A celebration of the stock market by Jay Walker, author of The Brink's Truck Burst Open on Wall Street! A Holistic Approach to Finding The Easy Money In Common Stocks.
Facts and ideas on how to outperform the general market, portfolio management and risk, with a growing focus on how climate change should affect your investment strategy. All wrapped nicely with a value-oriented investing bias.
Monday, October 13, 2008
Loss of capital
Here's something interesting that a lot of people don't often think about or realize ...
If the market drops a total of 50%, and you avoided the first 25% drop, and then invested, how much of your invested capital would you lose?
If you managed to miss the first 25% drop would you not have all of your $100 dollars to invest then only losing the last 25% to end up with 75 dollars?
If you invest $100 in an asset that is worth $0.750, you'll get 133 shares (and actually only spend $99.75). When that asset is worth $0.500, your shares will be worth $66.50.
You would lose $25 if the stock dropped 25% from your entry point, which is a different question.
This is a conventional ratio question, isn't it really? You invested when the stock was at 75% of original value, and then it dropped an additional 25%. No matter how much you invested, you still just lost 1/3 of it.
5 comments:
You would lose 33.33% of your capital.
Here's how that works ...
$100 investment will eventually become $50. Total loss will be $50.
$100-25% = $75
$75 would represent your entry point.
Remaining loss is to be $25.
$25/$75 = 33.33%.
And here's one more thing; to get back to your original $75 price investment, you need to get a 50% return to do so.
i.e. $25/50 = 50%
If you managed to miss the first 25% drop would you not have all of your $100 dollars to invest then only losing the last 25% to end up with 75 dollars?
Anonymous:
33% is still right.
If you invest $100 in an asset that is worth $0.750, you'll get 133 shares (and actually only spend $99.75). When that asset is worth $0.500, your shares will be worth $66.50.
You would lose $25 if the stock dropped 25% from your entry point, which is a different question.
This is a conventional ratio question, isn't it really? You invested when the stock was at 75% of original value, and then it dropped an additional 25%. No matter how much you invested, you still just lost 1/3 of it.
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