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“The market has gone up, I am scared!”

Anchoring is really a bad way to check if something is expensive or cheap - let see why

Dec 20, 2024

Inside Community Newsletter # 2

Caution: This newsletter shouldn't be considered a buy recommendation on the market or as if I am thinking that market might further go up – this is just to explain a concept!

I am scared of the market because it has gone up from 40k points to 115k points.

This was the first question someone posed to me during a 1-1 call!

And this is how I responded:

If there were no charts to see the historic prices i.e. no way to know what the index was 6 months or 6 years ago would you still have the same question?

I bet no!

Why? Anchoring bias.

Anchoring Bias - The stock market lens

What this does is, compare today’s price of anything vs the last price you remember of the same.

And this doesn’t happen to you only and doesn’t happen in the stock market only.

For most of us its 35-40k where the index was stuck for more than a year!

And when we remove the anchor, an average person has no way of know if the index is expensive or cheap.

By the way, anchoring bias is really bad at telling us if it was expensive or cheap in the first place.

Who said the index was cheap at 35-40k? Just because it has rallied from these doesn’t mean that it was cheap! Maybe it was fairly priced given the risks then?

More importantly, who can say 107k is expensive? Maybe its still cheap or maybe its expensive.

What I am trying to explain is, anchoring is really a bad way to check if something is expensive or cheap.

What it does is, make something feel expensive when it falls and cheap when it goes up. In other words, you will buy when the thing is going up and sell when it is coming down.

How is it different than just trading?

I have no bone to pick with trading but I value my peace of mind more than anything and I don’t want to hand over my peace to the market’s mood and momentum. And by doing this I agree and accept that I might not be able to have the last 20% but then again, I am ok with the first 100%!

When we added Energy Sector stocks (OGDC and PPL) last year into our portfolio, the market was bearish on it. Why? Cox there was no momentum with them. But we never cared.

Now the market thinks (as per research reports) that they should be 350 (OGDC) and 300 (PPL)!

What I am trying to say is that the best way to look at something is when it has fallen and of course the best price is to sell is when it goes up!

Because we look at these three things instead: