# Misuse of percentages



## burglar (26 April 2013)

I don't know why I keep seeing this !!

If you lose 20% of your capital, you need a 25% increase to get back to where you started.

20% of 10K = 25% of 8K = 2 grand.
The amount you lose is them same as the amount you have to get back.
Regardless of how you misuse percentages!! 

Somehow the implication is that - because the percentage is higher,
it is harder to get back to breakeven.

How hard can it be?


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## keithj (27 April 2013)

burglar said:


> I don't know why I keep seeing this !!
> 
> If you lose 20% of your capital, you need a 25% increase to get back to where you started.
> 
> ...



Try it using Babcock and Brown or ABC Learning as an example.


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## waimate01 (27 April 2013)

burglar said:


> I don't know why I keep seeing this !!
> 
> 
> Somehow the implication is that - because the percentage is higher,
> it is harder to get back to breakeven.




Ask yourself this: which is harder to achieve - a 5% gain, or a 50% gain ?

Higher percentage returns are harder to achieve. That's why we're all here. If it was just as easy to make a high percentage as a low percentage, then the people making low percentages would be pretty stoopid !

I guess the unwritten assumption in the example is that you'd make up the lost $2000 via investing activities. If one thinks about making it up by washing more cars, selling more lemonade or whatever ones day job happens to be, then yeah, 2 grand is 2 grand regardless what percentage of your investment portfolio that works out to be.


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## burglar (27 April 2013)

keithj said:


> Try it using Babcock and Brown or ABC Learning as an example.




Try shorting BHP as an example?!


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## burglar (27 April 2013)

waimate01 said:


> Ask yourself this: which is harder to achieve - a 5% gain, or a 50% gain ? ...




When I want 5%, I deposit in a bank.
When I want 50%, I gamble on exploration juniors.
What I don't do is compare these percentages after the base has moved.

Beware of shifting reference values.


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## Lone Wolf (27 April 2013)

burglar said:


> I don't know why I keep seeing this !!
> 
> If you lose 20% of your capital, you need a 25% increase to get back to where you started.
> 
> ...




I think you're making the assumption that you continue to risk the same $ amount regardless of how low your account gets.

Most traders use fixed fractional position sizing where you adjust the risk per trade to be a fixed percentage of your account size.

You start with $10,000 and decide to risk 2% ($200) per trade. You mess around trading with no strategy and lose $5,000. A 50% decline.

You now need a 100% return on your remaining capital to get back to where you started. If you continue risking 2% of your account (which is now only $100 per trade) then this will be very hard. You seem to be assuming that you would continue to risk $200 per trade. Doing that would mean risking 4% of your account per trade. You have now increased your risk of ruin.

You need to look at it in terms of risk to your capital.


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## Country Lad (27 April 2013)

It is not a misuse of percentages at all.



burglar said:


> Somehow the implication is that - because the percentage is higher, it is harder to get back to breakeven.




Of course it is.  A share is worth say $1.  Over a period of time it loses market share, the income is reduced, the profit drops, the eps reduces and because of the lower profit the dividend is reduced.  Investors lose faith and confidence in the company to regain market share and profit so the share slowly falls 25% to 75 cents to what is now the new base based on all the fundamentals.

So we now have a share properly priced according to its fundamentals and which then requires Herculean task to recover and post a 33% increase in price to return to the previous $1 level.  Made even more difficult because investor interest is zilch until there is some proven performance and even then, the market sentiment is likely to remain low while other opportunities with successful companies are out there.  I prefer to sell and go elsewhere when a stop is hit rather than have wait a long time till there is a 33% gain, if ever.

Cheers
Country Lad


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## keithj (27 April 2013)

burglar said:


> Try shorting BHP as an example?!




If you really believe it's just as easy to get back to break even, then you would have no qualms about donating all your capital to charity & shorting BHP starting with zero equity.  As a general principle it's a good idea to take hypotheses to the extreme case to see if they still sound reasonable.


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## pixel (27 April 2013)

The real lesson here is this:
*It's a helluvalot easier to lose 90% of an investment than it is to make the 900% necessary to regain what you've lost.*


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## CanOz (27 April 2013)

Lone Wolf said:


> I think you're making the assumption that you continue to risk the same $ amount regardless of how low your account gets.
> 
> Most traders use fixed fractional position sizing where you adjust the risk per trade to be a fixed percentage of your account size.
> 
> ...




How many people on this forum will view this post with the recognition it deserves?....not many i reckon. As Tech/A has harped on and on about so many times, this money management is needs to be understood even before you find an edge to apply.

CanOz


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## systematic (27 April 2013)

burglar said:


> 20% of 10K = 25% of 8K = 2 grand.
> The amount you lose is them same as the amount you have to get back.





You had a capital base of 10k to lose (or make, for that matter) 2k with.

Now you have only 8k to make your desired 2k with.

You can buy less shares (or whatever) with your 8k to make your 2k than if you had 10k to make (or lose) your 2k.

Your capital base is now smaller.  That's the difference (in your example).


