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Forget Your Cost Basis

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All good investment decision-making is forward looking. Whether you are buying or selling, it doesn't matter where prices have been in the past.

Now, that said, price and volume charts may occasionally indicate where there is support or resistance. That might be worthy of consideration in the short-run. When I was an institutional bond manager, competing against few others, but larger others, that was more important. Not sure it is so important when competitors are smaller.

My main concern is that investors focus forward. Use your best data. and estimate future advantage. Be aware of mean reversion, so don't let mere changes in price affect your opinion. Always aim for the best possible future return.

We win and lose constantly in the market. Don't let past successes delude you, they may be historical accidents. Instead, focus forward to try to see what opportunities and threats are in front of you.

There were two hard things I had to learn when I was a corporate bond manager: 1) learning to sell lower than my original sell. 2) Learning to buy higher than my original buy. That meant I had to forget my original cost basis, and try to estimate the best forward value that I could.

That is a tough place to be, but it is rational. Always look forward, and estimate where you will have the best outcomes going forward. You will get superior results from doing that.

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About the Author

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website RealMoney.com (http://www.RealMoney.com). Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that. In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. My chief responsibility will be to develop economic analysis with equity and fixed income strategies and provide advice to the firm’s sales & trading staff and its client base. Beyond that, we hope to develop my value investing into a product for out clients.

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