A Byte of my 2.2-lb Brain

Just sharing stuff…

Gaining back the losses

It is worth noting that for every x(%) of your capital C lost, you need to gain y(%) of your new total equity value v, where y=[x/(1-x)], to gain back your initial capital C. Sometimes, we forget that it is not linear (x=y). We ought to be reminded.

What does this mean?

If C= 100 and x=10%, your new total equity value v would be 90. To have this original C=100 back, your v needs to gain 11.11%. Similarly, if you lose 20%, you need 25%. To visualize the relationship between %loss and %needed to gain, see the graph below.

20140105-120543.jpg

Such simple math but with staggering implications on our portfolios. It very much reminds of the idea behind compound interest.

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein

One comment on “Gaining back the losses

  1. ScIoN
    January 5, 2014

    This is a great reminder for would-be traders! Can you kindly show the data points for x from around 0-20%? It could help readers decide at what levels they should set their stop-losses. hehe 😛

    Like

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This entry was posted on January 5, 2014 by in Stock Trading.
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