Most stock investors are wrong focus. Their main focus is on average buy (capital price). So what they pay attention to is how much the FP (Floating Profit) or FL (Floating Loss) is. This can be detrimental to your own consequences anchoring bias and loss aversion.
Why is that, dude?
Anchoring Bias
Why is this wrong and can harm yourself? Because focus on average buyFP, and FL could potentially be cognitive biasthat is anchoring bias.
What is anchoring bias?
Anchoring bias or anchoring effect This is explained by Daniel Kahneman in his book entitled Thinking, Fast and Slow. There is a special chapter entitled “Anchors” discussing this. If you are interested in learning various cognitive biasesyou can read the book, see the following list of stock investment books.
Daniel Kahneman is is a psychologist and economist best known for his work on psychology judgement and decision-makingas well as behavioral economics (behavioral economics), where he won the 2002 Nobel Memorial Prize in Economics for his achievement.
Please read the book excerpt above about anchoring effect. So, anchoring bias is cognitive bias (cognitive bias) that causes us to depend too much on the first information we receive about a topic. Even if you read the quote from Kahneman’s book above, the topic can be different and can still influence judgement people about other things.
An example from Kahneman’s experiment, a group of people initially rotates wheel of fortune – the result already created will always be 10 or 65 by Kahneman. Then these people were asked to answer questions about the percentage of African countries that are members of the United Nations. The results, although they have nothing to do with it, it turns out that the numbers 10 and 65 that they got previously influenced their answers to these questions. The numbers 10 and 65 are unconsciously used as “information” that is useful. In fact, there is no relationship at all. Kahneman refers to this phenomenon as anchoring effect.
Average Buy, FP, and FL Cause Anchoring Bias
Fixate on price average buyFP, and FL also in my opinion can make us suffer unconsciously anchoring bias.
Let’s say you bought stock A for the first time 5000/share. The stock drops to 1500 and you do it again and again averege down. Say average buy you are currently 2500. So, consciously or unconsciously, your focus is currently -50% FL position.
The second example, you buy stock B, the average purchase price is 500/share. Currently, the market price of stock B is 1500. Most people will focus: my current position is 200% FP.
Is that right, you guys? If no, do not proceed. But if you do, what you’re doing has the potential to be biased and can eventually give birth poor judgement.
This “information” – FL position -50% and FP 200% – has the potential to make you make the wrong decision.
You are fixated on the two prices (capital price and market price) both of which actually do not reflect anything about the issuer. Focus on the buy price and the current market price, and FP/FL I think is included anchoring bias.
What you should always focus on is: What is the intrinsic value or fair value of the current issuer?
I will explain further with some case examples. But before that, let’s talk a little about loss-aversion or risk-aversion.
Loss Aversion (Risk Aversion)
Loss aversion is a cognitive bias that explains why we feel the pain of loss/loss psychologically twice as intense as the pleasure of gaining something.
Basically humans do not want to lose / lose. Don’t want to lose this behavior included heuristic behaviour or behavior heuristics known as risk aversion or loss aversionaka not to lose.
For example, if we sit near a trash can, the bad smell doesn’t go away even after a long time. On the other hand, if we smell good perfume, no matter how expensive the brand is, it doesn’t take long to feel the fragrance. Those who wear perfume must first leave the room and come back after a while, then we can smell again how good the perfume is.
This also explains why those who like gambling, after winning, gamble again, because the effect is short, it must be repeated again. But the effect of loss/difficulty/sadness/hurt is long gone.
Behavior loss averse is our instinct as a natural form of protection to survive. That’s why we will always remember anything that makes us sick. The effects of pain are far more intense and long lasting than those of joy. This behavior is generally very useful for us, because we will avoid everything that is bad, uncomfortable and painful. But behavior risk averse can also harm us in several ways, for example in stock investment.
For example, if stocks in Porto go down, we are afraid that CL will go down even more. And if it goes up, we are also afraid of going down, eventually the TP speeds up, even though the shares are still cheap. This “scared of coming down” is humane but it can be cognitive bias if we are not aware
Once we understand what it is anchoring bias (anchoring effect) and risk aversion (or loss aversion), so now we try to discuss using some case examples.
