Misuse of percentages

Ves · 30 April 2013

waimate01 said:
Sure, sure. And if you started with $2k, and lost $2k, you'd have to be particularly wiley about how you deploy your remaining $0 to make that $2k you need to break even.

This isn't a question of philosophy; I'm afraid it's a question of numeracy. Sorry if that offends.

Often using extreme examples is helpful as it focusses the audience into realising a truth (total loss of capital, for instance), however, in this case the discussion is more nuanced and involves what lies in between the determinable outliers, not what resides at the extremes.

My own understanding of the question, obviously influenced by my own personal philosophy, and my only use for it in a practical sense (because I don't trade price action) is, "if a price moves from A to B, does that change the underlying value of the company?"

burglar · 30 April 2013

waimate01 said:
Sure, sure. And if you started with $2k, and lost $2k, you'd have to be particularly wiley about how you deploy your remaining $0 to make that $2k you need to break even.

This isn't a question of philosophy; I'm afraid it's a question of numeracy. Sorry if that offends.

That you disagree, does not offend me.

I may be wrong.
If you front me, I will respect you.

For me it was and is a question of separating the mathematics
of percentages from the philosophy of trading.
Obvious to me is, that forces which make it harder
or easier to regain your lost $2k have
nothing to do with the use or misuse of percentages.

A trader will say the forces are:
Supply & Demand or
Push & Pull
Volume
VSA
P&F

An investor would say:
They're now cheaper or
The price will oscillate towards true value.

I am not unaware of all that.

FlyingFox · 30 April 2013

Ves said:
Often using extreme examples is helpful as it focusses the audience into realising a truth (total loss of capital, for instance), however, in this case the discussion is more nuanced and involves what lies in between the determinable outliers, not what resides at the extremes.

My own understanding of the question, obviously influenced by my own personal philosophy, and my only use for it in a practical sense (because I don't trade price action) is, "if a price moves from A to B, does that change the underlying value of the company?"

Why are we making this more complicated than it needs to be? This thread should not be 4 pages long and the only reason I am replying to this is for the benefit of any beginners that may read this.

Please go back to the first post and read it carefully:

"If you lose 20% of your capital, you need a 25% increase to get back to where you started."

It is a matter of simple maths and a bit of English.

The assumption most made was that your exposure changed when you made a loss. If you are holding on to a stock that is fluctuating in price, then you have not made a loss. It is a paper loss. A profit or loss is made at the point of sale. Again if you buy the same stock or portfolio at the same price just after you sold them, for all intents and purposes you still have a paper loss/profit.

If we are following up to know, the rest of the arguments follow on in that percentages are relative and now you need to make 25%, a relative value, back from your reduced capital base.

We can have a philosophical discussion at this point about why the probability of a $1 stock to go to $2 is much lower than the probability of $10 stock to go to $11 but whether you want to agree with it or not, that is just the way it. It is the basis of most of financial modeling and has been showed to be a good model for the majority of stock price movements. Maybe that is the way our intrinsic value system works?

As for the case of the single stock fluctuating, we can discuss time series models, random walks and monte carlo methods but frankly it unnecessary for the answer to the question posed by the OP.

Julia · 30 April 2013

Julia said:
Such a simple, obvious point which seems to be lost amongst the spurious arguments to the contrary.

Ves said:
It is however, not full of spurious arguments, I think that comment was just plain rude.

white_goodman said:
that was clearly the intention

No, it was not either rude or my intention.

spu·ri·ous
Not being what it purports to be; false or fake: "spurious claims".
(of a line of reasoning) Apparently but not actually valid: "this spurious reasoning results in nonsense".

See Prawn's comment below:

prawn_86 said:
So is it easier to make 2k when you have 8k or when you have 100k?

If your original investment is $10,000 and you lose 20%, that's the end of that base.
You have to recalculate what you need to gain to make up what you have lost from the new base.
It's simple numeracy as has been pointed out by Waimate.

Nothing to do with your beloved value investing, Ves. Simple arithmetic.

Ves · 30 April 2013

So why does the original post have a chart if we are not talking about price fluctuations as opposed to realised losses?

