/biz/ - Business & Finance

Ever wonder why it is so difficult to recover from a loss that exceeds a certain percentage, say 50%?
Let's see. Let 1 be the initial value of your stock. Let x be the value remaining after the stock tanked. Let y be the %gain required to break even.
So we have x + x*y = 1. Now if you want to express x in the % of loss, then it becomes (1-x) + (1-x)y = 1.
Now solve for y. y = 1/(1-x) - 1. So it is the reciprocal function. Which is no joke. It appears somewhat linear at small values of x, then it shoots up similar
to the exponential function. I haven't compared their Taylor series, but the shape looks somewhat similar.
These two graphs are in exact same scale. Notice how the right graph is a lot steeper. That means once you hit a 50% loss which takes a 100% gain to recover and you continue
sinking, the next stop is 200% once that stock falls another 25%.