Working Wounded Blog: The Dow at Work

Aug. 1, 2007 — -- I'm no day trader, and this is not a blog about finance. It is a column that will use last week's stock market plunge to illustrate a dangerous leap in logic that many of us fall prey to at work. This won't immediately add zeros to your portfolio, but if addressed, it will pay dividends for you in the future.

Flashback to last Monday. My portfolio was up over $8,000. Regarding this, the second biggest gain I've had this year, my fiancée asked, "You've had a great day. Where is the celebration?" I shrugged my shoulders and thought to myself, why celebrate now when even better days are just around the corner? Talk about whistling into the graveyard.

Then came Tuesday's $6,000-plus loss. Ouch. My portfolio felt like it had been visited by Oscar the cat (the feline featured in the New England Journal of Medicine for his ability to sense when a nursing home patient is about to die). My fiancée observed my sullen stare and asked, "Doesn't this still leave you up $2,000?"

I was slack-jawed. She was right. I had so totally hyperfocused on the day's loss that I completely lost sight of the fact that I was still up for the year, month and week. OK, it was a short-lived gain for the month and the week, but it highlights the tendency that most of us have to overfocus on bad news and to take good news for granted.

Which reminded me of my finance professor from my MBA program -- not for his investment advice but for his lecture on sunk costs.

Sunk costs is the term for an investment that has already been made and can't be recovered. It can be an investment in the foundation of a building or in research on the market or on a competitor.

The challenge of sunk costs is that you are always advised to forget that the investment has been made and to look at all future investments asking only one question: Is this the best use of our money right now? Think of it as a short course in what-have-you-done-for-me-lately thinking.

Sunk cost examination requires you to turn your brain into an Etch a Sketch, to erase everything that's happened in the past and only evaluate your options moving forward.