bought were over-valued at that time. Rushing in to buy these stocks resulted in unnecessary heartache and losses. This made me realise, that I had made two of the most fundamental mistakes of investing.

Mistake 1: Over-generalising

The first and probably most common mistake that investors make is over-generalising.

I deliberately left this vague as over-generalising can occur in numerous steps during the investment decision-making process.

My first investing mistake was to believe that the stocks that were increasing in value were going to continue to appreciate. However, as we all know, stocks valuations do not work that way. Stock prices tend to mirror the performance of the underlying business behind it.

Investors also tend to over-generalise, while they look behind a company’s fundamentals.

This can be in the form of focussing on a particular aspect of a company. Investors are inclined to extrapolate a single business aspect to form a mental picture of the business performance. In reality, there are many facets of a business that we should look at. Over-generalising that a single aspect can overtly impact the business performance would be a huge mistake to make.

Mistake 2: Rushing into a decision

I think the record shows the advantage of a peculiar mind-set – not seeking action for its own sake, but instead combining extreme patience with extreme decisiveness.” – Charlie Munger

Charlie Munger, vice chairman to Warren Buffett, was a fond believer that patience is vital in investing. Rushing to make a decision just because we do not want to lose out can lead to embarrassment and disaster.

Having said that, even now I am sometimes still culpable of making this exact same mistake. Often I get “hot tips” from a friend who strongly believes that a company would make a great investment.

Without doing sufficient due diligence, I rush into making a decision and decide that the stock would be a good addition to my portfolio. In reality, making these rash decisions, usually do not end well. As with all investments, we should take the time to do sufficient research on the company.

The Foolish bottom line

Everyone makes mistakes. Even legendary investor Warren Buffett famously mentioned a few of his investment decisions that cost him and his shareholders billions of dollars. As we strive to be better investors, we should continuously learn from the mistakes we make and try not to make them again in the future.

Meanwhile, for more (free!) investing insights, sign up here for your FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

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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 Jeremy Chia doesn't own shares in any companies mentioned.