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## galumay (27 April 2013)

pixel said:


> The real lesson here is this:
> *It's a helluvalot easier to lose 90% of an investment than it is to make the 900% necessary to regain what you've lost.*




What is your logic behind that belief? To me its very obvious that there is no reason that a move in price is intrinsically more difficult in one direction or the other.

A $1 share can gain 99c or lose 99c just as easily. 

Using % of different numbers to make comparisons is comparing apples to oranges and is quite misleading IMO.


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## So_Cynical (27 April 2013)

pixel said:


> The real lesson here is this:
> *It's a helluvalot easier to lose 90% of an investment than it is to make the 900% necessary to regain what you've lost.*




Another quirk of percentages that no one talks about is the fact that the maximum you can lose is 100% however the maximum you can make is limitless 100,000,000,000%

--------------



Lone Wolf said:


> I think you're making the assumption that you continue to risk the same $ amount regardless of how low your account gets.
> 
> Most traders use fixed fractional position sizing where you adjust the risk per trade to be a fixed percentage of your account size.
> 
> ...






CanOz said:


> How many people on this forum will view this post with the recognition it deserves?....not many i reckon. As Tech/A has harped on and on about so many times, this money management is needs to be understood even before you find an edge to apply.
> 
> CanOz




But it only applies to Trendy's, and other trend following types that have a lot of losing trades...so not relevant to many i reckon.


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## burglar (27 April 2013)

keithj said:


> Try it using Babcock and Brown or ABC Learning as an example.




I've just googled B&B and in my opinion, it is an outlier!


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## So_Cynical (27 April 2013)

burglar said:


> I've just googled B&B and in my opinion, it is an outlier!




Burgler? where have you been for the last decade? you had to Google Babcock and brown.


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## craft (27 April 2013)

Burglar

I agree – A stocks ability to drop 20% or rise 25% is exactly the same.

The math though has implications for different approaches – Lone Wolf summed up the price perspective and the implications for risk of ruin.

The value perspective is the exact opposite ie. it is less risky to buy $1 for 50cents and will buy more at lower prices.  Implications for risk of ruin lies within the determination of value not within your reaction to price.

A misuse of averages that does occur though is using arithmetical averages of percentages – extrapolating a rough understanding of this is what probably leads some to thinking there is a difference in ‘potential’ for a stock to drop 20% as opposed to rise 25%.


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## CanOz (27 April 2013)

So_Cynical said:


> --------------
> 
> But it only applies to Trendy's, and other trend following types that have a lot of losing trades...so not relevant to many i reckon.




Really? 

You are saying that risk management is only used by those with systems with low win/loss rates?

CanOz


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## prawn_86 (27 April 2013)

craft said:


> A misuse of averages that does occur though is using arithmetical averages of percentages – extrapolating a rough understanding of this is what probably leads some to thinking there is a difference in ‘potential’ for a stock to drop 20% as opposed to rise 25%.




I think it comes more from the portfolio perspective than the individual stock perspective. If you lose 20% of your portfolio, you then need to make 25% back to break even. Yes its ok if you have one or 2 well researched stocks, but if you have randomly bought 5 stocks without being very certain in your decision making then to get that 25% back becomes a lot more difficult


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## wayneL (27 April 2013)

So_Cynical said:


> Another quirk of percentages that no one talks about is the fact that the maximum you can lose is 100% however the maximum you can make is limitless 100,000,000,000%




So what do you reckon the proportions of these two scenarios are?


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## sinner (27 April 2013)

Skewness of financial timeseries return distributions generally means there is not an equal chance of a -90% move as a 90% move, or even a -5% move as a 5% move.

The bell curve shape of almost all financial return distributions almost always means there is a much higher probability of a small move than a large move. It's not hard to show mathematically the advantage in compounding 1% gains every day for 10 days than a single 10% gain over 10 days. This means you have the probability of frequency and the probability of compounding on your side by betting on smaller moves.

>10Y of monthly return profiles (Yahoo finance data for speed):


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## odds-on (28 April 2013)

sinner said:


> This means you have the probability of frequency and the probability of compounding on your side by betting on smaller moves.




Hi Sinner,

You have not taken into account the probability of winning all the bets 

Cheers


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## Ves (28 April 2013)

craft said:


> Burglar
> 
> I agree – A stocks ability to drop 20% or rise 25% is exactly the same.
> 
> ...



I was thinking the same thing actually  -  providing that you can exercise skill and judgment there is no reason that one of your best winners may go from $2 to $1 before it ever sees $10.   

I think you once explained this to me as the theory of being a "strong hand" vs a "weak hand."


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## waimate01 (29 April 2013)

galumay said:


> A $1 share can gain 99c or lose 99c just as easily.




If your point is correct, then assuming you start with a hard-earned stake of $1000, on one outcome you've now got $1990 and might celebrate by going out for a nice pub dinner (but not order the lear jet just yet), and on the other outcome you've got $10 and wiped yourself out. These are not symmetrical.

