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Disregard sunk costs

Ask the Fool

Published: May 10, 2022

Q: What's a sunk cost? -- D.D., Waverly, Nebraska
A: It refers to a price paid that can't be recovered. Since it's gone and not coming back, it shouldn't factor into decision-making. Still, many people act on a "sunk cost fallacy" -- they figure that since so much has been spent already, more should be spent to make the initial expense worth it.
For example, imagine that you spent $1,200 repairing your car, and you're deciding whether to sell it or spend more on further repairs. Don't think about the $1,200; instead, think about whether spending more or selling makes sense. The $1,200 is a sunk cost -- don't let it lead you to throw good money after bad.
Q: When is the ideal time to sell a growth stock and buy a long-term, stable stock? -- C.R., Tigard, Oregon
A: Try thinking about it a different way: You don't have to choose between the two. There are plenty of relatively fast-growing companies that have long track records and promising futures. Relatively few stocks are very stable, though, as the stock market itself can be volatile. When there's a market crash, even blue-chip stocks can take a big hit -- but every market crash has been followed by a recovery, with stocks of many solid companies going on to hit new highs.
So keep your focus on the long term, aiming to hold your stocks for at least five years or so, and keeping any money you'll need within five (or even 10, to be more conservative) years out of the market.
Don't be afraid to own growth stocks -- just aim to buy them at attractive prices and follow their developments over time.
Fool's School
Don't Try to Time the Market
So you've heard that the market usually goes up at a certain time of year or usually falls at another, and you're planning to buy or sell stocks accordingly. Or maybe you just think the market has risen or fallen so much lately that it's bound to reverse course shortly, so you plan to act on that reasoning. Think twice about doing so, because these are examples of "market timing," a practice that can lead to poor investing results.
No one can know what the stock market is going to do in the short term -- even fancy Wall Street professionals making predictions on TV are wrong plenty of times. (You just rarely hear about those times.) Over the long run (many years or decades), the market has always gone up, which is one reason it's generally best to be a long-term investor.
Multiple studies have demonstrated the dangers of market timing. Index Fund Advisors, for example, found that in the 20 years from the beginning of 2002 to the end of 2021, someone who remained invested in the S&P 500 index would have averaged annual gains of 9.5%. But an investor who missed the 10 days with the biggest gains in that period would have an average annual gain of 5.3% -- while one who missed the 40 best days would end up having lost money.
Index fund pioneer John Bogle once quipped: "Sure, it'd be great to get out of stocks at the high and jump back in at the low, and if you know how to do that, then do that. But I've been in this business 55 years, and I don't have any idea how to do it."
As the folks at Charles Schwab have noted: "Our research shows that the cost of waiting for the perfect moment to invest typically exceeds the benefit of even perfect timing. And because timing the market perfectly is nearly impossible, the best strategy for most of us is not to try to market-time at all. Instead, make a plan and invest as soon as possible."
My Dumbest Investment
Penny Stock Disaster
My dumbest investment? Years ago, I was watching CNBC. A tiny stock was going nuts, with reporters saying the company had a new technology. I called my broker (yeah, this was in the old days) and bought 1,000 shares. It turned out the company was a fraud and was soon busted.
What's left of the stock (very little!) still sits in my IRA, reminding me how not to invest. I'm glad it was cheap, at least. -- S.J., online
The Fool responds: It was super cheap, indeed -- it was a classic "penny stock" (originally, one trading for less than $1 per share, though now the term is used for those trading at less than $5).
As you know, the company claimed it had a revolutionary fingerprint identification technology. In 1996, the CEO appeared on CNBC touting the technology -- and one of our Motley Fool writers penned a piece questioning why CNBC would give so much airtime to a penny stock.
Penny stocks are typically tied to small, often unproven companies that can be easily manipulated. You may have noticed, in April 1996, that your shares went from 3 cents apiece to around $2. Companies don't generally become that much more valuable in the course of a month. The company was being hyped online, and it ended up facing allegations of fraud and a lawsuit from the Securities and Exchange Commission. Its shares, as you know, tanked after that.
Foolish Trivia
Name That Company
I was founded in 1945. My first big seller was Uke-A-Doodle, a musical instrument for children. I released my Magic 8 Ball in 1950, and in 1959, a doll named for the daughter of two of my founders, Barbara. My Hot Wheels debuted in 1968. Today, based in Los Angeles County and with a recent market value of $8.1 billion, I'm a major global toymaker, with brands such as Fisher-Price, American Girl, Thomas & Friends, Uno, Masters of the Universe, Monster High and Mega. I also offer television and movie content, games, music and live events. Who am I?
Last Week's Trivia Answer
I trace my roots back to Stuttgart, Germany, in 1886, when a mechanical and electrical engineering workshop was founded. My better-designed magneto ignition devices for cars were an early hit, and my automotive lights made nighttime driving safer. By 1910 I had sales offices around the globe. Over time, I expanded my scope into fuel-injection systems, power tools, electronic components, household appliances, packaging and more. Now I'm getting into the Internet of Things, smart homes and artificial intelligence. I employ more than 400,000 people and rake in around $85 billion annually. I can help you clean up after dinner. Who am I? (Answer: Robert Bosch GmbH)
The Motley Fool Take
Big Data Analytics, Anyone?
Businesses generate a tremendous amount of data each day, and the proliferation of software and connected devices often results in a tangled mess of information. With data stored across separate systems, both on the premises and in the cloud, it's difficult to use that data productively. Digital transformation has made corporate information technology ecosystems even more complex. That's where Snowflake (NYSE: SNOW) can make a difference.
The Snowflake Data Cloud helps clients manage and make sense of siloed data sets, all from a single platform. The Data Cloud also supports the secure sharing of data and simplifies the development of data-driven applications. Better yet, Snowflake is infrastructure neutral, meaning it's designed to work across all three major public clouds, giving it an edge over Amazon Web Services, Microsoft Azure and Alphabet's Google Cloud.
That competitive edge has the company growing like wildfire. Over the past year, Snowflake grew its clientele by 44% to 5,944 customers, and the average customer spent 78% more than in the year before, demonstrating the stickiness of its platform. Meanwhile, revenue skyrocketed 106% to $1.1 billion.
Snowflake's shares can be volatile, but if you're a risk-tolerant investor, it may be smart to buy and hold some until you retire. (The Motley Fool owns shares of and has recommended Snowflake.)