Four investment mistakes you really don’t want to repeat.

It is unpleasant to realize how easily we make mistakes. However, it is precisely these mistakes that help us understand how our brain functions.

When we gain a better understanding of how the brain works, we will be able to avoid them more easily.

Here are four mistakes you should avoid to protect yourself from financial losses:

Planning for the recovery of a bad investment
In the early 2010s, a corporate savings scheme was used to purchase shares of Pearson, the company that owned the Financial Times until 2015. It was certain that education was a value desired by everyone, and that Pearson was able to provide it. The shares were bought at a price slightly above £12 and sold for about £10.50 a few months ago.

There was a reluctance to sell below the purchase price, as this would mean acknowledging a loss and feeling like a failure, even just in the context of investments in educational multinational companies. It would have been better to consider the investments more thoroughly and without ego and to execute the sale earlier.

Thinking in nominal prices
It is easy to think that a loss of £1.50 per share is not significant, especially when receiving dividends. However, in real, inflation-adjusted terms, it remains a minus of 14 percent, even after the dividends are paid.

The primary goal of investing is to provide the ability to spend money on goods or services in the future. Therefore, it is essential to adjust the return on investment to reflect the diminishing purchasing power of money. It is also necessary to measure the portfolio’s performance against lower-risk benchmarks.

Buying high and selling low
This practice is not intentional. However, private investors often enter and exit the market. They often miss out on participating in market events and opportunities. Successful businesses or sectors appear attractive, while failures and setbacks generate negative news for companies or industries that are not performing well. Financial commentators also contribute to this.

When a former fund manager shared that “journalists are natural trend followers,” it provided some reassurance, but at the same time reminded that “trend follower” could also describe animals running in herds and lacking basic survival instincts.

One solution is to avoid “market timing,” a term that describes attempts to buy low and sell high. However, this is much harder than it seems. Most investors act piecemeal and withdraw funds in the same way. In the end, they inadvertently practice market timing.

Compulsive storytelling
The human urge for storytelling is endless. Stories help us cope with the chaos in the world. However, it is easy to build narratives that are not sustainable.

There was a moment of expressing overconfidence, as it was claimed that the thriving Japanese stock market could not crash because the Ministry of Finance would not allow it. In reality, Tokyo stocks fell by half in 1990, triggering three decades of stagnation.

It is indeed true that in some Asian countries, cultures exist that are more consensus-driven compared to those in Western nations.