Anchor to the Price of These 3 Stocks, and You Could Miss Out

It's pretty much one of the worst feelings in the world for an investor. Jim has done his research, narrowed down the field of potential "buys," and finally picked the stock that he likes.

Unfortunately, while Jim was busy debating, the stock shot up from $50 to $100 per share. Frustrated, Jim decided to look elsewhere to invest his money, convinced that he "missed the boat."

As I've said with many of the investing biases I've been investigating, the reasoning here is easy to understand, but this line of thinking can be very dangerous to Jim's portfolio.

The name for what we're covering today is anchoring. Read on to see what anchoring is, why it can hurt investors, and what you can do to mitigate the consequences of this bias.

Anchoring in the real world
In the most simplistic terms, anchoring refers to the fact that the values of many things in life are relatively arbitrary. As humans -- and especially as Western thinkers -- we don't like this kind of uncertainty. So we develop a tendency to rely far too heavily on the first value, the "anchor," that is given to something.

Imagine if I ask one group of people: How tall is the world's tallest building? Do you think it's over 10,000 feet?

Then I ask a second group: How tall is the world's tallest building? Do you think it's over 5,000 feet?

When similar questions have been asked to participants in studies, those in the first group guessed a height significantly higher than those in the second group. The only difference was that each group was given a different anchor.

Anchoring in the investment world
The same thing can happen on the stock market, as it did with our unfortunate investor Jim.

When a company is firing on all cylinders, the price of its stock is likely to go up. We anchor to the original price we saw the first time and assume that there's no room for growth left once the stock appreciates in value.

Imagine if you didn't buy Amazon.com at a split-adjusted $10 because it had been $3.50 just three months earlier, as was the case in late 1998. Sure, you missed some gains, but you'd still be sitting on a 27,300% return right now. Missing out on returns like that is why the anchoring effect is so dangerous.

Here are three stocks that have appreciated a great deal since Labor Day. But if you assume they're not worth your money now, I think you'll be committing the sin of anchoring to past prices.

Company

What the
Company Does

Price Change Since Labor Day 

Heckmann (NYSE: NES  )

Creates water solutions for
energy companies

45%

3D Systems (NYSE: DDD  )

Designs and manufactures
3-D printers

64%

Intuitive Surgical (NASDAQ: ISRG  )

Makes daVinci
Robotic Surgical system

18%

Source: Google Finance.

Serial entrepreneur Richard Heckmann leads Heckmann, by far the smallest of the three businesses. The company aims to capitalize on the recent energy boom in the United States. One of the reasons for the boom is the advent of new fracking techniques -- which require both lots of water and the subsequent treatment of that water.

By acquiring Power Fuels, Heckmann added further credence to its commitment to help clean the water used in the fracking process. And not to be ignored, the company has increased revenue by a whopping 155% over the past year and is expected to have its revenue increase threefold by 2014.

3D Systems, on the other hand, is one-half of the 3-D revolution that many believe is just beginning. Though the company trades for a sky-high P/E of over 100, there are several reasons to believe that in the coming decade, the company's market cap could be worth far more than today's $4 billion.

For starters, 3-D printing alone holds untold possibilities. But beyond just potential, the company has increased revenue by 44% over the past year, and earnings by 81%! There really is no telling where this company could be in 10 years.

Finally, we have Intuitive Surgical. Even though it's up only 18% since Labor Day, I included it because it's increased 21% since late December alone and had an 11% pop just this past week.

Though the company now trades for about 36 times earnings, it might look too expensive. But there's no telling how many procedures the company's daVinci Robot will be able to perform in the coming years.

To help investors decide whether the future of additive manufacturing is bright enough to justify the lofty price tag on 3D Systems' shares, The Motley Fool has compiled a premium research report on whether 3D Systems is a buy right now. In our report, we take a close look at 3D Systems' opportunities, risks, and critical factors for growth. You'll also find reasons to buy or sell, and receive a full year of analyst updates with the report. To start reading, simply click here now for instant access.


Read/Post Comments (4) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 26, 2013, at 5:46 PM, dion2727 wrote:

    Anchoring is a term i have never heard before.I have held and increased my position in ddd since 1989.I have added adsk,plrb,onvo,and spls to my

    portfolio of a rounded 3d strategy and very recently added prcp.I expect to add and hold my positions with an occasional sell for profit and almost immediate rebuy and/or invest in other 3d

    opportunities.This strategy has worked quite well for me.

    I have done the same in natural gas.It has some transformative notions and incudes clne,wprt,mrc,

    cmlp,pwr,and ge.

    What do you think of this aggregate to investing.

  • Report this Comment On January 27, 2013, at 5:03 PM, TMFCheesehead wrote:

    dion-

    I'm not able to give investing advice to specific individuals, but if you believe in 3-D printing's future, you've collected quite the portfolio.

    Congratulations on the successful investments, especially in ddd.

    Brian Stoffel

  • Report this Comment On January 27, 2013, at 5:15 PM, crca99 wrote:

    chasing high flyers and bailing when they retreat is also dangerous to a portfolio

  • Report this Comment On February 09, 2013, at 10:13 AM, magystic wrote:

    Is 60+ too high to invest in 3D? I missed the perfect classic "cup and handle" at 45. Will it pull back or is ii a 100+ stock?

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