One of the most common mistakes that investors make is falling victim to what is known as “anchoring bias.” Advanced Micro Devices (NASDAQ:AMD) stock is one of the best examples of how detrimental that bias can be.
Anchoring bias isn’t limited to investing. It’s simply an overreliance on the first piece of information we receive. If, for instance, we see a television that costs $3,000, the next television which costs “only” $1,200 seems cheaper. Had we seen a $400 TV first, however, our perception of that $1,200 price tag would be very different.
For investors, it’s often past prices that drive anchoring bias. Think of a stock that once traded at $50, but now trades at $15. It seems like an opportunity. It’s “on sale.” It’s “cheaper.”
Now think of the converse: a stock that has gone from $15 to $50. That stock seems potentially expensive. Many investors would believe that, as the old saw goes, “the easy money has been made.”
Rarely is either argument true, however. After all, the stock market is constantly updating its prices based on investor reaction to new information. The $50 stock at $15 is not the same stock it was at $50.
Again, AMD stock is a perfect example of how that bias can lead investors to miss out on huge gains. During a staggering run from 2016 lows, AMD stock repeatedly has looked like it’s run too far. It’s repeatedly looked too expensive. It has repeatedly seemed like an obvious candidate for profit-taking.
Admittedly, at times all of those things have been true — at least from a short-term perspective. But over that stretch, AMD has consistently made new highs. With another, more modest pullback seemingly at an end, I believe that pattern is going to repeat.
The Incredible Run in AMD Stock
In February of 2016, AMD stock traded below $2. Less than five years later, it’s now at $84.
There are no tricks underlying those gains, either. There’s no reverse split. AMD has rallied more than 4,700% from its intraday low on Feb. 11, 2016.
For that entire stretch, investors could have believed — and certainly did believe — that the run was about to end. Thanks to a sizzling earnings report in April 2016, AMD more than doubled within two and a half months. It doubled again by August.
By the end of 2016, AMD was above $11 — up more than 500% from that February low. Surely, that meant the run was over.
In fact, for a time it was. AMD stock actually declined 9.3% in 2017, closing the year just above $10. But the stock was just taking a breather. In both 2018 and 2019, AMD was the best-performing stock in the S&P 500. It rallied another 85% in 2020, putting it in fourth place among constituents of that index.
All along, millions of investors ignored the stock because of anchoring bias. They hoped it would pull back to $3, or $10, or $15. Sometimes, it did: AMD saw big drawdowns in March of this year and in the fourth quarter of 2018. But, usually, it just kept rising. Investors who thought the stock had “run too far, too fast” or was “too expensive” kept missing out.
This Time Isn’t Different
Certainly, I don’t believe AMD is going to gain another 4,700% over the next five years. But the same broad principle holds.
After its modest rally, AMD stock doesn’t seem cheap. It trades at 51x next year’s earnings. It’s posted a historic rally over the past five years. It hardly seems like a bargain.
But AMD stock should have posted an incredible rally. It’s an incredibly different company. In early 2016, the company was a second-tier chip company that could only compete on cost and primarily served a seemingly dying personal computer market.
The sign above the door is the same, but this is not the same company. The Ryzen line makes AMD a real force in PCs. EPYC moved the company into the lucrative datacenter market, and Radeon GPUs (graphics processing units) make AMD a force in gaming.
What AMD stock cost in 2016, 2018, or in March has no bearing — none — on what it’s worth now. What matters is what the future looks like.
It looks awfully bright. This is a company now set to benefit from multiple megatrends. It’s one of the biggest potential winners of this decade, a decade I call the “Roaring 2020s.”
That’s why AMD stock is at $84. And that’s why it can go even higher — just as it has for nearly five years now.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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