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ask the fool

Ignore Sunk Costs

Q: What is a sunk cost? — JJ, Waverly, Nebraska

A: This is a price paid that cannot be recovered. Since he is gone and not coming back, he should not be considered in the decision making. Yet many people act on a “sunk cost fallacy” – they think that since so much has already been spent, more would have to be spent to make the initial outlay worth it.

For example, imagine that you spent $1,200 to fix your car and you decide to sell it or spend more on other repairs. Don’t think about the $1,200; instead ask yourself if it makes sense to spend more or sell. The $1,200 is a sunk cost – don’t let it cause you to throw good after bad.

Q: When is the best time to sell a growth stock and buy a long-term stable stock? — CR, Tigard, Oregon

A: Try thinking about it differently: you don’t have to choose between the two. There are many relatively fast-growing companies with long histories and promising futures. However, relatively few stocks are very stable, as the stock market itself can be volatile. When there’s a stock market crash, even blue-chip stocks can be hit hard – but every stock market crash has been followed by a rally, with the shares of many strong companies reaching new highs.

So focus on the long term, aim to hold your stocks for at least five years or so, and keep all the money you’ll need within five (or even 10, to be more conservative) out of the market.

Don’t be afraid to own growth stocks. Just try to buy them at attractive prices and follow their evolution over time.

school of fools

Don’t try to time the market

So you’ve heard that the market usually goes up at one time of the year or usually goes down at another, and you plan to buy or sell stocks accordingly. Or maybe you just think the market has risen or fallen so much lately that it will soon change course, so you plan to act on that reasoning. Think twice before doing so, as these are examples of “market timing,” a practice that can lead to poor investment results.

No one can know what the stock market is going to do in the short term – even fanciful Wall Street pros making TV predictions are often wrong. (You rarely hear about that time.) Over the long term (many years or decades), the market has always gone up, which is one reason why it’s usually better to be a long-term investor. .

Several studies have demonstrated the dangers of market timing. Index Fund Advisors, for example, found that over the 20 years from the start of 2002 to the end of 2021, someone who stayed invested in the S&P 500 index would have made average annual gains of 9.5 %. But an investor who missed the 10 days with the biggest gains during this period would have an average annual gain of 5.3% – while one who missed the best 40 days would end up losing money.

Index fund pioneer John Bogle once joked, “Sure it would be great to get out of stocks at the highs and back at the lows, and if you know how to do that, then do it. But I I’ve been in this business for 55 years, and I have no idea what to do.”

As the folks at Charles Schwab noted: “Our research shows that the cost of waiting for the perfect time to invest generally outweighs the benefit of even perfect timing. And because it’s nearly impossible to time the perfect market, the best strategy for most of us is not to try to time the market 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 small stock was going crazy as reporters claimed the company had new technology. I called my broker (yes, it used to be) and bought 1,000 shares. The company turned out to be a fraud and was quickly taken down.

What’s left of the stock (very little!) still sits in my IRA, reminding me how not to invest. I’m glad it’s cheap, at least. –SJ, online

Le Fou responds: It was super cheap, indeed – it was a classic “penny stock” (originally a stock traded at less than $1 per share, although now the term is used for those that trade for less than $5).

As you know, the company has claimed that they have breakthrough fingerprint identification technology. In 1996, the CEO appeared on CNBC to tout the technology — and one of our Motley Fool writers wrote an article asking why CNBC would give a penny stock so much airtime.

Penny stocks are usually tied to small, often unproven businesses that can be easily manipulated. You may have noticed, in April 1996, your shares went from 3 cents apiece to about $2. Businesses don’t usually get much more valuable over the course of a month. The company was hyped online and ended up facing allegations of fraud and a lawsuit from the Securities and Exchange Commission. Its shares, as you know, fell after that.

Stupid trivia

Name this business

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 after the daughter of two of my founders, Barbara. My Hot Wheels got its start in 1968. Today, based in Los Angeles County and with a recent market value of $8.1 billion, I’m a major global toy manufacturer, with brands such as Fisher -Price, American Girl, Thomas & Friends, Uno, Masters of the Universe, Monster High and Mega. I also offer TV and film content, games, music and live events. Who am I?

Answer to last week’s quiz

My roots go 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 success, and my automobile headlights made night driving safer. By 1910 I had sales offices all over the world. Over time, I expanded my scope to fuel injection systems, power tools, electronic components, household appliances, packaging, etc. Now I’m getting into the Internet of Things, smart homes and artificial intelligence. I employ over 400,000 people and make about $85 billion a year. I can help you clean up after dinner. Who am I? (Answer: Robert Bosch GmbH)

The Motley Fool’s Take

Big Data Analytics, anyone?

Businesses generate a huge amount of data every day, and the proliferation of software and connected devices often results in a clutter of information. With data stored on separate systems, both on-premises and in the cloud, it’s difficult to use that data productively. Digital transformation has made business information technology ecosystems even more complex. This is where Snowflake (NYSE: SNOW) can make a difference.

The Snowflake Data Cloud helps customers manage and make sense of siled data sets, all from a single platform. The Data Cloud also supports secure data sharing and simplifies the development of data-driven applications. Best of all, Snowflake is infrastructure-neutral, meaning it’s designed to run on all three major public clouds, giving it an edge over Amazon Web Services, Microsoft Azure, and Alphabet’s Google Cloud.

This competitive advantage makes the company grow like wildfire. Over the past year, Snowflake grew its customer base by 44% to 5,944 customers, and the average customer spent 78% more than the previous year, demonstrating the rigidity of its platform. Meanwhile, revenue skyrocketed 106% to $1.1 billion.

Snowflake stocks can be volatile, but if you’re a risk-tolerant investor, it might be a good idea to buy some and hold it until you retire. (The Motley Fool owns stock and recommended Snowflake.)