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A big lesson I learned from @DavidGFool
How a psychological trick causes even the most experienced investor to miss out on massive gains of great stocks.
Even Warren Buffett suffers from this
A THREAD
How a psychological trick causes even the most experienced investor to miss out on massive gains of great stocks.
Even Warren Buffett suffers from this
A THREAD
Some people look at a company’s stock price and decide it’s too expensive.
So they never buy shares in the company at all.
Others buy a few shares, but never add to their initial position
Even after a stock has proven itself by producing amazing returns.
We've all done it.
So they never buy shares in the company at all.
Others buy a few shares, but never add to their initial position
Even after a stock has proven itself by producing amazing returns.
We've all done it.
Why?
Because our brains are hard-wired to plant a big obstacle in our path to financial freedom.
What’s the obstacle?
It’s called Price Anchoring.
Because our brains are hard-wired to plant a big obstacle in our path to financial freedom.
What’s the obstacle?
It’s called Price Anchoring.
Price Anchoring is part of a wider phenomenon called Anchoring Bias
Where your brain gets distracted by information you connect with something you're thinking about.
Even when that information isn't relevant at all to the original thought.
Where your brain gets distracted by information you connect with something you're thinking about.
Even when that information isn't relevant at all to the original thought.
In sales you see price anchoring all the time.
It’s why every internet marketer puts the “total product value” at 10X what the product costs.
You get anchored to the higher price.
And it makes you think you’re getting a bargain.
But in stock investing, the opposite happens.
It’s why every internet marketer puts the “total product value” at 10X what the product costs.
You get anchored to the higher price.
And it makes you think you’re getting a bargain.
But in stock investing, the opposite happens.
You get anchored to a lower price
And this kills your returns.
Because there are two numbers you’re anchored to when deciding whether to buy a stock.
The first is the price at which you first heard about a stock.
This one applies if you've never invested in the stock before.
And this kills your returns.
Because there are two numbers you’re anchored to when deciding whether to buy a stock.
The first is the price at which you first heard about a stock.
This one applies if you've never invested in the stock before.
The second applies if you already own shares.
Its the price you first bought the stock at.
When stocks go above your anchor price, it’s harder to buy shares.
So you stay on the sidelines and make excuses for not investing
While hoping the stock falls back to your anchor price
Its the price you first bought the stock at.
When stocks go above your anchor price, it’s harder to buy shares.
So you stay on the sidelines and make excuses for not investing
While hoping the stock falls back to your anchor price
Why is price anchoring so hard to overcome?
Because we’re trained to look for bargains.
So when a stock price is at an all-time high.
You feel like you're getting ripped off.
Especially compared to your anchor price.
Because we’re trained to look for bargains.
So when a stock price is at an all-time high.
You feel like you're getting ripped off.
Especially compared to your anchor price.
Plus we hate losing.
As humans we act more to avoid a potential loss
Than we will to make potential gains (Survival instinct)
Because the amount of pain that loss causes…
Is far greater than the amount of happiness you get from potential profits
As humans we act more to avoid a potential loss
Than we will to make potential gains (Survival instinct)
Because the amount of pain that loss causes…
Is far greater than the amount of happiness you get from potential profits
How many times have you bought a stock
At what turned out to be the highest price possible...
Only to see the stock go lower right after you bought it?
The funny thing is.
This doesn't happen as often as you think it does.
But you DO remember the times when it does happen.
At what turned out to be the highest price possible...
Only to see the stock go lower right after you bought it?
The funny thing is.
This doesn't happen as often as you think it does.
But you DO remember the times when it does happen.
Price anchoring can be devastating on your long-term results.
Because anchoring will likely prevent you from benefitting from the stocks that go up the most.
Even Warren Buffett isn’t immune from this...
Because anchoring will likely prevent you from benefitting from the stocks that go up the most.
Even Warren Buffett isn’t immune from this...
Buffett started buying Wal-Mart in the 90s.
But when the stock inched pennies above his $11.50 target price, he stopped adding to his position.
The stock only went up after.
It's now worth $150 per share.
Buffett estimates he missed out on $10 billion by not buying more.
But when the stock inched pennies above his $11.50 target price, he stopped adding to his position.
The stock only went up after.
It's now worth $150 per share.
Buffett estimates he missed out on $10 billion by not buying more.
Just think about huge winners like Amazon, Tesla, Zoom and NVIDIA
Think of how much it would cost
To miss out on 1,000%+ gains because you didn’t want to pay a few extra cents per share.
Then think about the cost of not adding to those positions over time.
Think of how much it would cost
To miss out on 1,000%+ gains because you didn’t want to pay a few extra cents per share.
Then think about the cost of not adding to those positions over time.
How to beat it
You will never fully eliminate price anchoring from your investment decisions.
But there are some ways you can reduce its impact.
The easiest is to split your initial investment into thirds
- Buy 1/3 today
- 1/3 in 30 days
- 1/3 in 60 days
Regardless of price
You will never fully eliminate price anchoring from your investment decisions.
But there are some ways you can reduce its impact.
The easiest is to split your initial investment into thirds
- Buy 1/3 today
- 1/3 in 30 days
- 1/3 in 60 days
Regardless of price
So don't let price anchoring keep you from buying a great stock
Or adding more shares to a current winner.
If you enjoyed this thread, then check out this free report on our Top 3 Growth
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Have a great week
Or adding more shares to a current winner.
If you enjoyed this thread, then check out this free report on our Top 3 Growth
Stocks for 2021
https://gum.co/growthstocks2021
Have a great week
