Quick Take: Why you are making the wrong stock investing moves

Jul 04, 2023

When you lose money, there is an impulsive urge to make it back twice as quick. Why does this happen? Because of Anchoring.

Unconsciously, you have anchored yourself to your original cost and your original expectations for returns. That purchase price is now a reference point (or anchor) for making subsequent decisions.

This plays out in different ways.

Let’s say that you buy a small-cap stock at Rs 50 that you believe will double in 24 months. While you envisage Rs 100 in two years, the stock halves to Rs 25. But even at 25, you are still thinking about Rs 100.

Subconsciously, you are still anchored to that Rs 100 and the desire to now make a 4x return. You start looking for stocks you can make a 4x return instead of a 2x return.

Can you see what you are doing here? You are compounding a bad decision. You are increasing your risk exposure. You have the wrong expectations. And this is because you have taken irrelevant information as a baseline for evaluating or estimating the value of an investment.

Alternatively, you may have bought a stock at Rs 50 that is now worth Rs 100. But you don’t add to the position because in your mind, the cost price should be Rs 50. So you refuse to average up, even though the underlying business is growing and scaling up and getting stronger and more profitable.

Evaluating stocks is not easy. But should you do so, be aware of your biases than can work against you.

More on Behavioural Finance

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