Scanning the Vinvesting site for recent articles, I came across a write-up of Warren Buffett's visit to Texas A&M. Much of the stuff was a rehash, but one sentence grabbed my attention.
When asked what he stays away from when valuing a company, Buffett replied, "I don't want to know the price of a stock as I value it. Knowing the price anchors your thoughts."
For those who may not know, "anchoring" in the investment world is the use of uninformative numbers to make a judgment. Here's a classic example: Ask a group of kids to tell you the number of gumballs in a gumball machine. What will happen is that one kid will call out a number and the rest will shout out numbers very close to the first kid's number. The kids have become anchored on a number that does not give them information.
With that out of the way, here are some things that came to mind about that comment.
First, do you realize how hard it is to not know a stock price? Stock prices are everywhere! Do you want to know the market's reaction to Google (NASDAQ:GOOG) not meeting analysts' consensus earnings estimate? Do you want to know eBay's (NASDAQ:EBAY) new stock price after its pop the other day? There are hundreds of places to get that info on the Internet. Then there are the TV talking heads reciting the news of the day as the tickers scroll along the bottom of the screen. And don't forget your PDA or even your watch. Price information is everywhere. Yet Buffett says it's harmful.
Second, I tend to analyze companies after prices fall, not before. Doing it the opposite way, I would start analyzing Agilent Technologies (NYSE:A) first and not stop until I hit Zymogenetics (NASDAQ:ZGEN), ignoring market prices along the way. That's time-consuming, and it requires patience, discipline, and the possibility of forgoing purchases for a long time. I do not think this is the norm.
But thinking back on my valuation analyses, Buffett is exactly right. For a project in business school, I created a spreadsheet to value companies and then tried to calibrate it by making the market price match intrinsic value. That was anchoring at its worst, and I corrected my error. So when doing your analyses, turn off the TV, close your browser, and focus on the task of making a model that can value a company.
David Meier has a strong bias for sweets. He does not own shares in any of the companies mentioned. The Fool has a disclosure policy.
