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
Second, I tend to analyze companies after prices fall, not before. Doing it the opposite way, I would start analyzing Agilent Technologies
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.
