May 15, 2009

Anchoring and a stock sale

In my previous post, I referred to a situation where I started buying maruti suzuki at 500 and when the price started going up, I hesitated and am still waiting to build a full position.

Although any price between 500-600 would have been good, I still ended up getting fixated with the price of 500 and lost a good opportunity. This bias is called as ‘anchoring’. An individual under the influence of this bias gets stuck or anchored to specific value (in this case a specific price) and does not take a rational decision.

So how should one avoid it ? My antidote to this problem is generally to focus on the intrinsic value and have a range of discounts (40-60%) from intrinsic value at which to do the buying. So if we say that maruti suzuki has an intrinsic value of around 1000-1100 , then any price between 450-600 is a good buying point. So, why didn’t I do it ? hmmm still thinking of a good excuse !.

Another mistake I have done in the past is to wait for the price to hit the 50% mark (50% below intrinsic value) and then start buying. The smarter thing to do, would be to buy in a price range.

A sell
I had anaylsed
GSK consumer products a year back and had built a small position in it. However as the price never fell below 50% of my own estimate of intrinsic value, I never built more than a token position. The price crossed my estimates of intrinsic value recently and as a result I have closed my position at a decent gain.

The above idea is another example of anchoring where I got anchored to an exact 50% discount to intrinsic value. Finally, my own convicition about the stock has not been high and hence I could never convince myself to build a full position

Being featured
My blog was recently featured as one of the
must read 15 blogs in india. A little publicity never hurts :)

In addition, my articles are now being published on some other sites, which you can see on the side bar under affiliations and a few more.

The affiliation with other sites is non financial. I have been aproached by various sites in the past to syndicate or publish my article and if I find the site to be decent, I have agreed to it.

However I have the following understanding with these and any future websites which may want to publish my posts
- I do not and will not write exclusively for anyone
- I will not promote any site on my blog. I will provide a link if required and the readers are free to navigate to the site and use it if they find it good.
- My articles should be published without editing and with due contribution to me
- Complete freedom on what I write.


So you may find articles from this blog being published at other sites too. However I do not have a business relationship with any of these sites. If that were to happen, I will be open and candid in letting everyone know.

14 comments:

Amit said...

Hi Rohit,

I faced a similar anchoring problem with GSK Consumer - had analysed it in March when it was close to 600 - felt it was undervalued at that price - however I waited for a price in the region of 550 - which never came. Now the price is completely out of reach! In hindsight it feels more like a mental block - the Rs. 50 difference between 600 & 550 is only a matter of 10%, which is not really what we are after - after all if a company is undervalued at 550 it is also undervalued at 600, albeit a little less.

sumi said...

Hi Rohit,

I too faced an anchoring problem when I bought sintex. I bought it at 120 and thought I would increase the position even lower than that despite the fact that as per my estimates its intrinsic worth is around 280. Despite the 50% margin of safety I considered I could not get over the value of Rs. 120 so I ended up with a small position. The range idea is good it attempts to remove a bit of the fixation.

RK said...

I am new to your blog and I have to say that there is lots of common sense in your posts. As I read the posts here and in some of the other blogs I see that many people have similar problems like I do the same exact thing that you mention in this post - i stop buying once the stock moves up even though i know its still cheap. And of course I have missed on many good opportunities in this short time I have been on the market. It hurts but I think we will finally learn

rk
http://thedumbinvestor.blogspot.com/

Sachin Purohit said...

Hi Rohit,
The publicity is well-deserved. Your blog is a must-read, for sure. Every morning, it has become a kind of programmed task for me to check your site for whether there is a new post on it.

In the times, when people are more interested in giving and taking tips on hot-stocks, even the business newspapers are providing mediocre "trading tips". Your blog provides a good learning and knowlege-sharing experience. It must be quite a regimen for you to be able to keep regularly posting not only articles but also responding to each and every comment. Keep on the good work.

Regards Maruti, you are lucky. The day I got rid of my price fixation on Maruti, it had already moved very sharply. So I could not buy any of them.

Vic said...

Wow!! Congrats Rohit.

Man..you are getting famous now. I don't know whether India's Buffet title is still available.

Vic

Rohit Chauhan said...

Hi sumi, amit

the interesting thing is that although all of us consider ourselves as unique, most of us face the same baises and maybe the first step to overcoming it is accepting it and getting around it.

i dont speak for others, but personally i always assume that i am affected by a behavioural bias unless proven otherwise

regards
rohit

Rohit Chauhan said...

hi RK
most of us are in the same boat, only a few choose to accept it. maybe the first step is acknowledge the bias and work to avoid it.
the good thing about the market is that there are always new opportunities

regards
rohit

Rohit Chauhan said...

Hi sachin
thanks for the comment

regarding maruti, it was more of being sloppy than lucky, but anyway hindsight is 20/20. so next time need to avoid the same mistake

regards
rohit

Rohit Chauhan said...

vic
popular yes, famous no.
also the thing about titles is that pride goes before the fall :)

over time i have learnt is to be careful about getting puffed up. in earlier stages of investing everytime my pick went up, i felt smarter and the next whiz kid. well, in time realised that was the start of my downfall

nowadays my inner voice has this question whenever i start getting puffed up - if you are so smart, how come you are not rich :) ?

rgds
rohit

Ninad Kunder said...

Hi Rohit

Congrats on the listing. It is a reflection on the effort and perseverance that you put into the value investing process.

Cheers

Ninad

Rohit Chauhan said...

Hi ninad
thanks. i am just waiting for the bucks to start rolling in :)

regards
rohit

Anonymous said...

Rohit,

You frequently mention position size. How do you decide the size of your position for a particular stock ? Is it uniformly distributed across your stocks or do you weigh stocks with larger margin of safety higher (i.e., allocate more to these stocks to benefit from a larger potential upside) ?

Thanks,
PR

Rohit Chauhan said...

Hi PR
I have two portfolio - the core is about 14-15 stock with equal wieghtage.

i have rough target on how much money i will invest in the core portfolio which i have divided equally among the 14-15 stocks. if i feel very strongly any specific stock i may go 10-15% higher ..but no more.

also i am adding to stocks based on discount to intrinsic value, the cheaper the stock gets the more i add, till i reach full position

regards
rohit

Anonymous said...

Hello Rohit,
I want to know What is GDR? what does it mean by GDR held in foreign bank with no use for years towards the purpose for which it was raised?

Does the company gets interest on GDRs? How can we come to know the motive behind not using those GDRs for years?

regards
Ani