If the world has come up with a better way to lose your money than bad investments, I don't know much about it. (But then, I rarely set foot in a casino.) For all its ability to make smart, patient investors wealthy, the market's siren song also induces more than a few shipwrecks.

The bad news? This happens to all of us. The good news? These screw-ups offer lessons that, if heeded, should help you avoid the shame of buying high and selling low in the future.

As I look over last year's mess-ups in my own portfolio, there are two distinct themes.

"Buy high and sell low" trick No. 1:
Paying too much for a stock because it just keeps going up.

You will often hear investment gurus say that it's OK to pay up for quality. I'm not sure that's true; my own experience with the method is a very mixed bag.

My first shares of American Eagle Outfitters (NASDAQ:AEOS) were purchased at what I then considered fair value for the stock, or just shy of it -- about $30 a share. "What harm could come from paying up for quality?" I thought. This company was clearly doing a great job, and it had plenty of growth opportunity left.

Talk to the chart. Although American Eagle didn't make any great operational stumbles to warrant a drop of that magnitude, the share price was trimmed by a full third on worries alone. The stock has since recovered a bit, but had I waited to get my shares (and I did add near those lows), I would be sitting on gains on all my positions, instead of being merely breakeven because of that first mistake.

What if your dream stock never goes on sale? Buy something else!

But keep in mind that the premium brands do go on sale. Look at Pixar (NASDAQ:PIXR). I bought shares when they fell through the floor several months ago on worries about DVD returns. This wasn't a problem unique to Pixar, of course. DreamWorks Animation (NYSE:DWA) fell on similar concerns at the same time. Clearly, Pixar was a premium company suffering what looked like a minor setback. That's why I bought shares.

Soon enough, the stock recovered, as the Street renewed its zeal for anything connected to Steve Jobs. Before long, I figured the shares were fully, if not richly, valued, and I took the money and ran. Did I miss out on a few points after the recent buyout? Yeah. But my inkling of fair value was borne out when Jobs sold the company to Disney (NYSE:DIS) for just about this week's market price.

Lesson learned? Never pay retail, unless you know that retail is too cheap.

"Buy high and sell low" trick No. 2:
Judging a stock by what managers promise, not by what they do.

From time to time, we all fall for the allure of the down-to-earth, shareholder-interested CEO. The trouble is, we humans really are terrible judges of other people. We're all easy to hoodwink, even in the face of obvious evidence.

Believing CEO Simon Raab of FARO Technologies (NASDAQ:FARO) cost me quite a few bucks this year. In this article, I detailed my reasons for getting out of FARO. Chief among them was the way the company maintained optimistic guidance figures in the face of clear operational difficulties, like higher selling costs and dropping margins. Worse yet, Raab had accelerated his stock-selling at an amazingly convenient time for him -- before the real news came out and the real hurt was put on the rest of us. In December, figured the time was long since past for me to heed the writing on the wall.

I got to revisit that decision, which earned a fair share of scorn from the Faro faithful, last week. Unfortunately, FARO continues to bludgeon shareholders with its fabled "hockey-stick" growth. In this press release, FARO details why its incredible shrinking profits will come in at around a nickel or less for the fourth quarter, instead of the $0.19 to $0.27 originally forecast. The culprits include out-of-control selling expenses, a complete miss on expected taxes, and unexpected administrative expenses -- including legal fees from class action suits from the last major earnings whiff. The result is a company with margins shrinking across the board.

What reflects the worst on me as an investor is that the evidence of the fall had been piling up for months. And I ignored it. It was most notable in FARO's inability to scale its growing sales into growing profits.

Year-over-year margin changes (percentage-point difference)


Q3 '05/
Q3 '04

Q2 '05/
Q2 '04

Q1 '05 /
Q3 '04

Q4 '04 /
Q4 '03
















Had I paid more attention to the reality of the numbers and been more skeptical of Raab's excuses and stock sales, I might have saved myself a lot of money. I'm glad I got out soon enough to avoid the latest toboggan ride, but there's only so much comfort in being right a couple of thousand bucks too late.

Foolish bottom line
You're never going to bat 1.000 in this league. Mistakes aren't just inevitable in investing -- they're vital to your development as an investor. Unfortunately, you may have to repeat the same mistake a few times before you finally learn your lesson. (I just had to liquidate yet another loser from my portfolio; I'd held it for months, despite terrible results, because management kept promising to get its act together.) But cheer up, Fool, because even thick-headed folks like me can reform. Buy right. Watch the numbers. And sleep tight.

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Seth Jayson never pays retail, even at the retailers. At the time of publication, he had no positions in any company mentioned here. View his stock holdings and Fool profile here . Pixar and DreamWorks Animation are Motley Fool Stock Advisor picks. FARO is a Motley Fool Hidden Gems pick. Fool rules are here .