Properly Measuring Investment Profits

by David Jenyns on July 11, 2008

Suppose we buy an investment for $1,000, including buying expense, and sell it for a net of $1,500, after deducting selling expense. Customarily we say we have a profit, before tax, of $500; and if we pay a 15 percent Federal capital-gain tax of $75, our profit after this tax is $425. Suppose we paid $1,000 for an investment in 1940 and sold it for $1,500 in 1957. So by selling then for $1,500, we had a loss in buying power of $500. So even after paying a revenue tax of 15 percent of $2,000, or $300, the sale looks profitable, provided we consider that the sale closes the transaction.

But ordinarily when a man sells an investment, rather than spending the proceeds he uses them to buy another investment. Suppose we reinvest by again buying the same number of shares of X stock as before, and the cost of the new stock equals what we received for the old stock, $3,000. What matters is the cost of the new investment, the replacement cost, compared to the selling price of the old one.

Who Else Wants The Secret To Investing In The Stock-Market, With Minimal Risk And Using Simple Instructions, From One Of The Greatest Investors In History?


Previous post:

Next post: