As an investor I only make three decisions: buy, hold (or do nothing), and sell. I have observed that anchoring casts its shadow on all three decisions.
Over the past three years, I’ve researched several stocks like NKE, CMCSA, DIS, SBUX, SCHW, VFC etc. I own none of them. At one point, I seriously considered buying, but needed a greater margin of safety. In all cases, I wrote OTM puts hoping to back into a position at a better price. Unfortunately, in each case, the stock ran away.
“Darn! I missed it!”
That, by itself, is not the big mistake. If I was not comfortable with the price, it makes sense to wait it out. The mistake is the anchoring that happens next. Months, or years later, it is hard to look at any of these stocks without thinking of the price at which I “missed” it. Perhaps, right now, the security is actually attractive. But reconsidering the company brings back bad memories of the mistake of omission.
Anchoring also manifests itself in another form. I own something and sell it when price breaches my estimate of IV. This happened with AAPL (bought at $60 and sold at $150-$175), and MSFT (bought at $25 sold at $40-$45). In each case, I bought well, but sold too early. Now the stock prices are much higher. It is psychologically difficult to buy those names again at optically higher prices. In such cases, I might very well have bought the stock, if I didn’t have a past with it.
In investing, inertia is a friend. This “sitting-on-your-ass” idea is powerful, because it is true in large part. However, inertia and anchoring can cloud hold decisions.
There are companies (JEF, XOM etc.) that I bought a while ago. Say I bought at $X. Now, the stock trades at $Y > $X. I have gains, but the stock is really stagnant (JEF) or does not have significant upside. It may not be expensive, but it is not particularly attractive. If I sold the stock by mistake, I would not re-buy it, even if transaction costs were zero. There are better opportunities.
The unwillingness to sell can be defended by many excuses, including capital gains tax, a dependable dividend, and familiarity. It is undeniable that some of it is because I am still anchored on the buy price. It reminds me that I made a good decision once (Buffett and Coke in the late 1990s?). I am married to the stock.
However, capital has opportunity cost!
I will often hold on to losing position longer than I should (CFX, NOV, ALJJ, GME). The hope is to break even, and be proven right! I forget that there are no special points for a high batting average.
If the thesis is broken, or if the market refuses to recognize a mispricing for long enough, it is best to move on. Ditch the position, and fish elsewhere. I don’t have to make money the same way I lost it.
Don’t water your weeds. Cut them!
Don’t get mad at the market, and average down in revenge! Losers average losers.
Stocks don’t care what price I entered, exited, or first analyzed it. Anchoring to any historical price, just because it has special meaning for me, is completely irrational. The only gap that matters today is the difference between price and the current IV.
Tax consequences shouldn’t be central. “I missed it” shouldn’t matter. Let me get this back to zero is screwed up logic. I am familiar with this mediocre company is not a good excuse for holding on.
One has to make decisions based on rational interpretation of current facts. It is okay to be wrong – if you are not ever wrong then you are probably not risking enough. But one has to continually reevaluate facts, without prejudicing it with personal history.