Practical Opportunity Cost

I can never decide if I am amused or frustrated by the assertions of those who blatantly ignore the principle of opportunity cost. Take this individual, publishing a piece with the Motley Fool online community, who attempts to make the case that she receives an effectively higher dividend rate on her stock holding than is currently indicated because she purchased her position at a significant discount to the contemporary price. I'll admit that it is intuitive to relate our dividends (whatever form they may take) back to our original outlay of capital but this can be fundamentally flawed. In a highly liquid case such as this we have to realize that we are essentially purchasing those dividends each day with the resources we could have gained by terminating our position, that day. Failure to realize this principle obviously leads to an incorrect calculation of return on the investment and will cause us to fail to take advantage of promising opportunities that come our way.

1 comment:

Dr. Tufte said...

Wow. You nailed it! Excellent post.