hi everyone thanks for tuning into my channel this is sandeep in the world of information and availability of analysis and reports today it's no big deal to get any information about any company or any stocks for that matter you just search in youtube you get some 10 000 analysts coming and explaining you know different perspectives about different companies so what is the advantage for shareholders common retail shareholders what is that advantage that we have in terms of expecting some returns and creating some alpha in the future the only advantage and that has been existing over
many multiple decades and that will continue to exist in the future for seeing forcible future the only advantages are the behavioral aspects and the temperament that we shareholders can have we investors can have and uh the behavioral aspects and temperament forms 80 to 90 percentage of uh you know successful investing and to help with that i've started some new series around bringing some of the behavioral biases how that can influence the investing process today i'm going to explain one of the interesting bias like that which is called the anchor bias so take a look at
this and it might be helpful so here's a presentation let me set the expectations right this is going to be little dry subject but i'll try to make it as much informative and understandable so wikipedia definition is put there and anchoring or focalism but i'll make it very simple it is basically a cognitive bias which we humans face you know which depends uh heavily on the initial piece of information or data that we get we human beings tend to stick to that first piece of information or the initial data that we get or the initial
price that we see you know that sets like an anchor in our minds and any decision that we make in future will be predicated on that anchor uh so whether if suppose we have to make an estimation we do the estimation with that first piece of information that we get as it sits as an anchor typical life real life scenarios are you know it's most commonly used by marketing um strategist sales strategists so you know it's a real life scenario where most uh common approach taken by marketing and sales specialist uh you know they utilize
this anchor bias as the basis so they show us all a real estate for example if you're going to buy a real estate the sales team of agency uh you know they show us very highly priced houses initially much above our budget to set that anchor so that the expectations are set and then shows slightly in between range between our budget and at higher price which they want to sell and we end up almost every time making purchasing or choosing a house that is well above our budget and precisely that's the anchor buys that set
in example we go in search with a budget of say half a million and they show us a house of 1 million dollars and we uh you know when then the next set of houses they show is like 700k we might choose thinking that you know comparatively that anchor bias would fall in even though exceeding our budget then the next real life example is there is a common ad age that goes by you know the first impression is the best impression and that's predominantly predicated on anchor bias so when we meet someone the first impressions
created from the anchor on which we judge the person in future it's difficult to change that perception and which might take a lot of time and we make adjustments about that impression from starting point reference so starting point reference always at anchor then we try to adjust our impressions are based on that anchor now anchoring bias can influence everything from real estate pricing in our daily life to car purchases to salary negotiations uh you know any sort of negotiations anchoring bias comes into the picture now for us investors we only want to worry about how
it influences in investing and uh you could see that one of the most common anchor biases the 52-week high and low stock prices trading and its most flawed approach i would say most of the people take a investment decision based on the 52-week high and low price points and sometimes not always you know the 52-week high is usually considered you know mostly used people consider the 52-week high as an entry barrier 52-week low is considered as a suitable bargain but it need not be true always and uh so that's one of the anchor buyers or
if we know that about a stock which is going up drastically from the prices we came to know first time or we bought the first time we think multiple times to keep adding to that well performing stock and uh that is the anchor bias that keeps playing in and we'll find it difficult to build more positions more uh you know additions of the same stock when it has gone up already two three times and precisely that's why you know most investors end up selling early now here is the graph that shows shopify stock this is
a typical anchor bias that's played in uh i'm not saying stop shop shopify's valuation is justified by any means at this point but this happens since many years you can see 2015 onwards how many times shopify has hit the 52-week high that hit 2015 16 throughout 17-18 it's climbing up the wall and it has been climbing up the price stock prices and an investor who has bought who had bought you know at 250 would be thinking multiple times to add more positions at a thousand so this is a typical anchor bias that happens due to
the initial price that we came to know about stock prices how to overcome that uh you know stock prices may not be reflective of the underlying fundamentals most of the time and uh you know sometimes stock prices uh you know do not reflect the underlying fundamentals uh you know so a stock hitting 52-week high could be looking at excellent growth many years ahead so there could be a rational why it is going up and hitting 52-week highs continuously now the second uh bias that is happens during the investing you know with respect to the anchoring
biases selling best performing stocks and retaining the worst performing stocks in the portfolio it's a very flawed approach taken by most investors in and this is a typical anchor bias that's playing in here investors anchor to the purchase price of the stock so when we purchase a price at a price and the stock goes down say 40 from that point we tend to stick to that thinking that this price has to come back to the purchase price so that we don't end up in losses and there is another stock which is a great winner uh
