So after the 3 interesting stories, let's delve slightly deeper in the individual biases. Don't worry. I won't bore you with definitions or some heavy jargon or some theoretical stuff. It will be something more practical with few examples. Also it will be only related to Investing. I will be discussing one BIAS every blog in no particular order.
So let's start.
The first bias is going to be ANCHORING BIAS.
What is Anchoring Bias ?
As the name suggests itself, you are anchored to something. And it's difficult to let go.
Wikipedia definition is - The anchoring effect is a cognitive bias whereby an individual's decisions are influenced by a particular reference point or 'anchor'.
This can come in various forms. Maybe you are anchored to the security price itself or say to a ratio like PE / ROCE / OPM etc.
The most obvious one is the anchoring to the security price. And this can happen for both buying / selling.
From my example, in 2007/08 , I was following CRISIL. At that time, due to the Global Financial Crisis, when most of the stocks fell, this also came down to 2200 levels. But I was anchored to the round figure of 2000, so I didn't buy it and missed it. My anchoring bias was so strong that I never looked to buy it again. And from there it has become a 10 bagger in the last 14 years. So for saving a mere 10%, I missed 1000% gain.
It recently happened with Hikal when it fell down from 500 to 250 due to environmental mishap. But I was adamant to buy below 200. But again missed it, but some or what got the courage to buy it over 300.
Another instance where I was LUCKILY able to overcome anchoring bias was the Mold-Tech pack. I bought it at around 300 ,but again sold it at 400 for some reason. But after studying the business, bought at 500. And since then I have been riding the journey.
Same can happen with say anchored to some PE or Price/ sales or PB ratio - above which I won't buy.
Or say below one particular ROCE / OPM ratio , I won't touch it.
Ex. Titan / D-mart.
In both Titan and Avenue supermart, I avoided investing in them due to their high PE and single digit NPM. But both (even being index stocks) have become 2 baggers in less than 3 years.
So that way my anchoring to high PE & single digit NPM was wrong.
The anchoring bias can be with industries also. It's well known to invest in companies that are in your circle of competence. But this itself can be a part of anchoring bias. So one can be more CURIOUS and give more time and study other industries also to overcome this industry anchoring bias.
For me, being in the medical profession, I am kind of anchored to the whole Healthcare sector, be it pharma / hospitals / diagnostics. So naturally the healthcare sector is overweight in my portfolio. But what if it doesn't perform for a few years, I won't be able to beat the index. And more importantly do I have the courage to sit on with for a LONG TIME?
So how to avoid anchoring bias?
1. Acknowledge the bias
Being aware of your bias is the first step. Know the weaknesses of your mind and anticipate prejudiced judgment.
2. Drop your own anchor
The next time you impulsively pick up a stock , try to talk to yourself.
What is its intrinsic value? Is it a bargain?
Apply some checklist to know if it fits your investment criteria
Does this stock offer BETTER value than the stocks that you already hold in your portfolio?
3. Try to reflect on when the anchoring bias last affected your decisions
Here the importance of keeping the “Investment Diary" comes in.
Try to write a small note on the company in simple words that even a 10 year old can understand.
Why are you buying this ?
What is your time Horizon?
Under what circumstances will you sell it?
This way you will be able to realize your biases better and try to prevent them.
Actually all these biases are like the System 1 mentioned by Daniel Kahneman and by doing the above exercises you can try to use the System 2 to overcome these investing biases.
Hope you liked this piece on the anchoring bias.
I Will cover the ACTION BIAS in the coming blog post.
Please feel free to like, comment & share.
Regards,
dr.vikas