Looking Forward, Not Backward — The Hidden Traps of Opportunity Cost and Yield on Cost Thinking
Hi everyone, this is STE here and welcome back to my investing journey.
In this post, I’d like to talk about two popular ideas that often sound smart but can quietly mislead investors: Opportunity Cost and Yield on Cost.
Both concepts have value in theory, but in practice, they can distort how we view our investments , anchoring us to the past instead of focusing on the future.
Let’s unpack these two concepts and see why looking backward can hurt long-term performance more than help.
The Rear-View Mirror Problem in Investing
Many investors love to use “opportunity cost” and “yield on cost” as proof of how well or poorly they’ve done.
They look at the past , the missed winners, or the dividends growing from an old purchase and feel either regret or pride.
But investing is not a museum of memories; it’s a living, evolving process. The market constantly changes, businesses evolve, and capital must keep flowing to where the future returns are highest.
The biggest danger comes when we let backward-looking metrics control forward-looking decisions.
The Myth of Opportunity Cost in Investing
Let’s start with opportunity cost.
The concept of opportunity cost is theoretically elegant but practically misleading in real-world investing. It often tempts investors to compare actual outcomes to hindsight-optimized alternatives , a psychological trap that distorts rational decision-making. In reality, investment decisions should be driven by probabilities, risk-adjusted expectations, and capital allocation discipline, not regret-based comparisons.
In economics, it’s defined as what you “give up” when choosing one option over another.
Sounds reasonable, right? If you invest in Stock A, you forgo Stock B.
But in real-world investing, you never have full knowledge of both outcomes ahead of time.
Opportunity cost becomes a story you tell yourself after the fact, comparing your real return to a perfect hindsight scenario.
It’s like saying, “I should’ve taken Route B instead of Route A,” after you already reached your destination — when you couldn’t possibly have known Route B was faster.
This kind of thinking doesn’t help you drive better next time ,it just fills your mind with regret.
Why Opportunity Cost Is a Backward-Looking Illusion
1. It assumes perfect foresight.
You didn’t know which stock would outperform , the information wasn’t available then.
2. It ignores differences in risk.
A 10% yielding REIT and a 30% growth stock are not comparable. Each carries different volatility and capital risk.
3. It fuels emotional decision-making.
When investors fixate on “what could have been,” they start chasing whatever performed best recently , right before mean reversion hits.
4. It distracts from process.
Instead of refining your investment process, you waste energy on regret.
Professional investors think differently. They know that every investment involves uncertainty. What matters is the probability-weighted expected return, not hindsight comparisons.
The Rational Alternative: Probabilistic Thinking
The better way to invest is to think like a business owner and a statistician combined.
Ask yourself:
What is the expected value of this investment, based on probabilities?
How strong is the company’s cash flow and balance sheet?
What’s the downside risk if things go wrong?
Does the current valuation provide a margin of safety?
When you base decisions on future probabilities, not past regrets, you naturally become less emotional, more consistent, and better at compounding over time.
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The Yield on Cost Illusion
Now let’s turn to another beloved metric among dividend investors — Yield on Cost (YOC).
YOC is calculated by dividing your current annual dividend by your original purchase price. It shows how much your dividend yield has grown relative to your cost basis.
If you bought a stock at $10 and it now pays $1 in dividends, your YOC is 10%.
That feels fantastic , it means your patience and timing worked well.
But like opportunity cost, YOC tells you about the past, not the future.
Many investors proudly share their high yield on cost as a badge of honour — and rightfully so, it feels great to see that number rise over the years. But when it comes to making future investment decisions, yield on cost can actually mislead you into comfort, complacency, or even missed opportunities.
Yield on Cost Is History, Not a Compass
Yield on cost only reflects:
How cheap your entry price was years ago, and
How much the company has grown its dividend since then.
It doesn’t reflect:
The company’s current valuation,
The future growth in earnings and free cash flow, or
Whether the dividend is sustainable moving forward.
In other words, a high yield on cost is just a snapshot of your past success, not a forecast of future returns.
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The Emotional Trap of High Yield on Cost
Many investors take pride in seeing double-digit YOCs and think, “Why would I sell this gem? I’m earning 10% on my cost!”
But here’s the problem , the market pays dividends based on current price, not your historical cost.
If the stock price has risen to $80 and the annual dividend is $2, the current yield is 2.5%, not 10%.
Holding purely because of your high YOC can blind you to better opportunities offering higher forward yield and growth potential.
This mindset creates anchoring bias — where you refuse to reassess objectively because the old number makes you feel secure and proud. Of course,if the company still have much potential of growing it's dividend,it is okay to continues to hold if there's no better alternative but just don't look at the YOC to decide your next investment.
The Correct Focus: Forward Yield and Growth
When making new investment decisions, forget about what you paid in the past.
Ask instead:
What is the current yield based on today’s price?
What is the future growth rate of dividends?
Is the payout ratio sustainable?
How attractive is the expected total return (dividend + growth)?
The market rewards forward-looking analysis, not sentimental attachment to historical cost.
Your yield on cost is a reflection of past success, but your next decision should be based on future potential.
The Common Thread — Past Anchors vs Future Probabilities
Both opportunity cost and yield on cost appeal to our emotions.
One feeds regret (“I missed that winner”), and the other feeds pride (“Look how well I did”).
But both keep our eyes on the rear-view mirror.
Investing, however, requires forward vision.
The future is uncertain, but that’s where all returns come from.
The key is not to predict perfectly, but to allocate capital where the probability-adjusted future returns are highest.
As long as you make rational, risk-adjusted decisions today, there’s no reason to let regret or nostalgia control your portfolio.
Final Thought
Both opportunity cost and yield on cost are seductive — they make us feel either regretful or proud.
But neither one should drive future investment decisions.
Opportunity cost is hindsight. Yield on cost is history.
Neither predicts what matters most: future earnings, cash flow, and value creation.
A disciplined investor looks ahead , always asking, “Given what I know today, where does my next dollar have the highest expected return?”
Investment decisions should always be anchored on forward yield, growth prospects, and valuation , not nostalgia.
Celebrate your YOC quietly, but make your next decision with a clear, forward-looking mind and don’t let the past anchor your future.
Because investing isn’t about being right yesterday , it’s about positioning yourself for tomorrow.
Until next time, happy compounding. 👌😊
Cheers!
STE
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