The meaninglessness of $400
Anchoring is a common practice among investors. Whenever you draw an arbitrary line in the sand for a particular financial metric such as a stock price or index level, you’re anchoring your perspective on that stock to your chosen number, even if it’s based on nothing other than psychology. Anchoring reflects the behavioral need to try to take the chaos of the stock market and draw seemingly orderly conclusions, even if they’re based only on the initial arbitrary anchor.
Of course, the more people anchor to a particular figure, the more important it becomes to the overall psychology behind the stock. For instance, many investors pay close attention to whether a stock’s price is above or below what they paid for the stock. Yet most of the time, since every investor paid different prices for their particular shares, my anchor will bear no resemblance to your anchor, making them largely irrelevant as a predictor of group behavior.
By contrast, sometimes big groups of people come to the same conclusions and anchor to the same level. That happened with Facebook Inc (NASDAQ:FB) in its IPO, where $38 per share still represents a huge line in the sand based on its initial offering price. If enough people decide that Facebook Inc (NASDAQ:FB) hitting $38, Apple Inc. (NASDAQ:AAPL) falling to $400, the Dow hitting a new record high, or gold dropping below $1,400 per ounce represents some sort of special turning point, then what happens at those levels can turn into a self-fulfilling prophecy.
