Drop the anchor to judge value

Buying and selling decisions should be based on where a stock price is going, not where it has been.

- MARCUS PADLEY

We all have a lot of trouble buying stocks that have gone up a lot and selling those that have gone down a lot. If that's you, then I regret to inform you that you are being affected by a well-established financial concept that only affects soft-brained investors. It is called 'anchoring. Anchoring, also known as a 'focusing bias', is the use of a reference point against which to judge value.

The issue arises every day in a broking office. It's when someone says, "I can't buy that because the share price is up XYZ%" or "You can't sell that because the price is down XYZ%". An even more soft-brained variation on the theme is when you find yourself saying, "It's down XYZ% so it's cheap" or "It's up XYZ% so it's expensive".

But making money in shares is all about where the share price is going. In that equation, where the share price has been is pretty much irrelevant and the fact that we don't buy or sell a stock because it is up X% or down X% because of where the share price used to be is unscientific.