This year (as of October 27), six companies together have lost one trillion $$ in market capitalization. They are Apple, Microsoft, Alphabet/Google, Amazon, Tesla, and Meta/Facebook.
Meta has crashed, losing nearly 75% of its value on the year.
Instead of discussing the merits of Facebook’s business or how much money it’s spending on Second Life 2.0, I’d like to highlight the math behind this 75% loss.
The math behind crashes is brutal.
When asked what gain is required to recover from a 75% loss, most people will answer a 75% gain.
Unfortunately, that is not correct. The answer is a 300% gain.
For example, if you lose $75 of an initial $100, you are left with $25. To recover, you must make $75 back (obviously). But, $75 is 3x your (now) $25 investment or a 300% gain.
Here is another way to look at it:
You must double your money twice over: turn $25 into $50, and then $50 into $100. Using an estimated 10% stock market return, it will take you 14.5 years just to break even.
Facebook investors who bought on January 1, 2022 and continue to hold have a long road ahead.
This table shows gains required to recover losses ranging from 5% to 90%. As losses steepen, the pain accelerates.
It makes sense why Warren Buffett’s two rules of investing are:
“Rule #1: Never lose money. Rule #2: Never forget Rule #1.”
Severe losses really set you back.
It’s the math of it!
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