Anchors Aweigh

  • Posted by
  • on October 28th, 2009

We are built to fight off invaders, using the adrenaline generated by the fight or flight response. Not exactly a recipe for thoughtful trading and investing, unless we acknowledge the obvious and work with our brain’s wiring and not against.  Harmony with our personal wiring, combined with a recognition of disharmony among market’s collective wiring, offers a recipe for success.

For my money, recognition of “anchoring” is the most powerful tool at our disposal…we get locked into vivid memories from the recent past and place too much weight on that information.  Think football…how long does it take for us to acknowledge that a team isn’t the one we remember?  I’ll clue you in….the Panthers stink, the Bengals DON’T.  Yet 6 weeks into the NFL season, Carolina was laying 7 points and Cincinnati was a home underdog to a mediocre Chicago team.  2 weeks, OK…none of us has a clue who’s good and who’s not.  Put together 3 to 4 games as evidence, and it should become clear which teams may be for real and which ones definitely aren’t…last season no longer matters.

So how do we measure if anchoring is in place? What can we use to distinguish between a healthy trend and an overdone lovefest? For me, it’s when a stock or commodity gives evidence that it’s no longer the “known” reality that we and everyone else perceived.  This happened in droves in March when stocks we “knew” were in downtrends not only stopped making lows, but put some time and price distance between their new price and those unimaginably low prices we still vividly remembered.  Stocks that had fallen for months on any news were suddenly “too late to buy”. That’s the ripest situation of all…evidence of price strength amidst a backdrop of doubt, even by the observers of that evidence.

As small fish in the market’s pond, we have a wonderful opportunity to act on evidence.  If we can keep our mind open to REAL evidence of aggressive buying or selling, enough to stop a trend or jolt a stock out of a long range, we can place ourselves with the emerging reality at a time when the perception is still stuck in the past.  I consider this the sweet spot on the adoption curve, where our risk is lowest and potential reward greatest.  We’re not the first…that spot goes to the deep value players with the guts to make a stand, or the industry insiders with the information to position for the next phase of growth.  But if that ultra-minority “innovator” group shows enough confidence to absorb the existing supply, imagine what will happen when the majority rushes in later.

We need to be clear about two things…our timeframe, and our spot on the curve.  Make sure what you’re measuring matches these 2 critical traits in order to prevent personal disharmony. Then figure out how to execute a strategy that follows big footprints and fades clusters of small ones. Do whatever it takes to ensure objectivity and an open mind. My mental picture is sitting on a boat pulling out of rough seas…am I staring back at the storm, or am I open to enjoying the blue skies ahead? Being aware of the past can be useful info, but remember that you make your money in the future based on what you do in the present.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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