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Misuse of percentages

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burglar

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22 November 2010
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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?
 
Try it using Babcock and Brown or ABC Learning as an example.
 
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.
Click to expand...

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.
 
waimate01 said:
Ask yourself this: which is harder to achieve - a 5% gain, or a 50% gain ? ...
Click to expand...

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.
 

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.
 
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.
Click to expand...

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
 
burglar said:
Try shorting BHP as an example?!
Click to expand...

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.
 
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.
 

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
 
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.
Click to expand...


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).
 
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.
Click to expand...

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.
 
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.
Click to expand...

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%

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



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.
 
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%.
 
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.
Click to expand...

Really?

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

CanOz
 

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
 
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%
Click to expand...

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