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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Pitfalls for investors

Posted by Muthu on December 1, 2013

I stumbled upon 20 points given by one of the famous value investor Whitney Tilson on common pitfalls investors routinely commit to shoot themselves in the foot.

Though this is more relevant to investors in direct equity (stocks), it has equal relevance for fund investors as well.

Hence I thought of sharing the same with you.

“ 1) Herding behavior, driven by a desire to be part of the crowd or an assumption that the crowd is omniscient

2) Using mental accounting to treat some money (such as gambling winnings or an unexpected bonus) differently than other money

3) Excessive aversion to loss

4) Fear of change, resulting in an excessive bias for the status quo

5) Fear of making an incorrect decision and feeling stupid

6) Failing to act due to an abundance of attractive options

7) Ignoring important data points and focusing excessively on less important ones

8) ‘Anchoring’ on irrelevant data

9) Overestimating the likelihood of certain events based on very memorable data or experiences

10) Overestimating the degree to which they would have predicted the correct outcome of an event after learning of the results of that event

11) Allowing an overabundance of short-term information to cloud long-term judgments

12) Drawing conclusions from a limited sample size

13) Reluctance to admit mistakes

14) Believing that their investment success is due to their wisdom rather than a rising market

15) Failing to accurately assess their investment time horizon

16) A tendency to seek only information that confirms their opinions or decisions

17) Failing to recognize the large cumulative impact of small amounts over time

18) Forgetting the powerful tendency of regression to the mean

19) Confusing familiarity with knowledge

20) Overconfidence. “

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