Sunken Costs And Stubbornness

We had just partied like it was 1999.  I was coming up on 3 years into my investing career, and even though I mostly had mutual funds, I still liked the idea of researching and picking a winning stock.

Having been taught the value of hard work as a child, I was convinced that enough study of earnings data and PE ratios would lead me to winning stocks. 

If these regular jabronies can pick winning stocks, I can surely pick winning-er stocks. 

Ahh.. youth.

Everyone wants to think they’re smarter than others, and I’m no different.  Additionally, I’m stubborn as a bull.  Not always a good quality as you’ll see.

Remember that 1999 was approaching the peak of dotcom bubble madness.  The age of irrational exuberance.  If you didn’t live through it as an investor, it’s really hard to explain what it was like, and how easy it was to get caught up in the madness.

The possibilities of the digital age were unfolding before our eyes.  We had Star Trek phones!  Computers, and more importantly the internet, we’re going to solve mankind’s woes.  And any company connected to this rapidly evolving Utopia was a sure winner.

I mean, computers even created cool problems that they subsequently fixed.  There was nothing they couldn’t do!

No company was more ingrained in the workings of the internet than Cisco.  I had done my research.  The internet ran on Cisco switches and routers, and they’re still a powerhouse today.  Along with Intel, Dell, and Microsoft, they were chiseled on the Mount Rushmore of technology in the year 2000.

Their numbers were pretty good, which is of course a relative term in the times that were talking about.  Back then a PE ratio of 35 or even 40 was considered to be pretty normal and almost a good bargain if it was a technology company (I know, nuts). 

I followed their earnings reports, and they beat expectations quarter after quarter.  What was not to love?

Then in March 2000 their stock split again – it had been splitting around every 9 or 10 months and damn, just missed it!  I had been ready to pull the trigger on buying some and I just missed a crucial split. 

Well, their will surely be another soon….. This train ain’t slowing!

So in April 2000 I plopped down $5,000 on Cisco shares.  That kind of money was far from trivial for me at the time.  This wasn’t “play money”.  It was my way to start the new century fresh and a bit bold.  I mean, I wasn’t going to have a chance to start another new century, this was my shot.  And what do you know it was all downhill from there.

 

Well That Didn’t Work

As if on queue, the tech bubble started to burst.  I literally hadn’t even gotten the paper statements back from Charles Schwab yet in the mail when things started to tank.  Fast. 

For you younger folks, yes, we did the trades online but they still always confirmed in paper back in those days.  And there were still wooly mammoth roaming the plains…

How did Cisco fare when the tech bubble burst?  Well, like you might expect.  About one year after my purchase it had gone from $75 a share to $24 a share. 

Ouch. 

But this is THE INTERNET.  It keeps expanding.  And it can’t operate without Cisco!  It’s a sure bet, just let it recover from the crash!

So I held.  Remember, I was smarter than other folks.  It’ll come back.

Time went on.  It went up, it went down.  As the decade moved on I fell right into the sunken cost trap.  My stubbornness, the time I already had invested in the stock, and the fact that it was such a great company combined as a force that prevented me from selling. 

It’ll come back and I’ll get the last laugh. 

Then the market crash of 2008 happened.  Everything tanked.  I knew better than to sell in that hot mess, I held everything.  Waited it out.  Turns out of course that was the right move, at least with my other investments. 

I knew the market would recover, and when it did Cisco would surely shoot to the stars.  Alas, the market came shooting back, but Cisco didn’t. 

By then I had had enough.  I was like a defeated boxer laying in the corner, trying to grab the ropes and get back up.  But then I just said eff-it, I’m done.  I laid back down.

 

Stubbornness Is Expensive

The sunken cost trap is a real thing, and powerful.  Especially for us stubborn folks.  I’m used to plugging away at anything hard enough to get my way.  Persistence pays off in life.  But persistence can’t force a stock price up. 

In the end I sold it and got back $2400 of my $5000 investment, but over 10 YEARS later.  Take a look at the disaster. 

 

Let’s do the math, shall we?  

Had I put my initial $5000 in VTSAX in April 2000, by May 2010 when I sold my Cisco stock it would have grown to $10,750. 

And I sold for $2400.  That’s a stubbornness loss of $8350. 

Did that break me? No, I was plugging money religiously into my mutual funds all those years and learned to stop trying to pick stocks.  But it still hurts.  I mean, eight grand is a good chunk of money.  If you saw it laying on the street I’m pretty sure you’d pick it up. 

I learned some valuable lessons from this. 

• First, stop trying to pick stocks.  For me, this was the last nail in the coffin on individual stocks.  I realized that for me and my style (laziness) index funds are the way to go and require virtually no time or effort. 
• Stop being so stubborn.  Step back and be objective.  Reassess things from time to time and get out of your locked mindset.  
• ACT – don’t be lazy!  I think part of me just let those shares sit there because I didn’t feel like dealing with it.  A few years after they tanked I had become a completely lazy index investor and didn’t feel like going through the process of selling and figuring out all the numbers on my taxes in the following year.  I had many other priorities in life at that point.  I know, pathetic! 
• If you do choose to play individual stocks, know when to fold ’em and take your loss.  Hope and persistence don’t bring share prices up.  Remember a loss isn’t the end of the world, its also a tax write-off.

Ok readers, your turn – do you have any sunken cost stories.  Investments or otherwise?