Sunday, October 11, 2009

30% LOST is MORE than 30% profit ?

Have it ever occurred to you that 30% profit is NOT magnitude-wise the same as 30% lost ?

When your $100 investment earns a 30% profit, it goes up to $130 = 100 x 1.3. Pretty straight forward, no problem there. Then it makes a 30% lost. Instead of going back to $100, it actually drops to $91.

130 x ( 1 - 0.3 ) = 91

The calculation above is not deceiving. A 30% discount on any market item is actually calculated the same way.

So you have just made a lost of $9 !

Sounds tricky ? Lets see what if it moves the other way round.

This time you lost 30% from your $100 investment, it become $70 = 100 x ( 1 - 0.3 ). No problem here. Then it earns back 30%. This time you got 70 x 1.3 = $91. Again you lost $9 !!

There you go, sometimes 30% earning is NOT necessary the same as 30% loses. Get your numbers right in both your business and investment, 9% strategical lost due to a not-so-well-setup strategy could be killing.


jason said...

Why dont just make a more impactful example?

Let say you have RM100 portfolio, and it dropped 50% in value.How much percent increase to make it even(back to RM100)?


this is why you should not lose money.You have to take more risk to just to get back where u started.

Michael Tsen said...

good point, actually I didn't really relate to that earlier. This article was initially meant for business man who mark up 30% and then give discount 30% but always ended up losing money ... I just relate that to investment for this site.

'don't lose money' is a good ideology but often not practical especially when you are a volume trader.

this symptom of 'earn less lose more' actually turns out a great opportunity in some trading patterns.

Anonymous said...

It really depends to the businessman understand the formula of markup or not. If he applied the wrong formula that is cost x (100 + margin), then he is an idiot.

Michael Tsen said...

which is common ....

jason said...

what should be the correct formula of markup?

Michael Tsen said...

Don't mark up, sell by values :)

I support fix price mechanism :)

ChampDog said...

Good one! :)