But I disagree with your premise. A share goes down when management gets something wrong, and it goes up when management gets something right. So if I understand correctly, you're saying it's just as easy to get something right as wrong. So therefore I can go through my next multiple choice quiz, choose answer 'A' for everything, and expect to get a borderline pass, right? I disagree - I think it's a lot harder to get things right than it is to get things wrong. It takes no particular skill to mess something up. Therefore it's harder to pick winners than losers.

Anyway, as various other people have indicated, the correct way to think about this is to also consider the probabilities, and multiply the outcome by the probability. Otherwise you'd just buy yourself a lottery ticket and go jet shopping.


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## galumay (29 April 2013)

waimate01 said:


> ....... Otherwise you'd just buy yourself a lottery ticket and go jet shopping.




Mostly irrelevant and debatable! 

To come back to the initial point though, its not helpful or transparent for people to make statements such as,
 "If you lose 20% of your capital, you need a 25% increase to get back to where you started."

Its comparing apples with oranges and a misuse of %'s because they are calculated on different bases.


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## burglar (29 April 2013)

waimate01 said:


> If your point is correct, ...




What you say makes a lot of sense, but it is not all that simplistic.

What the OP is saying is this:
When the base number changes, 
(from that which you start out with, to that which you are left with), 
the two percentages are no longer comparable.

Just like apples and oranges!


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## waimate01 (29 April 2013)

Oh boy, good luck to you guys !


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## FlyingFox (29 April 2013)

waimate01 said:


> Oh boy, good luck to you guys !




Seconded !


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## burglar (29 April 2013)

If it is harder to pick winners than to pick losers,
would the market be rising for centuries?


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## Leiothrix (29 April 2013)

So_Cynical said:


> Another quirk of percentages that no one talks about is the fact that the maximum you can lose is 100% however the maximum you can make is limitless 100,000,000,000%




Not true -- you can lose a fair bit more than 100% -- the power of leverage


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## prawn_86 (29 April 2013)

burglar said:


> If it is harder to pick winners than to pick losers,
> would the market be rising for centuries?




Confirmation/survivor bias.

How many of the companies at the start of that graph are still included in the index?


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## burglar (29 April 2013)

prawn_86 said:


> Confirmation/survivor bias.
> 
> How many of the companies at the start of that graph are still included in the index?




Well, ... let me see! 
There is that one company that made the world's best buggy whips.
I believe they survived by manufacturing air bags for the modern horseless carriage! :


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## sinner (29 April 2013)

prawn_86 said:


> Confirmation/survivor bias.
> 
> How many of the companies at the start of that graph are still included in the index?




Not to mention a large portion of returns are attributable to inflation, which is always going to be a bottom left => top right kind of graph.


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## prawn_86 (29 April 2013)

sinner said:


> Not to mention a large portion of returns are attributable to inflation, which is always going to be a bottom left => top right kind of graph.




Yeh i wasnt sure if it is a real or nominal chart. It says it is log scale, but that doesnt mean it includes inflation


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## craft (29 April 2013)

Take a sound wave




No matter what scale you put on it, the % change from peak to trough is going to be less than the % from trough to peak – yet the amplitude does not change.  In this sense I agree with the OP that percentages are misused.  Trend, skewness, money management and other things discussed so far are related yet separate issues.


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## FlyingFox (29 April 2013)

craft said:


> Take a sound wave
> 
> View attachment 51959
> 
> ...




They are not misused. A percentage is a relative measure! Therefore it is always relative to something. 

% = AA/BB x 100 . If if you hold AA constant and change BB, your percentage changes and vice versa. 

the beginning of this discussion was about the AA part. Well 2K is 20% of 10K and 25% of 8k. It is not being misused whatsoever. you are comparing two different base amounts. 

Similarly your profit amount is relative to you capital base. We could have the same portfolio in terms of percentages but I have 10K invested and you have 30k invested. The portfolio goes up by 10%, I make 1K and you make 3K. 

The probability of making a dollar amount profit or loss for both of us is different but the probability of making a percentage profit or loss is the same......


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## galumay (29 April 2013)

FlyingFox said:


> It is not being misused whatsoever. you are comparing two different base amounts.




Thats exactly why its being misused, by comparing %'s of different base amounts and then suggesting that it can therefore be inferred that one change is more difficult than the other. In the quoted case, if you lose $2000 on a trade you have to make $2000 on a trade to get back to square. Suggesting that its harder to make $2000 because its a bigger % of a smaller amount is clearly misleading.


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## prawn_86 (29 April 2013)

galumay said:


> Suggesting that its harder to make $2000 because its a bigger % of a smaller amount is clearly misleading.




So you are saying it is just as easy to make a 25% return as it is a 20% one? What if you lost 9k (90%) of this example? Is it as easy to make 1000% off the new base to get back to square?

Pecentages are used universally to measure return for a reason, because the higher the % required, the harder it is to get.