First Example
In the first example of stock A above, if you fixate on a -50% FL position, this can make you confused, dude. Because we have nature loss aversion aka reluctant to lose as we just discussed before. Psychologically, this FL condition will make us sad and confused, unable to sleep, busy looking for justifications, noisy in the stock group, until the worst usually ends in CL (Cut Loss). All because we are fixated on current FL information.
Try to compare if your focus is: fair value of shares A. Psychologically, it’s very different. Say, in your opinion, the fair value of stock A is 7500. That’s why, when the price was 5000 you dared to buy it, because there is a 50% profit potential. Well, currently the market price is 1500 versus the fair price 7500. If your focus is on fair value, then your brain thinks differently: THIS IS VERY CHEAP ITEM! In the end, you will avoid the confusion caused by thinking FL -50%, on the contrary you realize that there is currently a 400% profit potential if you buy at the market price and a 200% profit potential from your current average purchase price.
Try it now, if your FL position is in Porto, change the focus.
Have you tried? How…. something different, right? 😎 If not, try again dude, maybe you’re not trying hard enough, your mind isn’t convinced yet. 😜
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Second Example
The second example, you buy stock B, the average purchase price is 500/share. Currently, the market price of stock B is 1500.
Most people will focus: my current position is 200% FP.
In the case of the FP position, it can also give birth poor judgement. As I’ve alluded to in the article Selling Stock Strategies, one of the mistakes (or maybe not a mistake, but a drawback) of investors is that they often sell stocks too quickly.
And in my opinion, one of them is because we are fixated on the FP position. Again, because we have nature loss aversion naturally. So when we see that we have made a lot of money, we want to quickly TP (Take Profit). Why? Because there is loss aversion, we are afraid that the stock will go down and we will “lose”. Previously, it was already 200% cash on paper, but it dropped sharply to only 150% cash…. our brain doesn’t like this and our brain considers this a loss.
Well, try again…. remember what the fair value of stock B according to you? If for example the intrinsic value is 3000, then by changing the focus, your brain will think that in the current position there is a 100% profit potential if you buy the market price and a 500% profit potential from the average buy price. So, the right judgment is: HODL. This way, you avoid the bias that can cause you to sell stocks too quickly. You can read other ways to optimize investment returns in my previous article: Selling Stock Strategy.
OK, if there is an FP position in porto, try to double-check what the fair value is. Have you tried? How…. something different, right? 😎 If not, try again dude, maybe you’re not trying hard enough, your mind isn’t convinced yet. 😜
Third Example
There are times when, in the middle of the road, the fundamental condition of an issuer changes. Could be better or worse. In this example, let’s say issuer C went bad. For example, you buy at 3000, the fair price according to your calculations is 5000. The shares go down to 500, you have averaged it down so that your average buying price is now 1200.
Then, something happened that caused issuer C’s fundamentals to deteriorate. You do your research again, check again with the new data and knowledge you get. As a result, the current fair price of C according to you is 2000, much lower than 5000.
Then what do you do? CL or HODL?
Correct! It should just HODL. Remember, the focus is always on fair value, not FL/FP positions. Because of the focus on fair value, the right decision is HODL C stock. Because the fair value is still above the market price and your purchase price.
Fourth Example of Anchoring Bias
If before, C got worse, sometimes you get lucky 😎. Issuer D that you bought at 2000 and at first you thought the fair value was 4000, it turns out that the fundamentals have improved. Issuer D managed to expand and therefore according to your calculations, currently its intrinsic value is 8000. Meanwhile the current market price is 4000.
So your current position is a profit potential of 300% of the capital price and 100% of the market price.
By thinking like that, then you decide Average UP ah… Wrong or not? No! Precisely true. Because there is still a potential profit of 100% of the market price, even though your current position is 100% FP.
So, in this way, judgement you get better. You are not afraid to average up even though you have 100% FP.
Conclusion
My advice, it’s best to start now, don’t focus too much on price average buy, FP or FL position. This way of thinking has the potential to make you biased (anchoring bias and loss aversion) and give birth poor judgement.
Better to always focus on the fair value of the issuer and compare it with the market value or the price of your capital. This way you avoid bias and can make investment decisions more objectively.
That’s what Mr. and Ms. Dude said about anchoring bias and loss aversion. Comments and input please. 😎 Don’t forget to share this article with your friends who need it.
