The Cruel Basic Mathethematics of Losses

An odd article in the today’s WSJ laments The Cruel Math of Big Losses.

What a terrible misonomer: This article should have been called “The Basic Mathematics of the Stock Market.”

Not understanding the simple percentages of losses and gains is a goodly part of the reason so many investors buy into the myth of Buy & Hold.


“If an investment declines 10%, it takes about an 11% gain to break even (assuming you don’t pump in additional dollars). If the drop is 20%, you need a 25% gain to recover. A fall of one-third requires a rebound of 50%. And if your investment falls by half, “you need a double,” or a 100% return, says Mr. Wiener, the New York-based editor of the Independent Adviser for Vanguard Investors. The recovery percentages grow exponentially because you have so few dollars working for you after a big loss.

Last year, the average diversified U.S.-stock fund was down 37.5%—requiring a 60% advance to break even—and plenty of funds were down 50% or more.”

If you understand how this simple math works, then you are in a better situation to appreciate the importance of capital preservation.

Originally published at The Big Picture and reproduced here with the author’s permission. 

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2 Responses to "The Cruel Basic Mathethematics of Losses"

  1. Pecos Banker   November 7, 2009 at 1:58 am

    Yes, Barry, but you know that kind of math is hard for most people to understand. Here’s another tough question that most people fail at: How many months are there from Jan 1, 2009 to June 1, 2010? That’s a toughy! But with Cramer and Kudlow, all you need to do is follow their advice and not worry about that pesky math. As people like to say, “I was never very good at math even though I’m a genius at analyzing James Joyce’s writings.”