[Reporter’s Notebook] Three Pitfalls of Stock Investing

A recent report released by the POSCO Research Institute has drawn attention. Titled "The Three Major Pitfalls in Discovering New Business Items," the report highlights three common mistakes companies make when searching for new growth engines: fixed thinking, Fear Of Missing Out (FOMO), and confirmation bias. Although the report analyzes corporate behavior, it also offers valuable lessons for individual investors in selecting stocks. In a time when the stock market is flooded with optimistic forecasts, what insights does this report offer us?

The first pitfall discussed in the report is "trained incapacity." Once a company forms a systematic way of thinking based on the success of its existing business, its knowledge and skills become trapped in established patterns, and it begins to favor familiarity, making it difficult to seek new alternatives. A classic example is Blockbuster, which dominated the U.S. video rental market in the 1990s but overlooked the growth potential of online business models and declined to acquire Netflix at a bargain price. Individual investors may also become fixated on stocks that have yielded profits in the past or on a technical analysis method that once worked for them. The vague expectation that what worked before will work again is the first pitfall to avoid in investing.

The second pitfall is "FOMO." This psychological bias leads people to fear missing out on opportunities when others are taking certain actions. Just as companies that blindly followed competitors' new businesses without proper research suffered losses, many investors have been swept up by trends such as the dot-com bubble, the COVID-19 vaccine boom, or the Bitcoin craze, only to face disappointment. With the KOSPI 3000 era opening after three years and six months, and securities firms racing to raise their targets, it is especially important to calmly assess the fundamentals of stocks and establish one's own investment principles during such times.

The final pitfall is "confirmation bias." When exploring new growth business items, companies often forget to remain objective and become captivated by compelling narratives. This stems from the tendency to selectively gather and interpret information that reinforces their existing beliefs. For example, searching only for reasons why a stock you own will rise on algorithm-driven platforms like YouTube, or isolating oneself in online communities comprised solely of shareholders of a particular stock, should be avoided. Shutting out objective feedback is a shortcut to investment failure.

So how can one avoid these pitfalls? The most important requirement is "metacognition." One should not mistake profits from beginner's luck for genuine talent. It is essential to regularly review whether the successful strategies established in the past with your own investment methods are still valid today. Decision-making based on data should become a habit. No matter how promising a stock may seem, you should calmly compare the opportunity cost of not investing immediately with the expected returns from investing, so as not to be swayed by the crowd. The courage to seek out critical voices rather than becoming addicted to the sweetness of rosy forecasts is the first step toward investment success.