RE­LY­ING TOO HEAV­ILY ON THE FIRST PIECE OF IN­FOR­MA­TION THAT WE GET

Finweek English Edition - - INVEST DIY -

WHEN MAK­ING A DE­CI­SION. stocks have never re­cov­ered to pre­vi­ous lev­els. A most no­table ex­am­ple here is African Bank, which is now bank­rupt.

A big­ger ex­am­ple is the Nikkei 225. The price falls, and we re­mem­ber the old price, so we are con­vinced things are cheap. The Nikkei 225 has not yet re­cov­ered to the highs of the late 1980s when it peaked at over 40 000. Th­ese days, it is half that value.

An­other an­chor, and per­haps the most danger­ous to in­vestors, is the price we pay for a share. The price we paid is no longer of any im­por­tance once we’ve bought the share, yet we re­mem­ber it. The prob­lem is es­pe­cially bad if the stock has fallen. Rather than look­ing at the stock with fresh eyes and ask­ing our­selves what we should do, we re­mem­ber the price we paid and want the stock to rise to that level again so we can exit with­out a loss.

The re­al­ity is that the price we paid is now gone and while it was im­por­tant when we were buy­ing, once we’ve bought the price we paid is mean­ing­less. What now mat­ters is if the stock is still worth hold­ing or even adding to.

So as an in­vestor, you need to watch out for an­chor­ing bias in your think­ing and when you spot it (and you will at times, no­body is im­mune), recog­nise it for what it is and re­mem­ber the cur­rent price is what mat­ters. What you paid or pre­vi­ous highs and lows does not mat­ter to the val­u­a­tion to­day.

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