Follow This Math and Your Investments Will Be Better Off

|September 13, 2023
Money Down the Drain

We ran across an old friend the other day. She quickly reminded us why we choose not to go out of our way to see her.

She was looking for some quick help.

Since we have a few restoration projects of our own underway, she figured we might know somebody who could get her out of a jam.

She said she needed a carpenter. But we told her she needed a shrink.

You see, she’d bought a new refrigerator. It was a big, expensive beast well outside of her budget. But she liked it. It has Wi-Fi. And she got 5% off.

But she bought the thing without measuring. It turns out the new unit is 3 inches wider than her old one. The hole in her cabinets where the fridge goes is 3 inches too small.

“I just need somebody to cut a notch in the wall,” she said. “Or maybe they can take a few inches off the cabinets.”

We told her she’s crazy.

She’ll pay more to have the work done than the fridge is worth… and she’ll slash the value of her home by putting a notch in her wall.

We told her to get rid of the new fridge and start over.

But she insists the work must be done. She likes the fancy beast… and besides, she already plunked down a few grand for it. What’s a few grand more?

We thought about getting out a piece of paper and detailing the impact of sunk costs, but, following our own advice, we decided we’d already invested enough time on our friend. We gave her the number of our best guy and moved on.

There’s no way he’ll take her money.

You Too?

In a Manward-like, roundabout way, that brings us to an important topic. It’s one that could not only save you a lot of money… but also make your life a whole lot more enjoyable.

After all, that lady with the oversized fridge… she wasn’t all that happy.

In the world of money, there is something known as a sunk cost. We already mentioned the term above. It’s simply a cost that’s already been realized. You’re not getting your money back no matter what you do.

Understanding the full impact of sunk costs – and how our emotional brains deal with them – is a powerful thing.

Figure it out, and you’ll be much better off.

Here’s a simple illustration of a sunk cost. It involves movies.

We’ve all seen movies we don’t like. And yet, once we’ve started one, we generally keep watching it, perhaps because we paid for our ticket and figure we might as well “get our money’s worth.” Or maybe we simply think that because we’ve endured however much of the flick already, we might as well hang around for the rest.

It’s a fallacy… a dumb idea.

You’re not getting your ticket refunded. And you’re certainly not getting the time you wasted back.

So why not cut your loss, get off your butt and do something better with your time?

We see this in relationships all the time. “Well, we’ve been friends for decades,” some sucker says.

We hear it in the rhetoric of dieters as well. “I already ate the pizza… might as well have some ice cream too.”

And, of course, we see it all the time in the world of investing.

A stock can totally crash, and folks will continue to hang on to it, hoping to make up yesterday’s losses.

What’s that old saying about getting yourself out of a hole? Stop digging?

The Easy Fix

So you made a $2,000 mistake and bought the wrong fridge? Don’t turn it into a $15,000 mega-blunder by cutting up your house or paying some hack to do it for you.

Or say you’re sitting on a 15% loss on a stock you really thought had some potential. Don’t waste time hoping it recovers enough to make up what you’re down. Sell it and move on.

Every piece of research and evidence says it’s the best thing to do.

The only thing holding us back is our hearts. And our emotions will rip us off every time.

We’ll leave you with some sage advice we heard during a recent meeting of business owners and investors.

“How do I keep my emotions out of this deal,” asked a fella who owns a golf course and several rental properties. “I really want this to work.”

Millions were on the line. But it was clear to all in the room the man was being led by his heart… not his brain.

“Just follow the numbers,” another man said. “Don’t do anything unless the numbers make sense.”

It’s good advice.

What’s the big, oversized refrigerator in your life?

Find it and get rid of it.

You’ve already lost. Follow the math and move on to a winner.