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Forget Your Cost Basis

All good investment decision-making is forward looking.  Whether you are buying or selling, it doesn’t matter where prices have been in the past.

Now, that said, price and volume charts may occasionally indicate where there is support or resistance.  That might be worthy of consideration in the short-run.  When I was an institutional bond manager, competing against few others, but larger others, that was more important.  Not sure it is so important when competitors are smaller.

My main concern is that investors focus forward.  Use your best data. and estimate future advantage.  Be aware of mean reversion, so don’t let mere changes in price affect your opinion.  Always aim for the best possible future return.

We win and lose constantly in the market.  Don’t let past successes delude you, they may be historical accidents. Instead, focus forward to try to see what opportunities and threats are in front of you.

There were two hard things I had to learn when I was a corporate bond manager: 1) learning to sell lower than my original sell. 2) Learning to buy higher than my original buy.  That meant I had to forget my original cost basis, and try to estimate the best forward value that I could.

That is a tough place to be, but it is rational.  Always look forward, and estimate where you will have the best outcomes going forward.  You will get superior results from doing that.

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7 Responses to Forget Your Cost Basis

  1. [...] Forget your cost basis, because all good investment decisions are forward-thinking.  (AlephBlog) [...]

  2. [...] Forget your cost basis: all good investment decision-making is forward looking (AlephBlog) [...]

  3. [...] Forget your cost basis. Your decisions should forward looking.  (Aleph Blog) [...]

  4. [...] Reading: Forget Your Cost Basis – Please [...]

  5. RichL says:

    This is correct for investment decision making, but is emphatically wrong for tax planning.

    The one major free lunch in owning a diversified portfolio of equities is being able to get long-term capital gains tax treatment on winners, and selling losing positions when they are still creating short-term losses. Never let a losing position go long-term!

  6. This seems like an obvious corollary of transaction costs being driven to zero. When it costs nothing to change your position, it makes no sense to hold a position that isn’t the one you would enter today.

    I think people still have a mentality born of multi-% costs. Plus of course emotional attachment issues.


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

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