A “profit,” in business or investing, is usually defined along this line: The selling price of an item, less its cost and expenses, is profit; or if selling price is lower than cost plus expenses, the difference is “loss.” Suppose we buy an invest ment 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 per cent Federal capital-gain tax of $75, our profit after this tax is $425. Within certain limits, these statements may be correct, but they can be quite deceptive for a long-term investor.

Here is the queer part. Before determining whether we have a profit or loss, and how much, we must adopt some standard way to measure the value of cost and sale. People generally take it for granted that the dollar is the proper standard for measuring, as in the example above. The Federal Government compels a taxpayer to use this standard in figuring the tax on a capital gain or loss. But presumably a man does not engage in long-range investing merely to collect dollars; what he is aiming for is future buying power. From this viewpoint, a sale of an investment is profitable to the extent that it gives him more buying power than he paid in when he bought. Certified Financial Planner - Read More.