Investors frequently speak of a stock having a fair price—a level to which it should return, a value it should reach, a target that represents what it is really worth. This language reveals a static conception of value that the actual dynamics of financial markets do not support. Value is not a fixed point toward which price gravitates over time; it is a constantly changing estimate that depends on earnings, growth prospects, interest rates, competitive dynamics, management quality, and a dozen other variables that are themselves in continuous flux. The fair price of a business today is not the fair price of the same business a year from now, even if the stock price has not moved.
The anchoring bias that creates the concept of a fair price operates by treating the value of a business as approximately constant while treating its price as the variable that needs to revert to that constant. This is backwards. Price, in liquid markets, moves continuously and reflects the aggregate assessment of all available information. Value—or more precisely, the range of reasonable estimates of value—also moves continuously, driven by changes in the business's fundamentals and in the economic environment in which it operates. The investor who is waiting for a price to return to some reference level is assuming that value has remained constant while price has temporarily deviated from it. This may sometimes be true; it is not reliably true, and treating it as an axiom produces systematic errors.
The most common version of this error involves the assumption that a stock that has declined significantly from a prior high is undervalued relative to that high. If a stock traded at one hundred dollars eighteen months ago and trades at sixty dollars today, the investor who uses one hundred as his fair value anchor sees a forty percent discount. But the relevant question is not whether sixty is cheap relative to one hundred; it is whether sixty is cheap relative to the business's current fundamental value—which may have declined along with the price, or may have declined further than the price, or may have declined less. The prior high is not evidence of fair value; it is evidence of what investors were willing to pay at a different moment under different circumstances, some of which may no longer apply.
The static conception of fair value is also responsible for the premature sale of positions that are performing well. The investor who set a price target of eighty dollars and sells when the stock reaches eighty has treated his initial valuation as definitive, failing to account for the possibility that the business has developed better than anticipated and that the current price, though higher than his target, may still represent good value relative to its improved prospects. Selling because a price target has been reached is no more rational than holding because a purchase price has not been recovered—both decisions are anchored to a reference point whose relevance to forward returns is negligible.
What sound valuation practice actually looks like is a continuous reassessment of the investment thesis in light of new information, producing a continuously updated estimate of the range of reasonable values for the business. This estimate is not a single number but a range, reflecting genuine uncertainty about future developments. The investment decision at any given moment is whether the current price falls within that range—offering adequate prospective return—or outside it—implying that the business is overpriced or underpriced relative to its current fundamental characteristics. This framework requires more analytical effort than anchoring to a fixed fair value, but it is the only approach that accurately reflects the dynamic reality of what financial markets are actually valuing.