Avoid This 1 Mistake When Bargain Hunting

Stock market crashes may be a good time to go bargain hunting for a stock or two. With the Straits Times Index (SGX: ^STI) closing at about 19% below its 52-week peak yesterday, there may be investors out there who are eager to put their money to work.

On the surface, bargains seem to be appearing with stocks prices declining in unison with the index’s fall. As an example, shares of instant beverage maker Super Group Ltd (SGX: S10) have fallen close to 32% since the start of this year. 

But, stock price declines alone do not make a stock worth buying. Especially when it is a stock that we already own.    

Anchoring bias 

I had written about the common behavioural bias known as the anchoring bias in an earlier article. It is worth talking again about this bias, as it may be pertinent in the context of the current market crash:

“Anchoring is the human tendency to rely heavily on the first piece of information offered (an anchor) when making a decision. In the case of investing, the anchor typically would be the share price that you paid for the company.”

When stocks that you own fall below the price that you paid for it, there is the temptation to try to “double down” to “come out even” precisely due to this bias.

Going back to our example, if we paid $1.14 for shares of Super Group at the start of the year, it would be down 32% at the close yesterday. Question is, does a 32% fall, in and of itself, make Super Group a bargain? 

Sadly, the truth is that the only person who cares about the stock price you paid at the start of the year is you. The market doesn’t care. As I pointed out in another earlier piece of mine, there might be good reasons why shares of Super Group have declined.  

A Fool’s take

 The psychologically tough – but very crucial – part about bargain hunting would be for us to ignore the prices that we have paid for our stocks in the past, and examine the businesses as if you are looking at it for the first time. 

Bargain hunting can be fun for the Foolish investor but do keep in mind our own biases as we head out shopping for stocks.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Super Group