 Good day fellow investors! Today I want to discuss behavioral finance. Many especially beginners focus on numbers when investing. However, numbers are available to everybody. Everybody knows the numbers. You can easily find those numbers, analyze them and come to a number. However, what determines your investing success is your mind and behavior of it. So in this video I'll start discussing behavioral finance and the concept of anchoring. So we always like to anchor our investment decisions to a price set in the past. We'll discuss what anchoring is, how it influences investments, what is the post earnings drift related to anchoring, what is loss aversion and why we always want to break even at least on an investment. It's very very interesting. And I'll also at the end of the video discuss five ways how to avoid anchoring and how to avoid losing money due to our behavior, not due to rational activity. So let's immediately start with what anchoring is. In this example here you have the stock price of hot bay minerals, a stock that I recommended a month ago, a copper miner and you can see how the stock price is very very volatile. It was at 3.74 back in October, then it went up to nine, then the company missed earnings because some short term problems with some engines that has at its main mine stock price dropped to 4.7 and then when those issues were resolved and copper price has increased the stock is now back at nine. However, if you anchored your past price from October you wouldn't have bought in May when the price was 4.75 and thus missed on a great run up to nine. But I recommended here on the channel around 7.7 something and you can see that many didn't invest because they thought they missed the boat. However, now the stock price is already at nine. Now anchoring was first described in 1974 by Daniel Kahneman and Mastverski when they first show the 10-minute presentation about the housing market to people, then they asked them what are the last three digits of their phone number and asked them to multiply that number with 1000. So let's say 457 multiplied by 1000 you get to 454,000 and after that they asked them to estimate what are normal house prices. When they put all the numbers together they seen that the most of the participants estimated the housing prices in relation to the last three digits of their phone number. So they anchored their estimation even if they had the fundamental presentation previous to it they anchored to the last three phone numbers. That's how our mind works we want to simplify things we use an anchor and then we evolve around that anchor. The same is with stock investing. You first look at the stock price and then only at the fundamentals. I had one viewer that commented in a private message that I recommended Norioz Knickl at 15 now the price is at 17 and he already missed the boat. Now that's a clear example of anchoring. He anchors his investment decision on my recommendation and not on the fundamentals of the stock which are still great and I expect the stock to be valued much much more because the earnings yield is very very high in comparison to the stock market. So anchoring really affects our investment decisions and the problem is we are unaware of it. Just an example of how anchoring works in normal life if you look at any advertisement from IKEA you will always see a higher price and then a lower price even if it is just one dollar difference in this case last year's price was 80 dollars and now you have the new price at 60 so oh it's cheap because it was much more expensive last year and that's how we think that's how we think in when we buy in IKEA if you buy there when we buy stocks when we buy anything always we anchor at the higher price and IKEA knows that and all other sellers know that. Going back to investing investors always anchor their buying decisions if the stock price was much cheaper three months ago investors tend to not to buy that because they anchor their price to the best price. However anchoring is even more influenced when selling a stock if you bought the stock let's say at 50 and the price drops to 40 you are angry at yourself and you're not willing to sell that stock at least until you break even because we have a very strong loss aversion. If you sell at 40 and you bought at 50 you made a mistake and you have to go over your ego and tell you oh I made a mistake so that's again anchoring to a best price not to fundamentals or maybe something really important happened so the loss aversion part is also important to keep in mind perhaps the best thing to do is okay on some investments I am going to lose money and that will avoid you to lose even more money if you really made a mistake. Another example of anchoring is the post earnings drifting in price it's not car drifting but very similar. Here we have the chart for TEVA a very interesting stock that on August 3 impaired 6 billion positive earnings were expected TEVA went with loss they cut their dividend and lowered guidance. However the stock price didn't immediately drop to the current 16 from 42 I managed to sell a 25 point something the whole day you could sell at 23 and then the stock price drifted to the current 16 during the whole last month so the stock price didn't immediately adjust to new information it lasted a month and that's called post earnings drifting so always be aware that the stock price will take a longer time to adjust this is because we are not rational and it takes a longer time to adjust to new information if you're not focused on fundamentals because most investors are focused on the stock market not on fundamentals if you focus on fundamentals then it's easy you mean to say okay dividend cut not what I bought sell immediately because you know the post earnings drift will bring it much much lower how to eliminate anchoring from your decision-making process well it's not that easy our anchoring process is wired by two million years of evolution nevertheless as investors we have to give it a try the first thing to do is to focus