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.

Mt. 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.

Mt. said...

which is common ....

jason said...

what should be the correct formula of markup?

Mt. said...

Don't mark up, sell by values :)

I support fix price mechanism :)

ChampDog said...

Good one! :)