How to avoid cost price bias?

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The focus would be active Indian investing here, while substack would continue to focus on passive Indian and any global investing

I am tracking my investments using google spreadsheet, sample below

there is an issue with this.

it anchors me to price paid for the stock and I ignored if the stock is doing well or not relatively. The cost price bias has given me a false sense of comfort it promotes Endowment effect, I lose objectivity in analysis.

I posted this on twitter on BAJAJ Finserv

 

As an existing holder like me who is holding the stock from lower levels, because of way I track portfolio (cost price driven), I will miss that the stock has done nothing for last 3+ years

This approach misses the

  • huge relative underperformance even against index, let alone other stocks
  • opportunity cost of not deploying capital effectively

So I think we should listen to William O Neil and not track portfolios like this, here is what he wrote in his book

 

“To help you avoid the price-paid bias, particularly if you are a longer-term investor, I suggest you use a different method of analyzing your results. At the end of each month or quarter, compute the percentage change in the price of each stock from the last date you did this type of analysis. Now list your investments in order of their relative price performance since your previous evaluation period. Let’s say Caterpillar is down 6%, ITT is up 10%, and General Electric is down 10%. Your list would start with ITT on top, then Caterpillar, then GE. At the end of the next month or quarter, do the same thing. After a few reviews, you will easily recognize the stocks that are not doing well. They’ll be at the bottom of the list; those that did best will be at or near the top. This method isn’t foolproof, but it does force you to focus your attention not on what you paid for your stocks, but on the relative performance of your investments in the market.”

I will start applying this approach to my own portfolio, the key takeaway is not to constantly switch in out of positions but also not to sit  on a position for long duration on elevated valuation especially if you have small capital to deploy.

Finally dont apply this to ETFs or Mutual Funds

Happy Investing

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