Stormy Weather and the Concorde Fallacy

The bolt of lightning split the night, and so I counted: one Mississippi, two Mississippi, three…

BOOM.

The sound of thunder echoed off the water at 767 miles an hour. I was holding a large metal wheel while rain pelted my face about two miles off the South River.

About 10 yards in front of me was a 35-foot aluminum mast, and though it had been built with lightning strikes in mind, I was old enough to know that electricity is difficult to herd and generally has a will of its own.

We had thought we were clever while sitting at the dock watching the radar loop — three hours condensed into 15 seconds. The squall line was well north of us, miles up the bay. The reports of 70 mph gusts and hail were halfway to Philadelphia. We could tuck in behind the squall and ride some nice wind. Heck, we would have the bay to ourselves; after all, we did drive all this way to take the boat out…

Sunken-Cost Fallacy

The sunken-cost fallacy, sometimes called the Concorde fallacy, is the idea that an organization will likely continue with a project if it has already invested a lot of money, time, and effort into it, despite the fact that moving forward it will lose even more money.

The case study for this is the Concorde. In the mid-1970s, England and France teamed up to create a supersonic passenger plane. After 12 years and monumental costs, a total of 14 planes were put into commercial production. They continuously lost money year after year.

Twenty-five years later in July 2000, an Air France Concorde crashed into a hotel just after taking off from Charles de Gaulle Airport. The disaster killed all 100 passengers, all nine crew members, and four hotel guests.

Three years after that, the last Concorde flew for the last time. What you may not know is that it was an economic failure from the beginning. Cities didn’t want sonic booms rattling windows. Fuel costs were exorbitant. Passengers were few in number, and space was cramped.

The managers knew of these problems before launching the service, but after a decade in production and €900 million, what was another year and another €100 million?

The rational thing to do would be to eat the loss and move onto something else. Otherwise you are throwing good money after bad.

Know When to Bail

The same can be said for investing, and here is an example.

I own shares of Bayer Aktiengesellschaft (OTC: BAYRY); the company makes aspirin but also bought Monsanto a few years ago. Monsanto makes Roundup, which kills off dandelions and other weeds. A form of it is used in industrial farming. One guy bathed in the stuff and sued, saying it causes cancer. There is no evidence that it does cause cancer, but there are several class action lawsuits against Bayer, which has put a cap on the share price.

I bought the stock thinking that Ukraine would cause crop shortages, which in turn would drive sales and/or there would be a resolution in the lawsuit.

As you can tell by the chart, it didn’t work out.

Every time sales increased, there was bad news on other fronts. Granted, the stock is undervalued and pays a 4% dividend, but it has gone nowhere for years.

So should you sell the stock or continue to wait for the lawsuit to resolve itself? If you sell, you could lose a 100% gain post-lawsuit settlement. If you hold, you could suffer another four years of dead money.

The answer is that you should set up a time limit of two years in your long-term portfolio. If the stock hasn’t made you money in two years, assume that your investment thesis was wrong and sell it. This will keep your money in play and your mind focused on what does make money.

As for the sailing, we made it back and lived to tell the tale. That said, next time I’ll remember that discretion is the better part of valor.

All the best,

Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.