Updated: Aug 11, 2019
Numbers don't lie, right? We have all heard this axiom throughout our lives and when based around a black and white context of simple arithmetic it can't be refuted. However, is it that difficult to understand how easily data can be used unscrupulously to reinforce an opinion which is inherently subjective?
One of my favorite sayings is "if you torture the data enough, it will say what you want it to." As investors we are constantly inundated with information that consciously and more importantly, subconsciously impacts our ability to form an objective conclusion. This may not seem like a big deal, but it can be the difference between a profitable investment and a detrimental, or even a catastrophic one.
Last quote (pinky swear), Confucius once said "True wisdom is knowing what you don't know." I wasn't around in 500 BC to ask what he meant by that exactly, but I believe it had something to do with remaining open to our own individual lack of understanding. Given that he is still widely quoted today, something tells me he went so far as to not only embrace it, but to seek it out in himself on a daily basis.
There's a point somewhere in here (thanks for patience in advance), and it has to do with a massively overused statement that is simply not true. It goes "if I don't sell when the market is down I can't lose." This is false based on inflation and fees alone. If one doesn't sell an investment while it nosedives, they won't incur what is called "a realized loss." But if we expand it to include the context of the markets from the past week, it can solidify the inconvenient truth of this common misunderstanding and help bring some much needed clarity to this often brushed over topic.
Before we dive in, think of it this way. If I gain 80 pounds of fat in the next week but never get on the scale or look at a mirror did I still become a slob? And when I say slob, I truly mean the most politically correct form of the noun (if that's possible) Furthermore, once I add that weight, it's my responsibility to lose it now before I die of heart failure.
Let's venture back to investing. If we look at the below Amazon daily chart, we can see that the stock was down roughly 36% from peak to trough. This entire correction took place over the course of four months so if you were in this position it was not only dead money, but it was also opportunity cost on the capital. If none of those factors cause you concern how about the fact that you need to gain close to double that loss in order to simply break-even.
Now, four months isn't that long to suffer through a down cycle in a stock, but imagine it took years for the stock or index to begin making new highs. If you want to see close to thirteen years of this on the S&P 500 take a look at the monthly chart from 2000 to 2013.
Bottom line, it's important to fully understand how returns on the up, as well as on the way down, are impacting the performance numbers that get purported. Below is a simple table that you can use to gain a better grasp of loss percent and the necessary gains to get whole.
Thoughts? Challenges? Want to learn more? See more? Or, just let me know what you think...
As always, there is so much more to learn about these charts. Greater clarity in anything, ultimately means more opportunities to choose from. Wouldn't it be more enjoyable to approach investing with a real edge as opposed to getting filtered information by someone you believe knows better than you?
Similar to golf, we all have our own unique swing. Don't take my word for it or judge me based upon a single qualification on a dead resume, or something I accomplished in college. The truth is, if a so-called professional can't show you in real-time where a particular stock is headed, then they are guessing.
We don't guess at Principles and neither should you, especially since it's your money. Remember, no one cares more about your hard-earned savings than you do.
Caveat, here comes the hard sell -- If you're ready to stop guessing and take your knowledge to the next level then sign up today risk-free (or keep making the same mistakes so the pros can eat your lunch). It is your CHOICE ----> https://www.principles1.com/plans-pricing