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Investor Psychology

5 Ways to Lose Money

Don't fall for these investing traps.

Warren Buffett frequently reminds listeners: "It's better to learn from other people's mistakes as much as possible." In that spirit, here are five traps that can snare even conscientious investors:

1. The game has changed. There's a fine line between opportunity and trouble when a once-strong business goes into decline, as investors in newspapers have learned in recent years.

2. High and rising debt. Value investors are naturally drawn to companies in trouble -- that's what makes stocks cheap if the difficulties prove to be temporary. But too much debt can ruin even the best-planned turnaround.

3. Consumer fads. When investors extrapolate far into the future what are highly likely to be impossible-to-maintain growth levels, trouble follows. Crocs is a prime recent example.

4. Serial acquirers or mega-acquisitions. Given the research showing that a significant majority of acquisitions are value destroyers for the buyers, it's remarkable how frequently investors get excited about roll-up stories or big acquisitions.

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5. Aggressive accounting. The gray areas in generally accepted accounting principles in the U.S. leave managements considerable leeway in how aggressively or conservatively to represent company operations. When a company's accounting treatment creates more questions than answers, something is usually wrong.

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