The Power And Danger Of Anchoring

March Newsletter | Is the power of anchoring influencing your investment decision making? Anchoring in finance terms refers to basing investment decisions on previous known facts or stock prices, even if they’re not relevant to assessing value. It is incredibly difficult to avoid and can be hazardous. Presented with a constant stream of prices that should have some relationship to the value of an asset, investors face the risk of giving these prices more meaning than they deserve. To use iron ore as an example, the facts around supply / demand dynamics have led to widespread bearishness amongst those analysing the iron ore market, yet price forecasts don’t reflect this view. We would suggest that were it not for the recent price history of iron ore, the price expectations from the bears would be considerably lower. To us, focusing too much on past price action can be to the detriment of the investor.