Money and Finance
- Seth Klarman: Adopt An Absolute-performance Orientation
From Margin of Safety:Most institutional and many individual investors have adopted a relative-performance orientation...They invest with the goal of outperforming either the market, other investors, or both and are apparently indifferent as to whether...
- "i Have No Sunk Costs."
Edge asked a group of people to respond to a question about how Danny Kahneman has influenced their work. Below is Jason Zweig's answer, which I think shows an especially important lesson: While I worked with Danny on a project, many things amazed...
- 5 Keys To Reinvesting Dividends
Once you've decided to build a dividend-based portfolio, it's essential to know what you're going to do with the income generated by your investments. There are three basic options -- spend the dividend, save it, or reinvest it. Sounds...
- What Matters In The Long Run
Here is a guest post from my friend Adrian Lane that shows what long term time horizons can do, how they massively overweight any other single advantage, and a lesson on when to sell: "In the 1990s, working in tech during the great Internet surge, cash...
- High Yield Reads - 3/29/14
Summary of recents posts and pieces of interest, sometimes enduring, to dividend investors: Brooklyn Investor continues the series on Buffet with 10x Pretax earnings. "It's amazing how so many of the deals cluster around the 10x pretax...
Money and Finance
The sunk cost fallacy...
From The Art of Thinking Clearly by Rolf Dobelli:
The sunk cost fallacyis most dangerous when we have invested a lot of time, money, energy, or love in something. This investment becomes a reason to carry on, even if we are dealing with a lost cause. The more we invest, the greater the sunk costs are, and the greater the urge to continue becomes.
Investors frequently fall victim to the sunk cost fallacy. Often they base their trading decisions on acquisition prices. “I lost so much money with this stock, I can’t sell it now,” they say. This is irrational. The acquisition price should play no role. What counts is the stock’s future performance (and the future performance of alternative investments). Ironically, the more money a share loses, the more investors tend to stick by it.
This irrational behavior is driven by a need for consistency. After all, consistency signifies credibility. We find contradictions abominable. If we decide to cancel a project halfway through, we create a contradiction: We admit that we once thought differently. Carrying on with a meaningless project delays this painful realization and keeps up appearances.
…
“We’ve come this far . . .” “I’ve read so much of this book already . . .” “But I’ve spent two years doing this course . . .” If you recognize any of these thought patterns, it shows that the sunk cost fallacy is at work in a corner of your brain.
Of course, there may be good reasons to continue investing in something to finalize it. But beware of doing so for the wrong reasons, such as to justify non-recoverable investments. Rational decision making requires you to forget about the costs incurred to date. No matter how much you have already invested, only your assessment of the future costs and benefits counts.
- Seth Klarman: Adopt An Absolute-performance Orientation
From Margin of Safety:Most institutional and many individual investors have adopted a relative-performance orientation...They invest with the goal of outperforming either the market, other investors, or both and are apparently indifferent as to whether...
- "i Have No Sunk Costs."
Edge asked a group of people to respond to a question about how Danny Kahneman has influenced their work. Below is Jason Zweig's answer, which I think shows an especially important lesson: While I worked with Danny on a project, many things amazed...
- 5 Keys To Reinvesting Dividends
Once you've decided to build a dividend-based portfolio, it's essential to know what you're going to do with the income generated by your investments. There are three basic options -- spend the dividend, save it, or reinvest it. Sounds...
- What Matters In The Long Run
Here is a guest post from my friend Adrian Lane that shows what long term time horizons can do, how they massively overweight any other single advantage, and a lesson on when to sell: "In the 1990s, working in tech during the great Internet surge, cash...
- High Yield Reads - 3/29/14
Summary of recents posts and pieces of interest, sometimes enduring, to dividend investors: Brooklyn Investor continues the series on Buffet with 10x Pretax earnings. "It's amazing how so many of the deals cluster around the 10x pretax...