Comments on: Playing the Percentages: The Effect of Gains and Losses http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/ personal finance tips, tricks, and commentary Sun, 22 Nov 2009 04:49:32 -0500 http://wordpress.org/?v=abc hourly 1 By: mapgirl http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/comment-page-1/#comment-77566 mapgirl Mon, 07 May 2007 13:15:27 +0000 http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/#comment-77566 And don't forget that you have to take the tax bite out of that too. :-) And don’t forget that you have to take the tax bite out of that too. :-)

]]> By: nickel http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/comment-page-1/#comment-76664 nickel Tue, 01 May 2007 14:10:05 +0000 http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/#comment-76664 Right. That's the point. It's essentially the difference between and arithmetic mean and a geometric mean. Right. That’s the point. It’s essentially the difference between and arithmetic mean and a geometric mean.

]]> By: plonkee http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/comment-page-1/#comment-76651 plonkee Tue, 01 May 2007 13:08:04 +0000 http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/#comment-76651 Kurt said: Assume you have $1,000 to invest and two options. 1) that returns +50%, -50%, +50% over the next three years and 2) that is +10%, +20%, +5% over the next three years. I calculate that the annualised average returns are 4.0% and 11.5% respectively. With percentages you can't average by adding them up and dividing by three and percentages are multiplied not summed. Kurt said:

Assume you have $1,000 to invest and two options. 1) that returns +50%, -50%, +50% over the next three years and 2) that is +10%, +20%, +5% over the next three years.

I calculate that the annualised average returns are 4.0% and 11.5% respectively. With percentages you can’t average by adding them up and dividing by three and percentages are multiplied not summed.

]]> By: nickel http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/comment-page-1/#comment-76600 nickel Mon, 30 Apr 2007 22:47:57 +0000 http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/#comment-76600 He's just kissing butt because he wants to win a flash drive. ;) He’s just kissing butt because he wants to win a flash drive. ;)

]]> By: tanyetta http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/comment-page-1/#comment-76599 tanyetta Mon, 30 Apr 2007 22:30:22 +0000 http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/#comment-76599 that was so nice of you to apologize patrick! :) that was so nice of you to apologize patrick! :)

]]> By: Patrick Szalapski http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/comment-page-1/#comment-76586 Patrick Szalapski Mon, 30 Apr 2007 18:31:38 +0000 http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/#comment-76586 Begging your pardon, the "stupid" comment was a little harsh. Forgive me? The applications of what you are saying are indeed meaningful. Begging your pardon, the “stupid” comment was a little harsh. Forgive me? The applications of what you are saying are indeed meaningful.

]]> By: Kurt http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/comment-page-1/#comment-76583 Kurt Mon, 30 Apr 2007 17:53:15 +0000 http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/#comment-76583 Unlike the last comment, I think this is a very useful post. Mainly because most investors miss this point when they try to pick a 'good' mutual fund. Assume you have $1,000 to invest and two options. 1) that returns +50%, -50%, +50% over the next three years and 2) that is +10%, +20%, +5% over the next three years. If you chose option 1, you would end up with $1,125 after the three years and if you chose option 2 you would end up with $1,386. But if you read the average returns for these funds over those years then option 1 has an average return of 16.7% whereas option 2 has an average return of 11.7%. People think they read average returns and know that they will end up with more money, when this post is a great example of why higher average returns does not mean more money. Unlike the last comment, I think this is a very useful post. Mainly because most investors miss this point when they try to pick a ‘good’ mutual fund.

Assume you have $1,000 to invest and two options. 1) that returns +50%, -50%, +50% over the next three years and 2) that is +10%, +20%, +5% over the next three years.

If you chose option 1, you would end up with $1,125 after the three years and if you chose option 2 you would end up with $1,386. But if you read the average returns for these funds over those years then option 1 has an average return of 16.7% whereas option 2 has an average return of 11.7%.

People think they read average returns and know that they will end up with more money, when this post is a great example of why higher average returns does not mean more money.

]]> By: Patrick Szalapski http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/comment-page-1/#comment-76580 Patrick Szalapski Mon, 30 Apr 2007 17:15:11 +0000 http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/#comment-76580 Sorry nickel, love your site, but this is stupid. Percentages are only meaningful when it is understood what it is a percentage of. If you have a hundred dollars as your original balance, and you lose 50% of your original balance, you then need to gain 50% of your original balance to break even. But it is true that you now have less money to work with and thus less opportunity to make a gain. If you lost 50% last year in a stock, yes, that stock will need to gain 100% of its current value in the next year for you to be able to sell at break even--but that's still only 50% of its purchase value that it needs to gain. Stores exploit this confusion by giving you "additional" percentages off. This new discount is off the "new" price after the regular "sale". For example, if you have a $100 list price shirt on a 50% off "sale", then a "20% additional off clearance", the shirt will cost $40 (50% + 20%*50% off), not the $30 you thought (50% + 20% off). Sorry nickel, love your site, but this is stupid. Percentages are only meaningful when it is understood what it is a percentage of. If you have a hundred dollars as your original balance, and you lose 50% of your original balance, you then need to gain 50% of your original balance to break even. But it is true that you now have less money to work with and thus less opportunity to make a gain.

If you lost 50% last year in a stock, yes, that stock will need to gain 100% of its current value in the next year for you to be able to sell at break even–but that’s still only 50% of its purchase value that it needs to gain.

Stores exploit this confusion by giving you “additional” percentages off. This new discount is off the “new” price after the regular “sale”. For example, if you have a $100 list price shirt on a 50% off “sale”, then a “20% additional off clearance”, the shirt will cost $40 (50% + 20%*50% off), not the $30 you thought (50% + 20% off).

]]> By: Blaine Moore http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/comment-page-1/#comment-76578 Blaine Moore Mon, 30 Apr 2007 16:35:51 +0000 http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/#comment-76578 So in other words, I should just aim for 50% gains in anything that I do? Heheh... So in other words, I should just aim for 50% gains in anything that I do? Heheh…

]]> By: MyNewChoice http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/comment-page-1/#comment-76574 MyNewChoice Mon, 30 Apr 2007 16:13:40 +0000 http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/#comment-76574 As basic as this seems, it is amazing that many people don't really seem to grasp this fact. IMO, this is a big reason why I feel it is so important to cut your losses early on stock transactions. Trying to hang on and wait for a stock to "come back" often results in a loss that is difficult to recover from. As basic as this seems, it is amazing that many people don’t really seem to grasp this fact.

IMO, this is a big reason why I feel it is so important to cut your losses early on stock transactions. Trying to hang on and wait for a stock to “come back” often results in a loss that is difficult to recover from.

]]> By: Chris http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/comment-page-1/#comment-76567 Chris Mon, 30 Apr 2007 15:07:34 +0000 http://www.fivecentnickel.com/2007/04/30/playing-the-percentages-the-effect-of-gains-and-losses/#comment-76567 I often wondered this about commission-based broker fees also. If they charge you 1.5% of the balance when your portfolio is up 5% one year but still charge 1.5% when it is down 2% the next year, wouldn't your effective fee rate be higher than 1.5%? Or do they charge 1.5% of earnings? Or does it vary? I often wondered this about commission-based broker fees also. If they charge you 1.5% of the balance when your portfolio is up 5% one year but still charge 1.5% when it is down 2% the next year, wouldn’t your effective fee rate be higher than 1.5%?

Or do they charge 1.5% of earnings? Or does it vary?

]]>