CHESSNOID

Whether your investment is a stock, bond, commodity, or even a house it is important to understand percentages as investment net gains and losses.  Especially once you have purchased an asset than is worth less than when you originally purchased it for. The last few years, most investments have gone down. So, at this point you have to ask yourself is the investment worth keeping and how much of a return do I need to make to break even.

I found this old article that highlights some great examples.

Climbing Out of the Hole:

Suppose you hold a stock that falls 50% in value. How much does that stock have to gain before you’re back where you started? Many people instinctively say 50%, but that’s wrong. If the stock’s price starts at $10 and loses 50%, it’s at $5; from there, gaining 50% would put it only back up to $7.50. To get back to $10, the stock would have to gain 100%, twice as much as it lost in percentage terms.

Recouping losses always requires a larger percentage gain than the loss itself, and the difference between the two gets more dramatic as the losses get larger. For example, as of March 5, Tivo (TIVO) stock had lost 10.1% over the past year, meaning it will have to gain 11.2% to recoup that loss.

As of the same date, homebuilder Toll Brothers (TOL) had lost 30% over the past year, but it will have to gain 43% to get back to where it was a year ago.

Starbucks (SBUX) had lost 51%, and it will need to gain 103% to make up those losses.

Once the losses exceed 50%, as they have for many financial stocks, the numbers get even uglier.

For example, regional bank KeyCorp (KEY) has lost 68% of its value over the past year as of March 5, meaning it would need to more than triple in price (gaining 214%) in order to make up for that loss. (If KeyCorp gained 68% from this point, shareholders would still be down 46% overall.) The numerous stocks that have lost 80% or more over the past year–nearly 900 of which are traded on the New York Stock Exchange or on Nasdaq–are in much worse shape and are unlikely to get back to where they were in the foreseeable future.

I think understanding how much percentage returns you need to achieve in the next few years may help you decide if an investment can come back or if you should cut your losses and look for an alternative.  That last example I think highlights the importance of having an exit strategy.  Once you are down 68%, it is easier to see objectively if your investment can come back with a 214% return.

In the past, I have talked about people walking away from a bad investment which includes homes (jingle mail).  Imagine if your house was valued at $500,000 2 years ago and it is now worth $200,000 in today’s market.  You may even have a $400,000 loan on it.  That would take a long time for anyone to recoup their original $100,000 down payment, since you would still have to even out the underwater loan balance of another -$200,000.  You could keep the house or give the keys back to the lender.  I guess it just depends on your situation and what time horizon you have to work with.