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An easy step to better investing

A past price determines whether you make a gain or a loss, but it is not a key consideration for a buy, hold or sell decision.

john HeadshotsTRY sq John Berry 3 minute read

If I bought Tesla shares at US$758, should I now lock in profits and sell given that the share price is up 40 per cent at US$1058? And if I bought A2 Milk shares at NZ$13.51, and they now trade at NZ$5.51, should I hold them and hope the price recovers to what I paid? These are common questions for investors to ask, but they are not the right questions.

We’re all pre-wired as investors to use our entry point as an important marker. You’ll hear property investors say they don’t want to sell a house for less than they paid, and those holding crypto say they’re waiting for the price to get back to what they paid before they’ll sell.

A past price determines whether you make a gain or a loss, but it is not a key consideration for a buy, hold or sell decision.

To treat our purchase price as a key input for decision-making means we are anchoring our thinking to some past event. This “anchoring bias” will lead to bad decision-making.

Going back to the Tesla shares bought at US$758 and now trading at US$1058, the ‘right’ question is “at US$1058 would I buy more of these shares?” If the answer is “hell no, they are overpriced” then you might think of selling – but that has nothing to do with the price you paid.

If your answer is “Tesla’s price will keep going up and outperform the other automotive companies” then you may think of holding or even buying more. Again, it’s nothing to do with the price paid in the past.

Going back to the A2 Milk shares bought at NZ$13.51 and now trading at $5.51, the right question is “where is the share price going from here?” Whether we think the share price direction is up, down or sideways should help determine whether it’s a buy, hold or sell.

There are of course other thoughts to factor into the investment decision like portfolio diversification or your ethical view on a company or industry. The ‘anchor’ of the past purchase price should not be the go-to data point for making a forward-looking decision.

Whether it’s shares, residential property, precious metals or any other asset class, the price paid simply determines profit (or loss) from sale and helps measure investment success or failure. The price paid may determine whether we feel good or bad about an investment, but these emotions should not drive decision-making.

What’s happening in markets now, not the past, determines the fair value of an investment. For shares this can include the company’s future outlook, the industry outlook, cashflow the investment will generate, its risk around transitioning to a lower carbon economy and how comparable companies are priced. But the past price paid for those shares is not part of it.

If we want to make good investing decisions, we need to ask ourselves the right questions. “What did I pay for this share” is not the right question – “what is this share really worth now” is a much better question. It’s an easy step to better investing - challenge yourself with good questions.

John Berry is co-founder and Chief Executive of ethical fund manager and KiwiSaver provider Pathfinder Asset Management, the first B Corp certified fund manager in New Zealand which is part of Alvarium Wealth. This commentary is general information only – it is always a good idea to seek professional financial advice for your personal circumstances. 

(This article was originally published by Stuff January 13, 2022)

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