Don’t Get Trapped by Anchoring Bias! The Fatal Mistake of Trying to Catch a Falling Stock 1. The Essence of Anchoring Bias: You think a stock is cheap not because it’s truly undervalued, but because it’s lower than its previous price. For example, if a stock rises from $20 to $80 and you think it’s expensive, then climbs to $200 before falling back to $80, you might think “it’s cheap now”—but its actual intrinsic value may never have reached that level. 2. The Anchoring Trap in Valuation: The same applies to P/E ratios. A P/E of 20x might not seem undervalued, but after the stock is pumped to 100x P/E and then drops to 40x, many investors assume “the valuation is low”—yet 40x P/E may still be far above reasonable levels. 3. Real-World Example: Haitian Sauce—When its market cap was under $100 billion and its P/E was around 20x, no one thought it was undervalued. Later, after being inflated to $700 billion with a 100x P/E, retail investors stayed away. But when it fell to $300–400 billion with a 50x P/E, retail investors rushed in to “buy the dip”—only for the stock to halve again. This is anchoring bias in action. 4. The Right Investment Logic: Judge a company’s value based on its own fundamentals—not by comparing it to past prices or valuations. Focus on its current and future ability to generate returns: dividend potential, core business value, and long-term growth—not simply “it’s cheaper than before.” 5. A Warning from Tech Stocks: After this tech bubble burst, most trapped investors weren’t those who chased highs—they were the ones who tried to “catch the bottom,” using previous highs as their anchor. They assumed a drop meant opportunity, ignoring the underlying company’s true intrinsic value.