It Takes a 60% Gain to Offset a 37% Loss

Chart of the Week for June 23-June 29, 2000

Between March 10th and May 23rd, the Nasdaq Composite Index dropped from 5,049 to 3,165— a 37% decline. From that low, it has rebounded 28%. While a 28% gain may sound as if it offsets most of a 37% drop, it is actually less than one-half. To move back to 5,049 from the 3,165 low requires a 60% rise.

The reason for the difference is that percentages are calculated using the beginning number. Let’s say a stock is trading at $50 and rises to $100. Clearly, that is a 100% gain, calculated by dividing the $50 increase by the $50 beginning value. The same approach applies to a loss. A drop from $100 to $50 is a 50% decline, calculated by dividing the $50 loss by the $100 beginning price. So, the 100% rise from $50 to $100 is comparable to the 50% drop from $100 back to $50.

It is important to understand these mathematics because today’s prices are being subjected to wide moves, as illustrated by the Nasdaq’s pattern above.

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