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.

3 Comments

  • 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!

  • 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.

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