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## FlyingFox (29 April 2013)

galumay said:


> Thats exactly why its being misused, by comparing %'s of different base amounts and then suggesting that it can therefore be inferred that one change is more difficult than the other. In the quoted case, if you lose $2000 on a trade you have to make $2000 on a trade to get back to square. Suggesting that its harder to make $2000 because its a bigger % of a smaller amount is clearly misleading.




for any given portfolio, would you agree that it is easier to make a smaller return (in percentages) than a larger one?

disregard invested capital amount for now..


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## chops_a_must (29 April 2013)

Talk about not being able to fight your way out of a wet paper bag...


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## sinner (29 April 2013)

galumay said:


> Thats exactly why its being misused, by comparing %'s of different base amounts and then suggesting that it can therefore be inferred that one change is more difficult than the other. In the quoted case, if you lose $2000 on a trade you have to make $2000 on a trade to get back to square. Suggesting that its harder to make $2000 because its a bigger % of a smaller amount is clearly misleading.




It's obviously harder, because you have a lower starting capital to make back the same amount of money that you lost.


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## Lone Wolf (29 April 2013)

sinner said:


> It's obviously harder, because you have a lower starting capital to make back the same amount of money that you lost.




Exactly.



burglar said:


> Somehow the implication is that - because the percentage is higher,
> it is harder to get back to breakeven.




No. The implication is that turning $8000 into $10,000 is harder than turning $10,000 into $12,000. Percentage is just a way of tracking the change in capital without using specific $ amounts.

You're thinking people believe it's harder due to the % difference. That's not true. The % figure is simply a measurement tool. The reason it's harder is because you need to make the same return of a smaller capital base.


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## craft (29 April 2013)

sinner said:


> It's obviously harder, because you have a lower starting capital to make back the same amount of money that you lost.




Why the assumption that exposure changes? The OP just shows one stock fluctuating? 	

Obviously galumay hasn’t made that assumption and neither did I. The argument seems moot because it is being warped by different assumptions.

Its just a mark up versus margin issue as far as I can see.


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## sinner (29 April 2013)

craft said:


> Why the assumption that exposure changes? The OP just shows one stock fluctuating?
> 
> Obviously galumay hasn’t made that assumption and neither did I. The argument seems moot because it is being warped by different assumptions.
> 
> Its just a mark up versus margin issue as far as I can see.




Even in the case of 100% exposure to a single $100 priced asset, if the price of that asset goes to $0 over the course of 1 year, are we really saying the probability of the asset returning to $100 over the next year is equally likely? If the price of an asset goes from $100 to $200 over the course of 1 day, is it equally likely for the price of that asset to go to $100 on the day after?

We aren't talking about a plot of a sin wave, we are talking about timeseries representing the historical traded price of a financial asset with economic factors determining that price.

EDIT: Said $0 meant $100


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## galumay (29 April 2013)

craft said:


> Why the assumption that exposure changes? The OP just shows one stock fluctuating?
> 
> Obviously galumay hasn’t made that assumption and neither did I. The argument seems moot because it is being warped by different assumptions.
> 
> Its just a mark up versus margin issue as far as I can see.




Exactly, people keep invoking conditions, context and assumptions that are simply not relevant to the initial point being made. It's pretty basic maths. Perhaps it is muddied by people trying to use analogies?


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## burglar (29 April 2013)

craft said:


> Why the assumption that exposure changes? The OP just shows one stock fluctuating?
> 
> Obviously galumay hasn’t made that assumption and neither did I. The argument seems moot because it is being warped by different assumptions.
> 
> Its just a mark up versus margin issue as far as I can see.




My "one stock in a portfolio" example was chosen for clarity *gulp*
Clearly there could be 2181 ASX stocks, doesn't change what I am saying!!

It could be the DOW, the time frame could be over a century!
As in my second example!

It doesn't change what I am saying!!

Seed capital is what I put in.
Market Value is what I have left.

If I change the base of percentages from one value to another,
I can no longer compare the two.


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## Lone Wolf (29 April 2013)

craft said:


> Why the assumption that exposure changes? The OP just shows one stock fluctuating?




I admit that I made an assumption in my response. My reason is that I thought the main point of the original post was this:



burglar said:


> I don't know why I keep seeing this !!
> 
> If you lose 20% of your capital, you need a 25% increase to get back to where you started.




The context that I usually see this stated is where you lose the money and it's not coming back. ie. Stoploss being hit, or a company suffering a serious unrecoverable setback. I'm not sure I've ever heard anyone use it in such a specific, tight range example such as the posted chart. I actually thought the chart posted was out of context and irrelevant to statement being questioned. So I responded according to what I thought people saying this really meant.

But experiences vary and Burglar may have seen it often used in the context he described. So I was wrong to assume he was using it out of context.

Maybe that's the simple answer to why he keeps seeing it. It's often used by people like me who use it in a different context to him.


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## Julia (29 April 2013)

sinner said:


> It's obviously harder, because you have a lower starting capital to make back the same amount of money that you lost.



Such a simple, obvious point which seems to be lost amongst the spurious arguments to the contrary.


