Before I write about this common investing mistake, I want to mention that I am not talking about others in this article. I am talking about myself. I have made all of these mistakes that I list in this article and I still make some of these today. Lot of people when they are starting to invest make their decisions based on the share price of a company. They anchor to the price of a stock. This is called Price-Anchoring. Remember that share price is noise, it’s not a signal. I am sharing these mistakes so that you can learn from others’ mistakes. 

 Price-anchoring takes many different forms. For example

  • We might think that It’s easier for a $10 stock to double vs a $200 stock, so our brain thinks that I am going to buy the $10 stock. This strategy usually doesn’t work. It’s not the individual share price that counts. It’s the market capitalization of the company. You might think that Facebook (FB) at $273 is cheaper than The Trade Desk (TTD) at $840. Both are in a similar industry (advertising). But you would be surprised to know that TTD at a $40 billion market cap is about 5% of FB at $780 billion market cap. This is how their size compares in graphical form. 
  • This is a very common mistake that all beginning investors make so I want to expand on this. Let’s take an example. Let’s say one of your friends asks you to become a partner in his restaurant. The initial capital required is $100 and there are four partners including you, so your “share” is $25. Now, let’s say the same friend says that there are eight partners including you and now your share will be $12.50. So, you are investing in the same restaurant and you are getting ⅛ share for $12.50 or ¼ share for $25. Do you think that $12.50 is cheaper? It’s not, right? You are getting a smaller share for a smaller price. It works the same way for share prices for companies. So, it is not a good idea to make investment decisions by just comparing stock prices of two different companies. You should consider the overall market-capitalization (total value) and other factors as I list in this article.
  • In a similar vein, when I started investing, and if I had $1,000 to invest, I used to look for smaller price shares (priced under $20) so that I could buy more shares. If you gave me a choice to buy Amazon at $250 or Westport (WPRT) at $25 in 2012, guess which one I bought. Of course, Westport because that way I could buy 40 shares instead of 4 shares of Amazon. Later, I learned that it does not matter how many shares you get. The only thing that matters is the amount of money that you are investing in a company. Westport is now hovering around $10 and Amazon is a little above $3,300 per share as I write this today. These days, you can easily buy fractional shares using brokerages such as Fidelity or Square Cash App so it shouldn’t matter what the price of each share is. Just decide how much you want to invest and you can buy a fractional share of that company and your returns will be the same as someone who holds a full share. For example, if you have $100 to invest and you want to invest in Zoom (ZM). The price of ZM these days is around $425 per share. You can buy 0.235 (100/425) ZM shares by investing $100 and if the ZM price goes up or falls by 10%, your investment will also rise or fall by 10%.   
  • Another way that price-anchoring affects your decision-making is that it makes you reluctant to add to winning positions. One of my investment mistakes earlier in my career was not adding enough to my winners. I invested in Netflix in early 2012 and still hold some of those shares. Great call, right? Problem is, I only added once more to that position and that was also in 2012 and that’s it. When a stock that you hold goes from $12 to $550, it is very hard to add to your position because your brain is looking for bargains and this is clearly not a bargain. This is, in fact, the opposite of a bargain. So, I would look for other stocks like Netflix where I can get in early. Problem is, I had already found Netflix and I did not need to look for another Netflix. I would have been much better off if I just bought more of Netflix. I did learn from this mistake though and have added to my winners in the last five years. Not only that, I bought Netflix for my kids accounts as well in 2018.
  • Another form of price-anchoring. Let’s say you bought TRIP (Tripadvisor) at $60 and after holding it for a couple years, you decide that this was not a good decision because the management failed in execution and now you want to sell that and invest those proceeds in SHOP (Shopify). Problem is TRIP is at $43 now, so you decide to wait until the price is back to your original purchase price ($60). Guess what, TRIP never crosses $60 again and in the meantime SHOP goes from $33 to $1,400. I am not making these numbers up. This is a true story and I am talking about myself. So not only, my TRIP investment sat at a loss, I missed the huge upside of SHOP. I learnt the hard way that stock price does not have a memory on its own. The current market price is what the market has decided to pay for that stock. It may never come back to your original purchase price or it may take 5 years to do that and in the meantime, if you can put your capital in stronger companies, do that. Now, it is a tough call to decide when to sell and you should look at earnings reports of the company to decide if it is a good idea to do that. Never make a buy/sell decision just by looking at the stock price.
  • Another example of price-anchoring. Last year I did some research over a weekend in August and decided that Livongo Health (LVGO) is a good business to own and I decided to buy it on Monday. It had closed on Friday around $78. Problem is, on Monday before the market opened, LVGO pre-announced their earnings saying that they have a surprise to the upside and the price jumped 10% to more than $85. Now, I had anchored the price at $78 but I couldn’t buy at $78. Should I have waited for the price to come back to $78? If I did that, I would have never been able to buy at $78 because it never came to that level again and was acquired by Teladoc Health in late 2020. Fortunately, I had learnt from my previous mistakes and did not wait this time and bought at $85. But this is a very common mistake. If you decide to buy a stock at $25 and it moves up 5-10% in a day, don’t wait for it to fall to your “buy price”. You are buying that stock at $25 because you expect it will be $250 in 10 years. Does it matter if you bought that stock at $25, $27.35, $28.90 or $32.30?
  • Last one. Let’s say that you started researching two different companies, let’s call them N and T. Both are in the $30-$40 range currently. You then forgot about these two companies because life got in the way and three months later, T is at $90 and N is about the same or maybe a little bit lower around $30. Which one would you buy now? If you said T, give yourself a cookie! Nine times out of ten, the company whose stock price has risen has done so for some underlying reason. Either the company’s business is doing well, they have hired a new team and the new team is executing well or something of that nature and the other company is languishing for some reason. Either the company is facing some challenges in growing their revenues, having trouble executing their plans or something of that nature. Once again, this is a real example and I am talking about Nutanix (NTNX) and Twilio (TWLO). NTNX is currently still at $33-$34 and TWLO is currently at an all-time high of $430. However, in my early investing career, I would buy the one whose price did not move or fell slightly because clearly that is a bargain and I have missed the boat on the other company. Later I learned that it is a mistake to do that. You might think that you have missed the boat on a great investment but you may be surprised to see that winning investments keep on winning for a long time. Never in my life, I have got in “early” on an investment. In fact, I have gotten in after watching that stock double or triple and even then I have done well. Looking for bargains might work in a mall but it won’t work in the stock market. In this example, I said nine times out of ten the winning investment would be the one whose stock price has risen because there are exceptions like the recent surge and fall of Gamestop in Jan 2021. Sometimes, stocks will go up parabolically for something that is totally unrelated to their fundamentals and that may not last long. So you have to watch for those. 

I chose to write about this mistake because I have talked to a lot of my friends who are starting to invest and make these mistakes of price-anchoring. Have you made any price-anchoring or any other investing mistakes? I know it is very hard to talk about your investing mistakes but if you would like to share them, please feel free to comment below or email me if you want to keep them private.