Comments on: Sunk Costs and Investing http://www.obliviousinvestor.com/sunk-costs-and-investing/ Investing Blog: The Oblivious Investor Tue, 07 Feb 2012 17:04:11 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Dave C. http://www.obliviousinvestor.com/sunk-costs-and-investing/comment-page-1/#comment-2198 Dave C. Mon, 10 Aug 2009 02:58:45 +0000 http://www.obliviousinvestor.com/?p=5012#comment-2198 Thank you Mark, that is a great explanation. Thank you Mark, that is a great explanation.

]]> By: Mark Wolfinger http://www.obliviousinvestor.com/sunk-costs-and-investing/comment-page-1/#comment-2197 Mark Wolfinger Mon, 10 Aug 2009 02:52:55 +0000 http://www.obliviousinvestor.com/?p=5012#comment-2197 Dave C, Yes, you can buy shares and pay a lower price. But that is not relevant. You can buy those shares at today's price - even if you had not bought any shares earlier. You are currently losing money on that original trade, and no matter what your time frame, that is not a good thing. Wouldn't you be better off if you had not bought those original shares and invested twice as much cash today? The people who tell you that current price doesn't matter don't grasp the concept. They believe that if you are not exiting the position, it does not matter what the value of that investment is. Don't fall for that. Here's what is true: There is nothing you can do about the fact that the price is lower. There is no need to shed tears over a trade that is losing money. Your decision is: Do you still want to own shares of this entity? If yes, continue to buy. Obviously you have two conflicting hopes: a) You want your shares to be worth more in the future; b) You hope to buy lots of shares at what turns out to be a relatively low price. You have no way on knowing what will be a low price in 30 years, so if you want to steadily invest, do so. But just because you are not cashing out today does not mean that you shouldn't care about the price. After all, if the stock price doubles over a short period of time and you cannot figure out why that happened, then you may decide this investment is now too overvalued and get out. It's not that you are timing the market or taking a quick profit. It's that you would rather own a different entity or different asset entirely - one that your research tells you is more fairly valued. Dave C,

Yes, you can buy shares and pay a lower price.

But that is not relevant. You can buy those shares at today’s price – even if you had not bought any shares earlier. You are currently losing money on that original trade, and no matter what your time frame, that is not a good thing.

Wouldn’t you be better off if you had not bought those original shares and invested twice as much cash today?

The people who tell you that current price doesn’t matter don’t grasp the concept. They believe that if you are not exiting the position, it does not matter what the value of that investment is. Don’t fall for that.

Here’s what is true: There is nothing you can do about the fact that the price is lower. There is no need to shed tears over a trade that is losing money. Your decision is: Do you still want to own shares of this entity? If yes, continue to buy.

Obviously you have two conflicting hopes: a) You want your shares to be worth more in the future; b) You hope to buy lots of shares at what turns out to be a relatively low price.

You have no way on knowing what will be a low price in 30 years, so if you want to steadily invest, do so. But just because you are not cashing out today does not mean that you shouldn’t care about the price. After all, if the stock price doubles over a short period of time and you cannot figure out why that happened, then you may decide this investment is now too overvalued and get out.

It’s not that you are timing the market or taking a quick profit. It’s that you would rather own a different entity or different asset entirely – one that your research tells you is more fairly valued.

]]> By: Dave C. http://www.obliviousinvestor.com/sunk-costs-and-investing/comment-page-1/#comment-2186 Dave C. Fri, 07 Aug 2009 03:49:44 +0000 http://www.obliviousinvestor.com/?p=5012#comment-2186 For somebody with a long investment time line (30+ years) does it really matter if the investment is performing poorly right now? Wouldn't I actually benefit by being able to purchase shares at a lower price? For somebody with a long investment time line (30+ years) does it really matter if the investment is performing poorly right now? Wouldn’t I actually benefit by being able to purchase shares at a lower price?

]]> By: Mark Wolfinger http://www.obliviousinvestor.com/sunk-costs-and-investing/comment-page-1/#comment-2166 Mark Wolfinger Wed, 05 Aug 2009 21:55:13 +0000 http://www.obliviousinvestor.com/?p=5012#comment-2166 I agree with the sunk cost concept. The position is worth what it today and there's nothing you can do about that (unless you are a bank and some small group of accountants tells you that you don't have to mark to the market). I agree with the sunk cost concept.

The position is worth what it today and there’s nothing you can do about that (unless you are a bank and some small group of accountants tells you that you don’t have to mark to the market).

]]> By: Mike http://www.obliviousinvestor.com/sunk-costs-and-investing/comment-page-1/#comment-2163 Mike Wed, 05 Aug 2009 14:48:19 +0000 http://www.obliviousinvestor.com/?p=5012#comment-2163 Rick: You're right: It certainly could be. It depends upon how drastic the change is. For instance, I wouldn't worry the slightest bit about moving from an actively managed large-cap blend fund into an S&P 500 index fund all at once. On the other hand, if the investor's overall asset allocation was going to change dramatically, it could well make sense to do it over time. Rick: You’re right: It certainly could be. It depends upon how drastic the change is. For instance, I wouldn’t worry the slightest bit about moving from an actively managed large-cap blend fund into an S&P 500 index fund all at once. On the other hand, if the investor’s overall asset allocation was going to change dramatically, it could well make sense to do it over time.

]]> By: Rick Francis http://www.obliviousinvestor.com/sunk-costs-and-investing/comment-page-1/#comment-2162 Rick Francis Wed, 05 Aug 2009 14:42:14 +0000 http://www.obliviousinvestor.com/?p=5012#comment-2162 Mike, I agree with the sunk cost analysis, however it strikes me that if a person shifts all of their investments at once they are effectively timing the market. Wouldn't a more gradual shift over a year or two say selling off non-index funds during rebalanceing be less risky? -Rick Francis Mike,

I agree with the sunk cost analysis, however it strikes me that if a person shifts all of their investments at once they are effectively timing the market. Wouldn’t a more gradual shift over a year or two say selling off non-index funds during rebalanceing be less risky?

-Rick Francis

]]> By: Mike http://www.obliviousinvestor.com/sunk-costs-and-investing/comment-page-1/#comment-2161 Mike Wed, 05 Aug 2009 14:05:14 +0000 http://www.obliviousinvestor.com/?p=5012#comment-2161 Too true. I've seen that exact error in reasoning come up <i>very</i> frequently. Too true. I’ve seen that exact error in reasoning come up very frequently.

]]> By: Dylan http://www.obliviousinvestor.com/sunk-costs-and-investing/comment-page-1/#comment-2160 Dylan Wed, 05 Aug 2009 14:02:06 +0000 http://www.obliviousinvestor.com/?p=5012#comment-2160 I think the other sunk cost that trips people up with investments are loads. If you pay a 5% load to buy a mutual fund, that money is gone, whether you keep the fund or change to a no-load index. There is no actual way to hold a fund long enough to recoup the load. I think the other sunk cost that trips people up with investments are loads. If you pay a 5% load to buy a mutual fund, that money is gone, whether you keep the fund or change to a no-load index. There is no actual way to hold a fund long enough to recoup the load.

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