A.I.M. Users Bulletin Board

[Qarel]

Tom, your Even at 45 points a day on the NASDAQ, it's going to take quite a while to get back to 5000!!! inspired me to post something I posted some time ago on a very different board ( http://groups.yahoo.com/group/mrmarketishuge ). Not that you fell victim to that fallacy; I just like to spread my idea around a little bit :)

== The "A drop needs a bigger rise" fallacy ==

While lots of us are looking at portfolios that are in the red, I started wondering about the old saw: "When a stock drops 50%, it needs a 100% gain to get even." It's true of course, and it does look pretty hopeless. But despite the truth in the saying, are things really that hopeless?

I set up a spreadsheet and entered 100 in the first cell. I then calculated .99*A1 in the cell below it, and copied that formula 68 rows down. In row 70, the result was down to 49.98. I then copied that value to the right of the first cell, and calculated 1.01*B1 in the cell below it. I copied that formula 69 rows down. In row 70, the result was 99.31; in row 71 the result was 100.31.

So it needed 69 1% drops to halve the value, and 69.7 1% gains to get back at 100. See? A drop needs a bigger rise! Yeah, right!!

== End of Yahoogroups post ==

Of course, this just a cumbersome way of showing that a 50% drop and a 100% gain are geometrically equivalent (more exactly: they are inverses), and for prices you need geometrical series (percentages), not arithmetical ones (dollars).

Regards,

Karel