Secret 86THE SECRET OF SUNK COST
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As you now know, one of the most critical attributes of a
successful option trader is his ability to take a loss. One major
reason investors have trouble taking a loss is sunk cost. They reflect
on how much they paid for that stock, futures or option, or
how much they will lose.
What you paid for that stock or option should be considered
a sunk cost and must be ignored in making an investment decision.
The question becomes whether the stock or option is a good
investment at today’s price, ignoring what you paid previously.
Unfortunately, too many investors make this mistake of
sunk cost by making their decisions based on the price they paid
for a stock, futures or options when they should be asking themselves
the question, “Would I buy at today’s price?” Don’t be one
of those unfortunate investors. If you realistically would buy at
today’s price, then hang on to the position. If not, sell the
position.
Here, I don’t understand when an analyst gives a HOLD rating
on a stock. Either a stock is worth buying or else you should
sell it. Having a HOLD on a stock or futures says that you must
hold on because you paid a higher price. That is bad decisionmaking,
for you are considering your sunk cost.
Most people in every-day-life situations consider sunk costs
when they should not. For example, let’s say you have an old car
or lemon and keep pouring money into fixing that car. Your excuse
is that you have already invested too much money in the car
to sell it; however, you will never get your money back, and furthermore,
the more you pour in, the more you lose.
As a result, the refrain is that you should never consider
what you have already invested; that is sunk cost, and you always
ignore sunk cost. A good poker player never considers how much
he has already put in the pot; he considers his chances of winning,
not his investment in the pot. He knows when to fold his
cards.
As you now know, one of the most critical attributes of a
successful option trader is his ability to take a loss. One major
reason investors have trouble taking a loss is sunk cost. They reflect
on how much they paid for that stock, futures or option, or
how much they will lose.
What you paid for that stock or option should be considered
a sunk cost and must be ignored in making an investment decision.
The question becomes whether the stock or option is a good
investment at today’s price, ignoring what you paid previously.
Unfortunately, too many investors make this mistake of
sunk cost by making their decisions based on the price they paid
for a stock, futures or options when they should be asking themselves
the question, “Would I buy at today’s price?” Don’t be one
of those unfortunate investors. If you realistically would buy at
today’s price, then hang on to the position. If not, sell the
position.
Here, I don’t understand when an analyst gives a HOLD rating
on a stock. Either a stock is worth buying or else you should
sell it. Having a HOLD on a stock or futures says that you must
hold on because you paid a higher price. That is bad decisionmaking,
for you are considering your sunk cost.
Most people in every-day-life situations consider sunk costs
when they should not. For example, let’s say you have an old car
or lemon and keep pouring money into fixing that car. Your excuse
is that you have already invested too much money in the car
to sell it; however, you will never get your money back, and furthermore,
the more you pour in, the more you lose.
As a result, the refrain is that you should never consider
what you have already invested; that is sunk cost, and you always
ignore sunk cost. A good poker player never considers how much
he has already put in the pot; he considers his chances of winning,
not his investment in the pot. He knows when to fold his
cards.