On this week's Rule Breaker Investing podcast, Motley Fool co-founder David Gardner takes a break from his usual topics and generally upbeat outlook to dig into some things that just irk him. He thinks we'd all be better off retiring some phrases from our vocabularies, because they're linked to ideas we'd do well to dump as well.
High on his peeves list is a common idea in the world of investing: that even if an investment has fallen in value since you bought it, the losses aren't "real" until you sell the asset and officially book them. You think so? He has a little experiment you might want to try.
A full transcript follows the video.
This video was recorded on Nov. 15, 2017.
David Gardner: Pet Peeve No. 2: This one comes pretty much straight from the investment world. It's the basic sentiment, "Well, you haven't lost until you sell." You haven't actually lost money, the thinking goes, until you sell that stock and, thereby, through transaction, admitting that you have sold below your cost basis that you have lost money.
And I pretty much always thought that that's wrong, and I'm definitely going to go right here with Pet Peeve No. 2 and say, "I think that you should think that that's wrong as well." I was reading a fun discussion board post from one of my favorite longtime Fools in our Fool community, Jim Huibregtse, and Jim basically said it this way. He was reacting to somebody who said, "Hey, a reminder. I haven't actually lost any money on this stock unless I sell. That price on my scorecard only tells me what I would lose if I sold today. It is not real."
And Jim certainly, at least pandering probably unknowingly to me, responds with, "Oh, it's real. Perhaps it's not realized, but the loss is real." I'll continue quoting him. "So, when I go to apply for that new mortgage, I'll be sure to tell the broker that I actually haven't lost a thing in that position because I haven't sold yet, so you should allow me to make that collateral for my mortgage to buy my new -- that should work just fine. Well, unfortunately, the market fails to agree."
To close out this post from Jim, he was talking about InvenSense, which was unfortunately a losing stock pick of mine in Motley Fool Rule Breakers. He said -- this was written a couple of years ago -- "InvenSense is worth X dollars a share today. No more. No less. And no one cares what your cost basis is. If your cost basis is higher, you've lost money. If it's lower, then you've made money. It's just that simple. I see this point made again and again on these boards, and it's just not true." He closes out with, "Good luck."
Good luck to us all. God bless us, everyone! Wherever the stock market is trading today for any one of your stocks, I'm suggesting you realize that's how you should be marking how you're doing as an investor with that stock and overall. You have lost [or gained, by the way] money based on today's present prices.
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