Anchoring: why the price you paid haunts you
Waiting to get back to what you paid is not a strategy. It is an anchor with a share certificate attached.
Stop letting an irrelevant number make your decisions.
How Anchoring: why the price you paid haunts you works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
The order matters more than the maths
Cheapness is the last question. Ask it first and you produce a list of companies the market has given up on, and it is usually right.
- 1
The anchor is usually the price you paid
It feels enormously significant and it contains no information about the future. The company's prospects are identical whether you bought at 40 or 80. Only your feelings differ, and the market is not interested in those.
- 2
It also happens with the 52-week high
A share that has fallen from 100 to 60 feels cheap because it was 100. It is not cheap because it was 100. It may be expensive at 60. The previous price is an anchor, not a valuation.
'It is down 40% from its high' is the single most-used non-argument in retail investing.
- 3
And with round numbers, which are just fingers
Targets and alerts cluster at 50, 100, 500, because humans have ten fingers. There is nothing in the accounts that cares. Set your levels where your thesis changes, not where the number looks tidy.
- 4
The counter is to re-derive the value, not recall the price
Ask what the business is worth today, from today's numbers, as if you had never owned it. If your answer moves when you remember what you paid, you have found the anchor.
Ordinary. The market expects steady, unremarkable growth.
You can value a holding without knowing, or caring, what it cost you.
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Waiting to get back to what you paid is not a strategy. It is an anchor with a share certificate attached.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.