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## craft (29 April 2013)

sinner said:


> Even in the case of 100% exposure to a single $100 priced asset, if the price of that asset goes to $0 over the course of 1 year, are we really saying the probability of the asset returning to $100 over the next year is equally likely? If the price of an asset goes from $100 to $200 over the course of 1 day, is it equally likely for the price of that asset to go to $100 on the day after?




No. Changing the extent of the argument to the extremes you suggest and I would assume an underlying change in value hence real exposure.

As I feel I'm going in circles trying to respond to varying assumptions and really don't follow what the OP is saying anymore, I'm going to tuck my tail between my legs and leave this thread to others.




galumay said:


> Exactly, people keep invoking conditions, context and assumptions that are simply not relevant to the initial point being made. It's pretty basic maths. Perhaps it is muddied by people trying to use analogies?




+1


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## burglar (29 April 2013)

craft said:


> ... I'm going to tuck my tail between my legs and leave this thread to others. ...




Me too.

I have a headache from trying to explain why, 
if I lose $2K, I need to regain $2K to breakeven!!


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## galumay (30 April 2013)

burglar said:


> Me too.
> 
> I have a headache from trying to explain why,
> if I lose $2K, I need to regain $2K to breakeven!!




Me three.


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## burglar (30 April 2013)

My ADN Adelaide Resources shares rose 187% in the first hour of trade.

This percentage is based on yesterday's Last Price.

I did not buy them yesterday at this price.
The percentage (whilst valid) is useless to me.


This is my calculation of "Return on Seed Capital":
($0.135/$0.265-1)*100=-49.06%


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## burglar (30 April 2013)

Julia said:


> Such a simple, obvious point which seems to be lost amongst the spurious arguments to the contrary.




Spurious??!
Why don't you just say I am wrong.

Are you afraid that 
A.)You may have misunderstood. 
...or ...
B.) You are wrong!

Spurious??!
Curious word choice.


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## prawn_86 (30 April 2013)

burglar said:


> Me too.
> 
> I have a headache from trying to explain why,
> if I lose $2K, I need to regain $2K to breakeven!!




So is it easier to make 2k when you have 8k or when you have 100k?


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## FlyingFox (30 April 2013)

prawn_86 said:


> So is it easier to make 2k when you have 8k or when you have 100k?




It's a lost cause prawn ...


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## white_goodman (30 April 2013)

burglar said:


> Me too.
> 
> I have a headache from trying to explain why,
> if I lose $2K, I need to regain $2K to breakeven!!




well done, if i drop a dollar on the ground, I have to pick up that dollar to get it back.. prophetic isnt it...

you dont seem to be aware of basic probability or risk, how quaint


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## Ves (30 April 2013)

white_goodman said:


> you dont seem to be aware of basic probability or risk, how quaint



I would disagree that the probability of the value of the cashflow stream generated over a long timeframe has any relation to the short-term fluctuations of its market price.

If something goes from $1 to $0.80 in the short-term the probability of the value of its future cash flow does not change (unless of course the price drop is in relation to an actual event distinct from the share market).

This argument has not been resolved because no one has stated any definition or context.   It's just a willy nilly mish mash of different philosophies.

It is however, not full of spurious arguments, I think that comment was just plain rude.


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## white_goodman (30 April 2013)

Ves said:


> I think that comment was just plain rude.




that was clearly the intention


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## burglar (30 April 2013)

Ves said:


> I would disagree that the probability of the value of the cashflow stream generated over a long timeframe has any relation to the short-term fluctuations of its market price.
> 
> If something goes from $1 to $0.80 in the short-term the probability of the value of its future cash flow does not change (unless of course the price drop is in relation to an actual event distinct from the share market).
> 
> ...




+ 1.0


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## Ves (30 April 2013)

white_goodman said:


> that was clearly the intention



Not referring to your comment, W_G.


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## waimate01 (30 April 2013)

burglar said:


> I have a headache from trying to explain why,
> if I lose $2K, I need to regain $2K to breakeven!!





Sure, sure. And if you started with $2k, and lost $2k, you'd have to be particularly wiley about how you deploy your remaining $0 to make that $2k you need to break even. 

This isn't a question of philosophy; I'm afraid it's a question of numeracy. Sorry if that offends.


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## Ves (30 April 2013)

waimate01 said:


> Sure, sure. And if you started with $2k, and lost $2k, you'd have to be particularly wiley about how you deploy your remaining $0 to make that $2k you need to break even.
> 
> This isn't a question of philosophy; I'm afraid it's a question of numeracy. Sorry if that offends.



Often using extreme examples is helpful as it focusses the audience into realising a truth (total loss of capital, for instance), however, in this case the discussion is more nuanced and involves what lies in between the determinable outliers, not what resides at the extremes.   

My own understanding of the question, obviously influenced by my own personal philosophy, and my only use for it in a practical sense (because I don't trade price action) is, "if a price moves from A to B, does that change the underlying value of the company?"


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## burglar (30 April 2013)

waimate01 said:


> Sure, sure. And if you started with $2k, and lost $2k, you'd have to be particularly wiley about how you deploy your remaining $0 to make that $2k you need to break even.
> 
> This isn't a question of philosophy; I'm afraid it's a question of numeracy. Sorry if that offends.




