Burden of the Past: When and How to Write-off or Salvage the Sunk Investment and Move On?


We all take wrong decisions. However, when we invest a whole lot of time and resources on a wrong decision, we get caged by it, making it impossible to break free from it. I have, at times bought stocks that went into downward spiral after my purchase. At every fall in price, I bought more to bring the average holding price down. A few times this strategy did work well. I could make some modest profit in the first upswing in the stock price. But more often than not, I was stuck with a larger loss! 

That is not an unusual circumstance in everyday business. You burn your capital to launch a product or service that fails to take off. Should you run (and burn) a little more in the hope that eventually it will all work out well? 

Here are some ways to think about your sunk investment rationally:

Understand the time-to-maturity- some plants just take longer time to bloom. All business ideas do not have similar lifecycle timelines. Some, especially the ones that require painstaking building of a brand equity, may require a much longer time to succeed. One could easily go wrong in estimating how much time and how many resources one will require to achieve a break-even. In such cases an honest and objective midterm reassessment of how far you stand from the goalpost can either point you to a path forward or may prompt you to slam your breaks!

Doing more of what you have done so far without success, will not yield success. Doubling your efforts may not work if your efforts are misdirected at the first place! When you reaccess how far you are from the goalpost, also make sure that you are heading in the right direction on your path forward. Make sure you are facing the goalpost and not sprinting sideways. 

Life (of an Idea, too) is finite. Judge your staying power realistically. Some ideas that may require longer endurance and more-than-available resources may not be a dream that you should chase. Cut your losses if that is the case! 

Think of the opportunity cost. The financial wizards take the US Treasury Bond yield as the risk-free return. For every day on an unsuccessful path, that is the minimum you are loosing on your investment in the financial terms. Of course, there are social, familial, and personal opportunities that you would be loosing on too. Think, if it’s all worth it. 

Look for new opportunities where you can leverage the work you have already put in. Can you utilize what you have so far accomplished without further stretching your resource and time horizon? This is what management gurus call pivoting of the idea. Maybe all that effort wasn’t futile after all! 

I welcome your views/ questions ...

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