Are You Wasting Money on Bad Investments?

Paul Atherton |
18-02-2021
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The sunk cost fallacy can cause massive losses for new and old investors. Here’s how to recognise it and beat it.

Have you ever waited in line for a restaurant and been told that it will only be 15 minutes?

You think to yourself; it’s borderline. If it were 20 minutes, you would leave. But 15 minutes, you think, I can handle.

Then 15 minutes goes by and… nothing. You ask, “where’s my table?” and they say 10 more minutes. And it goes on like this for about an hour.

You think to yourself, I have already invested 15 minutes, so now you have committed yourself. And it gets worse.

The more time you wait, the more time you have invested into waiting.

The restaurant, to a degree, owns you—trapped, enslaved, leaving you staring across the street at the people being seated at another restaurant straight from their door.

These restaurants know what they are doing.

They are getting you to commit enough time for you to feel invested but not too much that you leave straight away.

Has that ever happened to you?

You have just fallen for the sunk cost fallacy.

The sunk cost means you have ‘sunk’ your resources (time/money/energy) into the investment (restaurant/stock).

People who are investing fall victim to the sunk cost fallacy all the time.

Let’s work through an example.

You buy a stock at $100. It sinks to $80, and you think to yourself, how much do I really know about this company? Probably not much.

Then it sinks to $70.

Now you are unhappy with this company and, probably for the first time, start to take a serious look at your investment.

Unfortunately, this is all too common. Not until you have felt some pain, do you really start looking over the details and health of a company—something you should have done in the first place.

Pain is an excellent motivator.

And the amazing thing is that you stick to this trade (continually losing more) even though you know it might take years to recover.

Think back to the restaurant. After the initial commitment, you feel stuck.

What do you do when you’ve already sunk a lot of cost?

The worst move is to stay in your position ONLY because you have a sunk cost.

You would never buy a stock based on that, and you should never stay with a stock for the same reason.

It’s perfectly acceptable to stay in your position because you believe the company is fantastic, has an excellent balance sheet, high profits, and a unique position in the market.

If that is the case, then buying more at this newly (discounted) price would probably make sense.

But if your analysis says that the company might not be as good as you first thought, then you need to ask yourself the following:

“Are there any companies, trades or positions that you like more than this current position at the moment?”

Because, if there is, you should move.

So, remember…

  1. Analyse your trades on fundamentals—don’t fall in love with your investment.
  2. Never stay because you have lost money—if anything, that should be a motivator to leave.
  3. Assess your investments every day—ask yourself, ‘is there a better position for me to be in right now? Is there a better company?

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Who is Paul Atherton, That Wall Street Guy?

An ex-Wall Street advisor who worked with major players in the global financial industry for over 30 years, Paul’s mission is to help regular people reclaim their wealth and financial security.

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