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5 classic but costly stock market clangers to avoid!

Bus waiting in front of the London Stock Exchange on a sunny day.
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Investors have been making the same stock market mistakes for decades. Here’s a handful of errors I try to avoid!

1. Becoming emotionally attached

A share is a stake in a business. Buying or selling one therefore ought to be a rational decision.

Becoming emotionally attached to a particular position, for example because it was the first share one ever owned, can be a financially costly mistake.

2. Ignoring inconvenient signs

A common form of what psychologists call ‘cognitive dissonance’ is a confirmation bias. In everyday life, we have all experienced this when someone says “you only hear what you want to hear!”

This is dangerously common in investing too.

Take my shareholding in boohoo. Since I bought it around a year ago, the shares have continued to fall. With each piece of news, I wonder whether the worst is yet over – or still to come. Having spent money on boohoo shares, I have a natural instinct to hope for the best. But hope is not an investing strategy.

Ignoring signs about the likely valuation of a share just because they do not fit with one’s investment thesis is a mistake.

3. Too much of a good thing

As an investor, I find it a helpful discipline to identify what I think is my single best idea at any one time.

So, if I came into a windfall tomorrow and wanted to invest it, would I put it straight into my current best idea? Not necessarily. In the stock market, certainly, one can have too much of what seems like a good thing. Even the best run company can stumble, sometimes dramatically and without prior warning.

Lacking sufficient diversification is a classic investing mistake. When it costs, it can cost a lot.

4. Skipping the complex stuff

Some companies use complicated language, unusual financial metrics or opaque accounting techniques.

There are various reasons why a firm may employ such jargon or methodology. But as an investor, what matters to me is whether I can confidently value a business. If not, I cannot judge whether its shares offer me good value.

So when faced with complex corporate information, I normally do one of two things.

Either I take that as a red flag in itself and stop researching the firm, or else I dig in to learn more. Simply skipping complex parts of a company’s reports and stock market announcements because I do not understand them is a recipe for financial disaster!

5. Ignoring personal experience

Personal experience can add useful context on top of what a company reports to the stock market.

For example, one reason I continue to hold J D Wetherspoon shares despite their weak performance is because every time I go into a Spoons pub, it is heaving. Yes, the business faces ongoing challenges with inflation. But my personal observation makes me think it still has the foundations of a successful company.

However, what if a company seems to be doing well, but my personal experience is at odds with that? I would not ignore my personal experience. I would do more research to understand whether it might be part of a wider issue that could affect the investment case for a company.

The post 5 classic but costly stock market clangers to avoid! appeared first on The Motley Fool UK.

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C Ruane has positions in Boohoo Group Plc and J D Wetherspoon Plc. The Motley Fool UK has recommended Boohoo Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2023