CHICAGO (Morningstar) - Look on the bright side. The past two years' losses on Wall Street have given us an excellent guide for what not to do when investing in stocks. And who better to relay our collective sins than Morningstar's 25 stock analysts?

They receive dozens of e-mails from investors each week full of questions, mistakes and lessons learned. In addition, these analysts have had a dramatic period over which to observe their readers' reactions -- from the bright dawn of the New Millennium to the shadows of Nasdaq 1,500. I asked our analysts to list their readers' biggest mistakes so that all of us may take heed.

Arguably the single largest error made by investors. Have you ever run a fantasy baseball team? If so, I suspect that you've signed, traded and shuffled your ballplayers far more rapidly than a major league manager ever would. High turnover happens when you substitute an electronic commodity for a living, breathing person. It's one thing to fire a virtual ballplayer. It's quite another to look somebody straight in the eye and send him to the minors.

Unfortunately, all of this trading tends to be bad for results. Many a fantasy baseball team has suffered for dumping a star player because he suffered a three-week slump, only to watch him blast nine home runs the month after he was traded.

The same holds true for stock portfolios. Too often, investors stop thinking of their securities as shares in a business -- which, as a real-world operation, will have its good and bad moments -- and instead view them as electronic goods to be bought and sold on a whim. Morningstar's analysts can cite dozens of cases of investors who, tired of several months' worth of sluggish stock performance, dumped a perfectly good company to buy a fashionable, overpriced "story stock." In the next six months the new stock heads south, while the old one recovers nicely.

And don't just take Morningstar analysts' word for it. There's plenty of proof out there. A few years ago, Terrance Odean, assistant professor at the Hass School of Business, University of California at Berkeley, examined the trading results of several thousand discount-brokerage investors. His conclusion? Investors who traded most rapidly gave away, on average, three percentage points of return to their more deliberate cousins. Sadly, transaction costs ate up another six percentage points.

Curiously, even many rapid-trading investors fall prey to the opposite problem: holding on to their losers for too long in the hope that the stocks will rebound and they will at least break even. These are the investors who often ask, "It can't get any cheaper, can it?" Yes, it most certainly can. JDS Uniphase got cheaper, and WorldCom got cheaper, and Enron and Global Crossing got way cheaper. All the way to zero.

Now, I admit, knowing when to sell can be difficult. If a company's business starts to slide, it's tough to figure out if the slump is the result of a temporary inventory backlog or of deeper, long-term ills. You'll sometimes be wrong. But at least make the attempt. Recall Peter Lynch's advice for when to sell a stock: when the reason that you bought the company no longer holds true.

Oh, those charts! Many investors hold a supernatural faith in the wisdom imparted by squiggles and jiggles, as if a stock were struggling to tell a story via semaphore. Close your eyes. Forget about 90-day moving averages, breakout moves and the like. They don't work.

Or more accurately, they do work -- 50 percent of the time. The other 50 percent, the stock heads in the opposite direction from what the charts predicted, which is just what you would expect from a random event.

Closely related to the false idol of chartism is the belief that the absolute level of a stock's price is meaningful. Our analysts repeatedly hear statements like "Oh, that stock sells for $240, it's too expensive." Or "Well, at $4 it's a cheap stock."

Wrong. The actual dollar value of a share of stock is immaterial. The price is meaningful only in relation to the total number of shares outstanding. A company with 100 million shares selling at $35 is worth exactly as much as one with 10 million shares and a stock price of $350.

Remember, there are two reasons to buy a stock. One, the company has favorable prospects. Two, the price is fair, given what you're purchasing. The best stocks fit both descriptions.

Just because the first element is present doesn't mean that you can ignore the second. A Mercedes E-class is a fine car, but since it is widely available for about $50,000 you wouldn't scoop one up for a hundred grand. Investors who landed Coca-Cola in 1998 because it was a splendid business at $85 a share are now holding a splendid business at $58 a share. That ain't no fun.

Besides, you might be wrong about the great company part. When you look at the companies that mutual fund managers favored in the 1990s, some are still winners, but others are really struggling. Identifying companies that have a strong current business is pretty easy; identifying those that will be strong in another five or 10 years is another matter altogether.

Running a small company doesn't feel much like playing the lottery. It's hard work punctuated by moments of joy or frustration. But buying a piece of paper in the hopes that a tiny company will become the next Microsoft ... well, that's a dream that many investors have. That's why when a small company or two skyrockets in price, investors tend to flock to that sector, hoping to pick up another winning ticket.

However, just as your chances of actually winning the lottery are slim, these small high fliers also rarely pay off. Of all the investment styles tracked by researchers, emerging growth stocks have, over time, had the single-lowest rate of return. With the brief exception of the late 1990s, popular initial public offerings have dropped in price after their first day of trading. Remember, by the time you hear how attractive a hot stock or sector is, the odds are that the professionals are already on their way out. Worse, they're probably still talking up the stock or industry even as they exit.

With the lottery, you might be willing to lose 50 cents here and there in return for the entertainment value of dreaming that little dream. But why do so on a $10,000 or $50,000 investment?

Wasting a few quarters is one thing; losing real money in your portfolio is another. Avoid the temptation.