Once upon a time, there was a man. Like many men, he held some shares in a few companies. Every week, he would gather with his friends at a local diner.

On this particular morning, one of the stocks he owned had been the subject of an extremely glowing story in the business press. Its shares had increased by 23%. At the diner, his friends exclaimed "Wow! That is tremendous luck!"

"Maybe," replied the man.

Many investors find themselves getting excited by things like press releases, analyst upgrades, and other nice things said about the companies they own. If great press releases were the hallmark of great companies, the stock of secretive insurer Alleghany (NYSE:Y) would have performed horribly, while PR-happy Motley Fool Hidden Gems pick HouseValues (NASDAQ:SOLD) would be among the best-performing stocks (rather than having been halved). Stock prices over time will track their companies' financial performances and little else. A cheery consensus is often quite expensive and provides no real safety. Consider that, of 38 analysts, none had called Lucent -- now part of Alcatel Lucent (NYSE:ALU) -- before it imploded, shedding more than $200 billion in market capitalization.

A few weeks later, the man was on his way out to the diner when he heard that the SEC was investigating the company for leaking material inside information to analysts, that the CEO and CFO had been fired, and that its financial statements were going to be restated. Predictably, the stock got clobbered.

When he saw his friends, they exclaimed, "What horrible luck!"

"Maybe," replied the man.

How many times have you wanted to dismiss pieces of information or analyses that are negative on the companies you hold? This is the other side of the incentive bias to which many shareholders succumb. Rather than considering all of the information they have at the moment and seeing whether their previous analysis is still valid, they close their minds to the possibility that they might have made a mistake, or that subsequent events have altered the company's prospects. Now-defunct wearable computer company Xybernaut hit shareholders with unfulfilled hype, SEC investigations, multiple dilutive offerings, enormous insider options, and compensation packages, none of which seemed to dull the fervor with which its shareholders would "defend" the company against any perceived slight. Xybernaut stock now? "Priceless."

Following the news of the investigation, the man carefully analyzed the situation and decided that despite the drop in stock value, he did not believe that the company offered good prospects. So he sold the firm, called Zenron. Six months later, the company collapsed, as investors found that it had stashed billions of dollars of debt in hidden subsidiaries and millions of dollars of cash in executives' numbered accounts in the Cayman Islands.

When his friends realized he would have lost everything if he had held on, they exclaimed "Great luck!"

"Maybe," replied the man.

One of the biggest mistakes that investors make is culling winners and cultivating the weeds. A stock isn't a better bargain simply because its share price has gone down. One very constant refrain we see with stocks that have gone down a lot is: "It's only $2 per share; how much further can it go down?" The answer -- as shown by companies like Enron, MCI, Spectrasite, PSINet, and even US Airways (NYSE:LCC) -- is "100%."

He decided to try to find IPOs for his cash. He signed up through his brokerage to participate in offerings, but he found that he was never allocated shares. Meanwhile, IPOs like MasterCard (NYSE:MA) and Chipotle (NYSE:CMG) rocketed.

His friends at the diner said "what rotten luck!"

"Maybe," replied the man.

Though many people look at the IPO market as easy money, the fact is that most newly public companies underperform the market, and the number of IPOs that do well is relatively small. Some do spectacularly, which causes the market to maintain high levels of interest in participating. Both MasterCard and Chipotle did better after their IPOs than they did when they first came public, and there was no gatekeeper to keep anyone from getting an allocation.

Instead, the man rolled his money into companies like TransMontaigne and TODCO (NYSE:THE). Both were taken private within months after he bought them, at substantial premiums to his purchase prices.

Naturally, his cohorts at the diner toasted his good fortune: "What great luck!"

"Maybe," replied the man.

Last year, more than 2% of the entire combined market capitalization of the companies listed on the New York Stock Exchange were removed from public access through private equity or other going-private transactions. Generally, buyers paid 10%-40% more than the quoted price for these companies, creating financial windfalls for shareholders. The thing is, strategic buyers who overpay for businesses don't stay in business very long. If you are forced to sell a company at a 20% premium that would have doubled, tripled, or more over the next following years, that was not a good deal for you.

That night, the man sat at home, reading annual reports, wondering where to put his money to work next. Sitting by his side was a check, made out to the Internal Revenue Service for the amount of gains he'd generated by selling.

Bill Mann cultivates. He is the co-advisor of the Motley Fool Hidden Gems small-cap investing service, and the advisor of Motley Fool Global Gains, our international investing service. He holds shares in Chipotle, which is a selection of both Hidden Gems and Rule Breakers. MasterCard is an Inside Value pick. All such circumstances are rooted in impermanence. The Motley Fool has a disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.