That you disagree, does not offend me. 

I may be wrong. 
If you front me, I will respect you.

For me it was and is a question of separating the mathematics 
of percentages from the philosophy of trading.
Obvious to me is, that forces which make it harder 
or easier to regain your lost $2k have 
nothing to do with the use or misuse of percentages. 

A trader will say the forces are: 
Supply & Demand or 
Push & Pull
Volume
VSA
P&F

An investor would say:
They're now cheaper or
The price will oscillate towards true value.

I am not unaware of all that.


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## FlyingFox (30 April 2013)

Ves said:


> Often using extreme examples is helpful as it focusses the audience into realising a truth (total loss of capital, for instance), however, in this case the discussion is more nuanced and involves what lies in between the determinable outliers, not what resides at the extremes.
> 
> My own understanding of the question, obviously influenced by my own personal philosophy, and my only use for it in a practical sense (because I don't trade price action) is, "if a price moves from A to B, does that change the underlying value of the company?"




Why are we making this more complicated than it needs to be? This thread should not be 4 pages long and the only reason I am replying to this is for the benefit of any beginners that may read this.

Please go back to the first post and read it carefully:

"If you lose 20% of your capital, you need a 25% increase to get back to where you started."

It is a matter of simple maths and a bit of English. 

The assumption most made was that your exposure changed *when you made a loss*. If you are holding on to a stock that is fluctuating in price, then you have not made a loss. It is a paper loss. A profit or loss is made at the point of sale. Again if you buy the same stock or portfolio at the same price just after you sold them, for all intents and purposes you still have a paper loss/profit.

If we are following up to know, the rest of the arguments follow on in that percentages are relative and now you need to make 25%, a relative value, back from your reduced capital base.

We can have a philosophical discussion at this point about why the probability of a $1 stock to go to $2 is much lower than the probability of $10 stock to go to $11 but whether you want to agree with it or not, that is just the way it. It is the basis of most of financial modeling and has been showed to be a good model for the majority of stock price movements. Maybe that is the way our intrinsic value system works?

As for the case of the single stock fluctuating, we can discuss time series models, random walks and monte carlo methods but frankly it unnecessary for the answer to the question posed by the OP.


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## Julia (30 April 2013)

Julia said:


> Such a simple, obvious point which seems to be lost amongst the spurious arguments to the contrary.





Ves said:


> It is however, not full of spurious arguments, I think that comment was just plain rude.






white_goodman said:


> that was clearly the intention



No, it was not either rude or my intention.


> spu·ri·ous
> Not being what it purports to be; false or fake: "spurious claims".
> (of a line of reasoning) Apparently but not actually valid: "this spurious reasoning results in nonsense".



See Prawn's comment below:


prawn_86 said:


> So is it easier to make 2k when you have 8k or when you have 100k?




If your original investment is $10,000 and you lose 20%, that's the end of that base.
You have to recalculate what you need to gain to make up what you have lost from the new base.
It's simple numeracy as has been pointed out by Waimate.

Nothing to do with your beloved value investing, Ves.  Simple arithmetic.


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## Ves (30 April 2013)

So why does the original post have a chart if we are not talking about price fluctuations as opposed to realised losses?

Yes, most of you made one assumption.  I made a different one.  And apparently that means it must be a "spurious argument" or about  "beloved value investing", what a pompous load of a crap.


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## FlyingFox (30 April 2013)

Ves said:


> So why does the original post have a chart if we are not talking about price fluctuations as opposed to realised losses?




ok. See sinners post on Page 1 about stock price fluctuations and skewness of returns.


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## Julia (30 April 2013)

Ves said:


> So why does the original post have a chart if we are not talking about price fluctuations as opposed to realised losses?



You would need to ask that question of the OP.  Not those who have just responded to the simple numerical proposition.



> Yes, most of you made one assumption.



So perhaps consider the view of the majority.


> I made a different one.  And apparently that means it must be a "spurious argument" or about  "beloved value investing", what a pompous load of a crap.



I'm happy to withdraw the adjective of 'beloved', and acknowledge it was unnecessary,  despite my inability to understand why you would attempt to turn a simple numerical proposition into a discussion about the value of a company.


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## burglar (30 April 2013)

Ves said:


> So why does the original post have a chart if we are not talking about price fluctuations as opposed to realised losses? ...




Ohhh, I see what I have done now!!!

I forgot to ask if these losses have been crystallised  .... or no!


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## Ves (30 April 2013)

Julia - the relevance of the basic maths seems to change in the situation of realised capital loss vs exposure still kept  (especially when time frames change).

The danger with the second instance, and most likely your problem in understanding it, is the necessity of the investor use skill and judgement to come up with an arbitrary valuation and use it to gain an edge over the market in the long-term... despite the obvious disadvantage of facing the price falling below purchase price every now and then. That's to most a leap of faith, and possibly why I am in the minority in this instance.

