Lesson 2 of 25 · 7 min

Anchoring on a peak price

The highest number a holding ever printed is the one figure in its history that enters no calculation anyone performs.

Anchoring is the tendency to weight a first-encountered or most-salient number more heavily than the numbers that arrive later. A peak price is unusually good at becoming that number. It was reached once, it was the largest the position ever was, and it is the figure a holder can recall without effort.

What makes it consequential is not the recollection. It is that the anchor implies a claim about the future — that the gap between the peak and the present is temporary — and that claim is never stated, so it is never tested. A holding that peaked at $214.60 and now trades at $137.20 has fallen ($214.60 − $137.20) ÷ $214.60 = 36.1 percent. Returning to the anchor is not a 36.1 percent move back. It is $77.40 ÷ $137.20 = 56.4 percent, because the base has changed.

required recovery = (peak − current) ÷ current

peak: The highest price the holding has printed. Historical, and an input to nothing.
current: The price the collateral is marked at today. The only price the lender uses.
required recovery: The rise from the current price needed to reach the peak again. Always larger than the fall that created it.

The cost of the anchor is measurable in headroom. On 6,400 shares, the peak values the position at 6,400 × $214.60 = $1,373,440 and the market values it at 6,400 × $137.20 = $878,080. With a balance of $520,000 and a threshold of 62 percent, the trigger value is $520,000 ÷ 0.62 = $838,710. Measured against the remembered figure, headroom is ($1,373,440 − $838,710) ÷ $1,373,440 = 38.9 percent. Measured against the mark, it is ($878,080 − $838,710) ÷ $878,080 = 4.5 percent.

Those two numbers describe the same account on the same afternoon. One of them is a memory and the other is the one the maintenance test uses. The anchor does not merely flatter the position; it produces a headroom figure 34.4 points too high, which is the difference between a position with room and a position that is one ordinary day from a call.

Key terms

Anchoring: Weighting an early or vivid number more heavily than later ones when making an estimate, even when the later ones are better information.
Anchor price: The remembered figure a holding is mentally valued against. Often a purchase price or a peak, and never the figure a lender marks against.
Required recovery: The percentage rise needed to undo a percentage fall. Larger than the fall, because it is computed on a smaller base.

Worked example

The same account, valued at the peak and at the mark

6,400 shares. Peak price $214.60, current price $137.20. Balance $520,000, maintenance threshold 62% of market value.

Position at the peak price: $1,373,440
Position at the current price: $878,080
Trigger value: $838,710
Headroom against the remembered figure: 38.9%
Headroom against the mark: 4.5%
Size of the error: 34.4 points

The peak is not an opinion about the position. Carried into the headroom calculation, it is a 34.4-point arithmetic error with a date on it.

Check yourself

A holding fell from $214.60 to $137.20. By what percentage must it rise to reach the old price again, and why is that figure not 36.1 percent?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.