We all love compounding. We hate decompounding. The term is not often used; however, understanding it is critical for any investor.
Think about the Warren Buffett rule - Rule #1 -Don't lose money. Rule #2 Refer to rule #1.
The cost of losing money is high for two critical reasons: 1. if you lose a lot, it takes a higher required gain to make up the difference. You lose 20% and you will need to gain 25% to get back to even. 2. The time it takes you to get back to even is significant. If you are down 20%, you not only need to make 25% to get even, but you also need to generate 12% for 2 years to win back those loses.
Charts from a post by Ingo Kurpick and comments by Peter Urbani in linkedin.
No comments:
Post a Comment