I think it's an interesting dynamic (and in my opinion why it is hard to be both a technical investor and a fundamental investor in the same instance), and I don't need sinner's skewness study to tell me that it exists, if it didn't we wouldn't have people successfully exploiting both arbitrage of price action and fundamental value.


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## FlyingFox (30 April 2013)

Ves said:


> Julia - the relevance of the basic maths seems to change in the situation of realised capital loss vs exposure still kept  (especially when time frames change).
> 
> The danger with the second instance, and most likely your problem in understanding it, is the necessity of the investor use skill and judgement to come up with an arbitrary valuation and use it to gain an edge over the market in the long-term... despite the obvious disadvantage of facing the price falling below purchase price every now and then. That's to most a leap of faith, and possibly why I am in the minority in this instance.
> 
> I think it's an interesting dynamic (and in my opinion why it is hard to be both a technical investor and a fundamental investor in the same instance), and I don't need sinner's skewness study to tell me that it exists, if it didn't we wouldn't have people successfully exploiting both arbitrage of price action and fundamental value.




Therefore, since it looks like both scenarios have been answered, can we consider this closed?


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## Julia (30 April 2013)

FlyingFox said:


> Therefore, since it looks like both scenarios have been answered, can we consider this closed?



Excellent idea.  Given the title of the thread, it seemed like a simple numerical question to me.  As a result I'm confused when someone starts talking about the value of a company which imo has nothing to do with the original proposition.  
If I've added unnecessary heat to the argument I humbly withdraw any remarks which have upset anyone.


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## Ves (30 April 2013)

FlyingFox said:


> Therefore, since it looks like both scenarios have been answered, can we consider this closed?



Whilst we personally may not need to say anything in this instance.... my experience in life suggests that this topic of discussion will never be closed.   It's a revolving door, and like everything else, there is always time for new wisdom. The point, mostly, is that there is always different ways of looking at things, and sometimes someone new will surprise everyone.  And that's why sometimes, it's nice, to disgress away from what is considered to be "normal" or "majority" every once in a while.  

Then again, I'm happy for you to call me weird.


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## craft (30 April 2013)

burglar said:


> Ohhh, I see what I have done now!!!
> 
> I forgot to ask if these losses have been crystallised  .... or no!





Burglar

Have the losses been crystallised?

Is the chart attached to your post relevant to your point?


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## FlyingFox (30 April 2013)

Ves said:


> Whilst we personally may not need to say anything in this instance.... my experience in life suggests that this topic of discussion will never be closed.   It's a revolving door, and like everything else, there is always time for new wisdom. The point, mostly, is that there is always different ways of looking at things, and sometimes someone new will surprise everyone.  And that's why sometimes, it's nice, to disgress away from what is considered to be "normal" or "majority" every once in a while.
> 
> Then again, I'm happy for you to call me weird.




I don't think the issues you raised about the value of a company or the mathematics behind time series computations and skewness of returns are weird or a topic not worthy of discussions. whether returns are skewed or even if the normal distribution is the right model or maths vs guts; all useful.



burglar said:


> If you lose 20% of your capital, you need a 25% increase to get back to where you started.





and 



burglar said:


> My ADN Adelaide Resources shares rose 187% in the first hour of trade.
> 
> This percentage is based on yesterday's Last Price.
> 
> ...





being refereed to as misuse of percentages in the beginners lounge is a recipe for confusion for beginners. 

BTW burglar, if you say stock A went up by 25% today, it is generally assumed that it was against yesterdays closing price. There is a generally accepted implicit convention to what the percentage is relative to (yesterdays price because you said today) or it is explicitly given like in your return on capital.


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## burglar (30 April 2013)

craft said:


> Burglar
> 
> Have the losses been crystallised?
> 
> Is the chart attached to your post relevant to your point?




Who's losses are we talking about?

Half of my net accumulated losses have been crystallised.


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## burglar (30 April 2013)

FlyingFox said:


> ... BTW burglar, if you say stock A went up by 25% today, it is generally assumed that it was against yesterdays closing price. There is a generally accepted implicit convention to what the percentage is relative to (yesterdays price because you said today) or it is explicitly given like in your return on capital.




Understood!


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## burglar (1 May 2013)

craft said:


> ... Is the chart attached to your post relevant to your point?




Yes. 

It visually demonstrates how the Share Price rises as easily as it falls!
It rises 100% as easily as it drops 50%.


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## craft (1 May 2013)

craft said:


> Burglar
> 
> Have the losses been crystallised?
> 
> Is the chart attached to your post relevant to your point?







burglar said:


> Yes.
> 
> It visually demonstrates how the Share Price rises as easily as it falls!
> It rises 100% as easily as it drops 50%.




Ok - so this is the 20% Margin = 25% mark up argument – to say there is a difference because of the differing size of the percentage is a misuse of percentages.

Some have presumed this is what you were referring too.




burglar said:


> Who's losses are we talking about?
> 
> Half of my net accumulated losses have been crystallised.




I was asking in relation to the original post, the basis of this thread. 