on fundamentals when you focus on earnings when you invest in earnings then you exactly know what and when you have to do if earnings disappoint you not the market then you sell if the fundamentals deteriorate you sell if the fundamentals are better or the stock price gets over hyped and the fundamentals don't increase then you sell then you have a line that keeps your mind rational which is the fundamental line and then you see the stock price move around you sell high and you buy low and you rebalance around it and that's it and you try to keep your emotions away from it even when there is a stock run it looks like it's exciting but if it is detached from the fundamentals then the what you have to do is easy sometimes you'll miss future trains but sometimes you'll save a lot the second thing to do is focus on absolute performance so from earnings look at what's your needed earnings yield and then invest accordingly so we mentioned Noriel's nickel my expected earnings yield on that is 10 to 15 percent in the long term per year so that's the base where I invest around if I look at what the market does if the stock price will go up and down short term movements then I'm in trouble however if I'm happy with the 10% yield from the company then I invest and I happily invest and I know how to rebalance around that yield if you look at what the market does for example you look at 10 year treasuries that yield 2.2 percent and then you look at stocks oh stocks yield let's say in the long term 4 to 5 percent you say oh stocks are so cheap both the treasuries with 2 percent and stocks with 4 percent will give minimal returns over the long term because 2 percent and 4 percent let's be honest is very very low especially when you can do better in this global environment the third thing to do is focus on the long term the economy works in cycles there are business cycles sector cycles market sentiment everything is very very short term however if you focus on the long term we discussed here long term economics are positive long term economic growth is positive in the world demographics are positive and we as humans will always improve the world and we'll leave we will live in a better place every day so if you focus on that and you have a look at the long term line you can really take advantage of short term swings however if you think about what will happen in Korea from the sixth nuclear testing that now the nuclear testing is important but the first to the fifth were not regarded from journalists and then you start selling buying we had Chinese crisis two years ago and all those kind of things then you really fall under the influence of short term marketing media and so on and that really affects your mind and then you start panically selling or panically buying and those things usually lead to terrible returns the average investor over the last 20 years achieved a return of 2.3 percent even if the SAP 500 achieved a return of 7.7 percent because of behavioral influence the fourth thing to do is eliminate the influence of media if you can focus on fundamentals proper fundamental research then you can eliminate news the news will bombard you with the latest thing which is soon forgotten after five days and then they'll start talking about some but something else who talks now about the brexit nobody in the global environment because it's not cool it's not hot it's overused news but the effects of the brexit will be there and will come in a year two years it will be again interesting somebody will start talking about Bloomberg Wall Street Journal and then it will be interesting again but if you keep the fundamental the economic the macroeconomic line the impact in your calculations you will see how everything is much much easier over the long term news media focus usually on the short term and can lead you to make very very bad investment decisions especially if you anchor yourself to past prices and not to fundamentals the fifth thing to avoid with anchoring is anchoring yourself to high water mark if an investor starts the year with 200 000 in his portfolio and at the end of the year the portfolio increases to 240 000 directly he's very happy however if the portfolio goes from 200 000 to 300 000 and then drops to 260 000 see he is very very unhappy because his high water mark is 300 000 and he then thinks oh i could have had 300 000 even if the 260 are much better than 240 he's unhappy so if you can eliminate those high water marks what could have been what could have happened then your investment returns will be much much better and your life will be much much healthier to conclude anchoring is really one of the worst enemies of investors because when you anchor yourself to a stock price that's volatile that's influenced by noise 98% of daily stock market moves are influenced by noise i think it goes to 76% over a month and around 50% of stock market moves over a year are just influenced by noise like North Korea or something just over a decade and more stock market returns are influenced by fundamentals so you have to eliminate that noise and look at the fundamentals when you make your investment decisions in the short term it's difficult because you see oh i could have made this this this but in the long term your risk is lower and your returns are higher and just returns of two three percent higher over the long term make a huge difference in your investing life so think about anchoring please share with us any issues that you had with anchoring do you look at the stock price do you anchor your investment decisions to past prices do you not buy because the price was lower or not sell because the price was higher so i'm looking forward to see what you think about this because investing is mostly a mind process not so much numbers numbers are easy to learn and everybody knows them thank you for watching click like if you like the video consider subscribing as we'll discuss much more about behavioral finance and how to train our mind to better investing returns i'll see you in the next video