Mental Anchoring And Investor Folly

When you build an ownership collection of the best companies in earth—I have in mind firms like Visa, Coca-Cola, Johnson & Johnson, and Chevron—there is a pleasant occurrence you can come to expect: These companies will regularly grow their profits, causing your calculations of the firm to constantly be subject to upward revision.

It came to my attention when I was in dialogue with a reader that had an average cost basis in Chevron stock somewhere around $63 or $64 per share, and couldn’t bring himself to pay $115 per share even though he thought the stock seemed like a good deal at the price. That’s a behavioral force worth examining—previous experience with a stock at a cheaper price can color your current perception of the company’s value now. It can have the effect of preventing you from making a good investment (into a company you already own) and lower your overall returns if you choose an otherwise inferior investment instead simply because it is something new and you don’t have previous mental baggage with that company.

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