Skip to main content

The Math Behind Comebacks

Investing can be a wild ride. Endless ups and downs. Bulls and bears. Both thrilling and crushing. As investors, we tend to focus on the crushing part.

And there's nothing more crushing than permanent loss, the inability to get back what we once had. The math makes recovering from investment loss much more difficult than most think.

A common misconception is that a 10% loss can be recovered with a 10% gain. This is not the case. Let's demonstrate with an example.

Sarah's Comeback

Sarah is a big fan of XYZ company. They have an earnings call coming up and Sarah thinks the company's going to announce a big pop in sales. To participate in the prosperity, she buys $100 in shares. 

The call happens and it turns out XYZ had a bad quarter. Sales were lower than expected and the stock takes a hit, dropping 10%. Sarah's shares are now worth $90. 

Some time passes and XYZ's sales are starting to catch up to expectations. Investors begin buying and XYZ gains 10%. 

Sarah should be back to even, right? Nope.

A 10% gain means her shares are now worth $99 ($90 x 1.10). She's still in the red. Sarah will actually need a 11% gain to get back to $100. 

Tougher and Tougher

When you experience a loss, your starting line is pushed back. This means the percentage gain needed to recover will be much higher. 

The greater the loss, the greater the gain needed. This is the asymmetric nature of gains and losses. It's a tough road back.


Popular posts from this blog

The Art of Giving Feedback

Constructive feedback is an awkward affair. You don't want hurt feelings, but recognize the importance of honesty. You've tried the classic "hoping things will get better on its own" and unfortunately it hasn't played out. When giving feedback, here are a few things that I try to keep it mind. Start with empathy. Step into their shoes and understand their story. If you don't know, ask. Be genuinely curious. Feedback is a dynamic affair. Shared communication with a shared goal towards progress. Take the emotion out of it. Focus on the situation, not the person. Focusing on the person adds unnecessary weight to an already emotionally-bloated event.  Be specific. Give clear examples. Vague feedback equals dismissed feedback.  Doing above won't de-awkward things fully, but it will dampen it and increase the chance of better outcomes. 

ELI5: The Stock Market

Today we get back to basics and answer some of the most common questions about the stock market.

Step One is Knowing

In school, we listen to our teachers. At home, our parents. Throughout our childhood, following instructions is praised and rewarded. When we're young, there's value in this. We don't understand how the world works quite yet, so guidance can be lifesaving.  The bias to just accept obviously has drawbacks. Insert old jumping off a bridge adage .  This conditioning is especially strong for kids from lower income households. Their parents are more likely in working class jobs involving strict order-taking. Parents of middle-class households tend to be knowledge workers where influence is essential.  Studies have shown kids from middle-income households are more willing to negotiable with their teachers. They learn from their parents that things are not set in stone. This leads to better grades and learning outcomes when compared to their lower income counterparts who don't negotiable.  In business, if we simply accept things as they are, we would never innovate. In work, w