Sunk Costs: risk, return and irrecoverable costs

Some investments cannot be salvaged. That’s the hard truth.

I don’t believe anyone willingly walks into a bad investment. When dealing with risks, most of us walk into situations with the expectation of some return when we take on the ‘unknown’. 

Sometimes it works out in our favour to take on these risks. Sometimes it doesn’t. 

I must begin with a caveat. There’s a huge difference between gambling and making an investment. Gambling is playing with luck in the hope that things will turn out in your favour. Making an investment is pouring resources into someone or something with the expectation that it will generate a return based on the information you presently have.

But some investments we make inevitably end up generating losses. So what do we do?

It’s then that we need to cut our losses and move on. 

I know it’s hard. It’s easy to get stuck in a rut of throwing money, time and effort at a situation hoping that somehow it will all work out. But this is not the time to think with your heart. 

When you look at the facts, it’ll become all too clear. What you anticipated would happen is not happening. In fact, things are moving in the opposite direction.

Anyone who starts any new business or venture needs to anticipate sunk costs. In accounting, a sunk cost is a cost that cannot be recovered. For anyone who’s in the startup stage and dealing with a limited amount of resources, sunk costs can feel like a curse from the heavens. 

But the truth is, it is an inevitable part of starting any venture. Some investments simply don’t bear fruit. On the contrary, they wither and die. The same is true in nature, and the same is true in life. Things that seem glossy and promising can sometimes fail to deliver.

When that happens, we need to take whatever resources we have left and invest them someplace where it is more likely to bear fruit. Again, there are no guarantees, but it is the only way to mitigate the risks of the unknown. 

Many people don’t like dealing with unnecessary risks. I happen to be one of them. After all, I grew up in a very traditional conservative business family. 

But there’s a huge difference between taking on risks, and taking on unnecessary risks.

Taking on risks is an inevitable part of business. We all know the adage: nothing ventured, nothing gained. 

When dealing with unknowns, we have to ask ourselves, “Will I be able to stay afloat if I never see this money, time or effort ever again? Am I willing to invest this much in the hopes that it will generate a return?”

Everyone has a different appetite for risk. Our ability to bear these risks depend on our present circumstances and resources. 

If you don’t have anything or anyone to cushion you when you take on those risks, I suggest you don’t take them. There’s no point in giving it all to a situation that will never yield the results you’re looking for.

All we can do is invest what we can afford to.

And beyond that, we can invest no more.