Investing is an eternally forward-looking business...
November 22, 2021
“The market doesn’t care what your cost basis was.”
I can’t remember where I picked that up or who said it to me first. But it was a real wake-up call, and it entirely changed the way I thought about investing.
You see, for quite some time I had unknowingly been anchoring on the relative position of stock prices. I was a believer in the much-less-helpful “buy low, sell high” adage, and it was negatively influencing my perception. I would look at 12-month stock charts, and try to find stocks that I thought had hit (what I considered) to be the bottom. Then I’d just scoop them up for a bargain and cash them back out once they hit the top again.
Unfortunately, I didn’t realize at that time that I wasn’t actually Nostradamus and that wasn’t exactly the way the market works. Stocks that were selling at their 52-week lows often fell even farther down into the pits. And the stocks selling at their 52-week highs — which I was largely turned off by their high-flying performance — often went on to climb even higher without me.
My anchoring bias was also impacting how I thought about the stocks I owned. If I bought a stock and it fell from my purchase price, I wouldn’t sell it until it reached that purchase price again. There was no rational reason for this, other than the psychological feeling of success from not having to report a loss in the bookkeeping. Holding those underperformers often meant that I missed out on redeployed that capital into stocks with much greater forward potential.
But eventually, I realized that sage advice was indeed true. The market really didn’t care at what price I bought my shares.
And taking those words of wisdom one step further, I’d recommend thinking of investing as eternally a forward-looking game. If you can block out the past and always think of your future returns happening from this point on, you will be a huge advantage.
You’ll no longer be influenced by the relative position of a 12-month stock chart. You’ll no longer be wooed by ‘bargain’ companies who will still continue to have their issues. You won’t miss out on great companies who continue to do even more great things. You’ll begin allocating your money to the greatest opportunities.
You’ll stop looking back, and you’ll begin looking forward.
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