🔔 Warning: May Contain Hidden Costs

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Hidden costs... Those wonderful little consequences that creep up on us when we least expect them

They usually appear when we do something unfamiliar or new...

A couple of months ago, we took the plunge and bought a puppy.

As new/first-time dog-owners we figured a few unexpected costs would crop up so we tried to think of every possible thing: beds, dog food, toys, vaccinations, chip, pet passport, insurance, EVERYTHING!

Except...

We didn't factor in the tiny possibility that our puppy would catch parvovirus even though she had already been vaccinated...

We took her to the vets only to be told

Thankfully, after a week of intensive care with a brilliant vet (followed by two weeks of obscene gluttony) Luna has now made a full recovery...

I haven't had the bill yet but I know that a BIG hidden cost will soon emerge from the shadows...

Although lessons have been learnt, there is nothing we could have done differently...

Sometimes, plans just don't work out...

As much as any of us try to plan for every eventuality, the future is reliably unpredictable...

But that's not the point I wanted to make!

Despite this omnipresent uncertainty, we all have to make our best guess and get on with life anyway, especially when we're dealing with markets...

Which is why it's so important to consider the opportunity costs of our decisions...

As concepts are best explained with examples, let's travel back to May 2020...

Covid hit, the world locked down and the great Work From Home debate was in full swing: this was going to change everything: people could live wherever they wanted and work from anywhere in the world OR it changed nothing and was just a temporary blip...

As with most heated debates the 'truth' emerges somewhere in the middle...

Back then, I saw an opportunity among the chaos.

So, I picked Hays and said:

I've marked those levels on this chart 👇

Entry at 107 (blue line), barely any drawdown and both price targets were hit...

On the face of it, this was a great trade.

But was it really?

Yes, it was available at a discount and the odds definitely favoured a return to pre-covid values at some point in the future...

What about the opportunity cost of holding Hays instead of say, the S&P?

Let's take a look 👇

• The S&P rallied 600 points by September...

• Hays initially rallied and then drifted back down until November...

Enter the Naysayer:

Taking away the theoretical, Hays needed babysitting for six months with no opportunity to add to the position and compound gains...

The agonising psychological cost of managing the position plus the huge temptation to make a new decision and dig a hole just because we're all wired to be doing something...

"I'll just read this report, research some more, hmmm inconclusive, should I cut it or keep it?"

After six months it's back at the entry price.

We haven't lost money (on paper), but the alternative option of buying the S&P, adding positions and managing risk as it climbed DID offer the opportunity to compound returns...

Put another way, there was zero opportunity cost to buying the S&P instead of Hays...

It was definitely the superior choice.

Easy to say all of this in hindsight, but realistically there was no catalyst for Hays at that time.

There was simply too much uncertainty in the labour market...

If no-one is confident about hiring, how could Hays possibly generate income?

However, it WAS worth having on the radar for when that uncertainty lifted and an obvious catalyst emerged...

There is always an abundance of opportunity in markets.

If you are taking a portfolio approach it can be tempting to stick a few in ' just because they're cheap'...

But it's always worth considering just how long those stocks can remain cheap for...

If there is no expected impetus on the horizon then maybe they'll be cheap for a while and that capital would be better deployed elsewhere...