fundamentally great stock uh you have that has say doubled or tripled from the purchase price most investors end up selling the one that has gone up to three times and retain the one that's loss making so that we wait for that purchase price to come this is a flawed approach because there is no fundamental analysis done by investors when they arrive at such decisions if you really do a fundamental analysis there could be a reason why the stock that fell 50 or 40 percent there's a reason why it felt so and uh there could be
a reason why the stocks that's going up double double tripled is doing so well uh fundamentally and business aspect-wise so we had to do the fundamental research now here is a famous peter lynch uh story that came in uh you know in the forbes 100th anniversary where peter lynch explained peter lynch for people who are uh new to the investing world he had uh you know managed the me fidelity material in front from 1977 and ran it until 1990 and the magellan fund averaged around 29.2 percentage annual return fidelity is one of the best performing
fund in that time and uh his book one upon wall street is a great read uh he has written multiple books he's one of the legendary investors like warren buffett so here's a story where uh you know peter lynn says my biggest mistake was that i always sold stocks way too early in fact i got a call from warren buffett in 1989 my daughter picks up the phone and says it's mr buffett on the line and i thought some of my buddies are kidding me because she was only six i pick up the phone and
i hear this is warren buffett from omaha nebraska you know he talks so fast and i love your book one up on the wall street and buffett says uh you know i want to use a line from your uh book in the year-end report i have to have it can i please use it and peter lin said sure what's the line uh he was curious and buffett said uh you know selling your winners and holding your losers is like cutting the flowers and watering the weeds and that one line he picked in my whole book
and has been my greatest mistake that is what peter lynch has revealed that it was his greatest mistake was the same line that selling winners too early i visited the first home depot you know ever built i sold the stock after a triple then it went up another 50 fold if you are great in the business you are right six times out of ten but the times you're right if you make a triple or a ten bagger it overcomes your mistakes so you have to find big winners i sold way too early on home depot
i sold too early on dunkin donuts why did i do that i was dumb with great companies the passage of time is a major positive forbes 100th anniversary issue so this is a great treat and i for people have not read peter lynn's books one upon wall street especially it's a must treat to start with so that is where the buying prices sets us anchor for most of us common investors then the third one is most commonly used is price to earnings multiple which also has a typical anchor which could be the most common anchor
buyers in the investing world people rely too much on the p e ratios the price to earning ratios of the company to arrive at valuations and that to going by purely numerical ratios without doing any fundamental analysis and uh they compare historical low peas relative valuations um you know it is just a relative valuation measure although price to earnings but we cannot call it a sacrosanct measure of valuation now overcoming these biases how do we do that fundamental analysis and research should be done before buying or selling decisions decisions should be taken through rational might
and ensure that anchoring biases don't influence so charlie munger was asked in one of the interviews what is one reason they would hat that he would attribute to all his investing success in the world and charlie munger's response was being rational is the single most factor he would attribute to in the to his success in the investing world the third point is to overcome bias a good idea to maintain an investing lessons book we all can maintain a personal book where we enter all the mistakes we have done in the markets and lessons learned so
that we don't repeat such mistakes and probably create you know checklist we should always have a checklist in investing process and add certain bias related decisions which can influence our decisions add those things to the checklist and to ensure that decisions are taken rationally now for more depth analysis and research on anchor biasing and overall in the heuristics and biases world the anchoring effect was deeply studied by the nobel prize winners daniel kahneman um and amos twersky i mean daniel kahneman won the nobel prize and his partner amos kwersky they did a lot of experiments
especially with quantitative focus on estimation tasks documented well in the much celebrated book of thinking fast and slow by daniel kahneman so he won nobel prizes in uh prize in economic sciences for his ground work groundbreaking work in you know psychological insights to economic theory particularly in the areas of judgment and decision making under uncertainty so there is a beautiful book out there in amazon called judgment under uncertainty heuristics and biases it's a great read and it covers almost all the biases and we can typically apply with our rational mind and learn a lot from
that so here is what uh you know it says in many situations people people make mistakes by starting from an initial value that is adjusted to yield the final answer the initial value of the starting point may be suggested by the formulation of the problem or it may be the result of partial computation either case the judgments are typically insufficient that is different starting point yield different estimates very important point which are always biased towards the initial value now this is a except from the book judgment and under uncertainty uh you know it's a paper
or book which uh journal rather written by ken kahneman sloick and tuvarsky so that covers it all in the analysis and understanding of anchoring effect take a look at real life scenarios where all this anchoring effect plays a role in our daily life decisions and we might be surprised with the amount of influence these biases can cause so thanks for staying with me till this and i hope it was helpful
