“I had bought 2 XYZ shares @Rs. 100 each. The stock has doubled since then. Today I sold 1 share for Rs. 200 and recovered my full cost of purchase. Remaining 1 share is now Free-of-Cost.”
You may see posts like these in investment forums.
My thoughts:
If you a 100 rupee note, its irrelevant whether you found it lying on the road, won it in a lottery or earned it with hard labor. Its still Rs. 100 that belongs to you. It can buy you same things irrespective of where it came from. So, attaching different emotions to the money – being frivolous when you did not earn it and cautious when you did – is irrational.
That “Free-of-Cost” share that you have is worth Rs. 200 at this time. That is your money. You could have converted it into cash today. But you choose to keep it invested in share. That is your “cost”! How that share came to you is irrelevant. Whether you inherited it from a rich uncle, whether your father-in-law gifted it or whether you bought it cheaper earlier is not relevant. What is relevant is – right now it is your money in form of share rather than cash. It is no different from you having bought this share from fresh hard earned money.
Therefore, it is better to look at a share in terms of its present price and dissociate it from its buy price. It will save us – fundamentally irrational human beings - from making bad decisions.
P.S: Flip case of this is equally irrational i.e. not selling poor quality shares in which you are making losses and waiting to recover original cost. Cost at which you bought is not relevant. How much its worth today is the real money (“cost”) you have in there.
