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