If you are applying this to a situation where the base has been reset by buying and selling *OR* the underlying exposure has changed because of a change in the real circumstances and value of the underlying asset the other side of the argument applies, best described in this thread by Lone Wolf. 

This thread would have to be the most confusing on percentages I have ever seen - But compelling on human nature and how people make assumptions in the absence of explicit information to support their predetermined  views.


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## white_goodman (1 May 2013)

burglar said:


> Yes.
> 
> It visually demonstrates how the Share Price rises as easily as it falls!
> It rises 100% as easily as it drops 50%.




no it really doesn't..


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## FlyingFox (1 May 2013)

white_goodman said:


> no it really doesn't..




That is for another thread ...


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## sinner (1 May 2013)

burglar said:


> I don't know why I keep seeing this !!
> 
> If you lose 20% of your capital, you need a 25% increase to get back to where you started.
> 
> ...




The chart you provide here is completely fallacious because you are treating it as a liquid timeseries when it is actually an 8c stock on the ASX. If I purchased $50,000 worth of shares in the company at 8c, and over the next couple of months it declined to 4c on heavy supply, and now the chart shows the "price" at 8c, am I actually back to breakeven? Not unless there is enough liquidity at that price to absorb my shares.

Using a 8c stock on the ASX as your evidence on "ease" of movement is obviously going to lead to blatantly incorrect conclusions.


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## sinner (1 May 2013)

craft said:


> This thread would have to be the most confusing on percentages I have ever seen - But compelling on human nature and how people make assumptions in the absence of explicit information to support their predetermined  views.




and haven't you made a bunch of your own assumptions about

a) being a strong hand, never required to liquidate assets 
b) investing in securities with moderate liquidity
c) investing in securities loaded against the quality and value factor


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## pixel (1 May 2013)

I just noticed that this thread was started inside the discussion group "Beginner's Lounge".
How fitting :1zhelp:

(btw: shouldn't that be "Beginners' Lounge" ? Surely there are more beginners involved than just one....)


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## burglar (1 May 2013)

pixel said:


> I just noticed that this thread was started inside the discussion group "Beginner's Lounge".
> How fitting :1zhelp:
> 
> (btw: shouldn't that be "Beginners' Lounge" ? Surely there are more beginners involved than just one....)




No-one is owning up to being that beginner!
Everyone is an expert! :


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## craft (1 May 2013)

sinner said:


> and haven't you made a bunch of your own assumptions





Yep. Are you assuming I wasn't talking about myself too?

Last time I checked I was human.

I have tried to acknowledging both arguments depending on the assumptions made - but people seem to just want to keep arguing – I give up _again_.


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## burglar (1 May 2013)

sinner said:


> The chart you provide here is completely fallacious because you are treating it as a liquid timeseries when it is actually an 8c stock on the ASX. If I purchased $50,000 worth of shares in the company at 8c, and over the next couple of months it declined to 4c on heavy supply, and now the chart shows the "price" at 8c, am I actually back to breakeven? Not unless there is enough liquidity at that price to absorb my shares.
> 
> Using a 8c stock on the ASX as your evidence on "ease" of movement is obviously going to lead to blatantly incorrect conclusions.




Only if you are a contrarian, would you have chosen 0.8c to win an argument.
If your eyesight were better, you would not be out by a factor of ten.


PS This company is sufficiently liquid to accomodate you!


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## craft (1 May 2013)

burglar said:


> No-one is owning up to being that beginner!
> Everyone is an expert! :




Expert (_ex. spurt_) : _ex_ is a has been and _spurt_ is a drip under preasure.

Lucky I'm still just learning.


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## Julia (1 May 2013)

There was an illustration today of how imprecise language can cause misinterpretation.
On the NDIS, most people I've heard talking about it, including the Prime Minister, have referred to a "0.5% increase in the Medicare levy" to fund the scheme.

A caller to a radio program pointed out quite correctly that it's actually a 33.3% increase in the levy.


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## waimate01 (1 May 2013)

Julia said:


> There was an illustration today of how imprecise language can cause misinterpretation.
> On the NDIS, most people I've heard talking about it, including the Prime Minister, have referred to a "0.5% increase in the Medicare levy" to fund the scheme.
> 
> A caller to a radio program pointed out quite correctly that it's actually a 33.3% increase in the levy.




Very good point, Julia. And a wonderful opportunity to highlight the difference between a 'percentage' increase and a 'basis point' increase. There's a 50 basis point increase in the levy, or a 33.3% increase in the levy. 

Let's see our antipercentagists chew on that !


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## ROE (1 May 2013)

Ves said:


> I was thinking the same thing actually  -  providing that you can exercise skill and judgment there is no reason that one of your best winners may go from $2 to $1 before it ever sees $10.
> 
> I think you once explained this to me as the theory of being a "strong hand" vs a "weak hand."




I bought CCP at $1.20 Average down to 80c a pop it dropped to 40c at the depth of GFC...

and it is now close to $9  by next year all my capital invest in them paid for via Dividend 

I haven't sold a single share ..I bought some more in my super account at $3.70...

lose 50%  make back a couple hundred % more plus dividend


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