Sunk cost is a cost that has already been incurred in the past and can’t be recovered.
You booked tickets to watch a movie but you caught viral infection, still you went to the movie to justify the money you spent to purchase the tickets instead of taking rest. So, have you justified your cost to purchase ticket…??
Well, we feel this decision was irrational as your viral infection could get more serious and you end up paying more to doctor.
Keep sunk cost fallacy in your radar while investing
Mr. Mihir Rao & Mr. Mahesh Patwal, invested in stock ABC for Rs. 1000 per share but after 1 year the price of that stock came to Rs.800 per share, i.e. loss of Rs. 200 per share.
The stock further showed no sign of recovery after holding it for additional six months.
Now, Mr. Mahesh sold off stock ABC after booking losses & invested the proceeds into stock XYZ at Rs 800 per share.
After, holding it for another one year the price of stock XYZ rose to Rs 1100 per share, which means profit of Rs 300 per share at current price.
While, during this period Mr Mihir continued to hold stock of ABC wherein the price continued to deteriorate. He continued to hold because his acquisition cost was higher than the market price. And, thus to justify the acquisition cost he missed on the better opportunities available.
Thinking Man Advices:
Keep two criteria in mind while investing i.e. acquisition cost and future performance outlook as discussed in above examples.
No matter how much you have invested the assessment of future benefit should count the most to cut down your losses rather then sticking to investment which are non-performers.