Question of the Day: If You Own a Stock that Drops 50%, How Much Does It Have To Increase To Get Back To Even?

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Sep 24, 2014

Math alert!  This is an interesting way to show students one of the most important tenets of investing which I might summarize in an informal way as “Avoid Disasters.”  What are disasters?  Well, it might be my initial foray into investing in 1989.   I bought a stock called CheckRobot (it pains me to even type these words).  A revolutionary company to bring self checkout to supermarkets.  Labor savings, great ROI, a management team.  All the ingredients for a phenomenal investment, right?  Let’s just say I was a little early.  A year later the stock was down 83% and the pain of opening my brokerage statement every month (pre-Internet days so no online access) eventually led to a sale and an important lesson learned.  And no, the stock price never did recover.

Sorry for the digression.  Back to the example.  Most students will have a gut reaction that if a stock price falls 50%, well it has to increase 50% and then you will be back to even.  Aha, a learning opportunity!  Take an example:

  • You purchase SureThing Labs at $10/share
  • It drops 50% (stock price is cut in half) and now the share price is at $5/share
  • How much will the stock price need to increase to get from $5 back to $10/share?

Voila, the stock price would need to double (or a 100% increase), which is quite a large hill to climb.  How to put this lesson to work.  Avoid Big Disasters (like CheckRobot) and instead diversify your portfolio by holding a variety of assets.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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