I received an interesting stat the other day …
Based on Wednesday’s close, the S&P 500 was up 39.64% from its low and down the exact same percentage.
Initially, many investors might take that to mean that the market is exactly halfway between its bull and bear extremes. But that’s not the case at all.
Sure, if you’re mathematecially inclined you know that. But I can’t tell you how many people I talk to fail to understand the simple idea that on a real basis, the same percentage loss is far worse than the same percentage gained.
In the case of the S&P 500, the 39.64% off the low represents a $2.36 billion gain.
But based on the high price, the index is still down $5.55 billion!
I’m not pointing this out to make anyone feel bad about the market’s rally. It’s certainly better to see you portfolio recover a good portion of money rather than none at all!
However, I think it’s important that everyone understand exactly how percentages work so they can properly analyze what’s happening in the markets and their own portfolios.
(And as a sidenote, I absolutely do believe percentages are the only way to measure performance. I can’t stand when someone tells me their stock is “up five points” since they bought it! But that’s a rant for another day …)
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{ 2 comments… read them below or add one }
Hi Nilus. That is an excellent point. Most people don’t get how it works so I thought I use an easy example to illustrate the point. Let me know if I have it right.
Suppose the market was at 100 and it drops by 40%. The new low is 60. So 40% drop from 100 is 60.
What does 40% rise from the low point of 60 look like?
40% X 60 = 24 or 40% of 60 is 24. So you must add 24 to the low of 60 =84
or the equation can be written as 60X 1.4 =84 or (60 X 40%) + 60 =84
So the market starts at 100. It drops 40%, which makes it now at 60. Then it rebounds from 60 up 40% which is only at 84. The market is still 16 less than when you started.
You are still at a loss from the original starting point (100).
When people hear it dropped 40% but has regained 40%, it is not back at 100. That is a wrong assumption. It regained 40% of 60 (the low point) not 40% of 100 the original point.
Hope that helps others with the math.
Nilus Mattive Reply:
June 5th, 2009 at 1:57 PM
Abolutely right! That’s a perfect, easy-to-grasp way of showing it.
Bottom line: It takes a much bigger percentage gain to negate a percentage decline!