Yes, most of you made one assumption. I made a different one. And apparently that means it must be a "spurious argument" or about "beloved value investing", what a pompous load of a crap.

FlyingFox · 30 April 2013

Ves said:
So why does the original post have a chart if we are not talking about price fluctuations as opposed to realised losses?

ok. See sinners post on Page 1 about stock price fluctuations and skewness of returns.

Julia · 30 April 2013

Ves said:
So why does the original post have a chart if we are not talking about price fluctuations as opposed to realised losses?

You would need to ask that question of the OP. Not those who have just responded to the simple numerical proposition.

Yes, most of you made one assumption.

So perhaps consider the view of the majority.

I made a different one. And apparently that means it must be a "spurious argument" or about "beloved value investing", what a pompous load of a crap.

I'm happy to withdraw the adjective of 'beloved', and acknowledge it was unnecessary, despite my inability to understand why you would attempt to turn a simple numerical proposition into a discussion about the value of a company.

burglar · 30 April 2013

Ves said:
So why does the original post have a chart if we are not talking about price fluctuations as opposed to realised losses? ...

Ohhh, I see what I have done now!!!

I forgot to ask if these losses have been crystallised .... or no!

Ves · 30 April 2013

Julia - the relevance of the basic maths seems to change in the situation of realised capital loss vs exposure still kept (especially when time frames change).

The danger with the second instance, and most likely your problem in understanding it, is the necessity of the investor use skill and judgement to come up with an arbitrary valuation and use it to gain an edge over the market in the long-term... despite the obvious disadvantage of facing the price falling below purchase price every now and then. That's to most a leap of faith, and possibly why I am in the minority in this instance.

I think it's an interesting dynamic (and in my opinion why it is hard to be both a technical investor and a fundamental investor in the same instance), and I don't need sinner's skewness study to tell me that it exists, if it didn't we wouldn't have people successfully exploiting both arbitrage of price action and fundamental value.

FlyingFox · 30 April 2013

Ves said:
Julia - the relevance of the basic maths seems to change in the situation of realised capital loss vs exposure still kept (especially when time frames change).

The danger with the second instance, and most likely your problem in understanding it, is the necessity of the investor use skill and judgement to come up with an arbitrary valuation and use it to gain an edge over the market in the long-term... despite the obvious disadvantage of facing the price falling below purchase price every now and then. That's to most a leap of faith, and possibly why I am in the minority in this instance.

I think it's an interesting dynamic (and in my opinion why it is hard to be both a technical investor and a fundamental investor in the same instance), and I don't need sinner's skewness study to tell me that it exists, if it didn't we wouldn't have people successfully exploiting both arbitrage of price action and fundamental value.

Therefore, since it looks like both scenarios have been answered, can we consider this closed?

Julia · 30 April 2013

FlyingFox said:
Therefore, since it looks like both scenarios have been answered, can we consider this closed?

Excellent idea. Given the title of the thread, it seemed like a simple numerical question to me. As a result I'm confused when someone starts talking about the value of a company which imo has nothing to do with the original proposition.
If I've added unnecessary heat to the argument I humbly withdraw any remarks which have upset anyone.

Ves · 30 April 2013

FlyingFox said:
Therefore, since it looks like both scenarios have been answered, can we consider this closed?

Whilst we personally may not need to say anything in this instance.... my experience in life suggests that this topic of discussion will never be closed. It's a revolving door, and like everything else, there is always time for new wisdom. The point, mostly, is that there is always different ways of looking at things, and sometimes someone new will surprise everyone. And that's why sometimes, it's nice, to disgress away from what is considered to be "normal" or "majority" every once in a while.

Then again, I'm happy for you to call me weird.

craft · 30 April 2013

burglar said:
Ohhh, I see what I have done now!!!

I forgot to ask if these losses have been crystallised .... or no!

Burglar

Have the losses been crystallised?

Is the chart attached to your post relevant to your point?

FlyingFox · 30 April 2013

Ves said:
Whilst we personally may not need to say anything in this instance.... my experience in life suggests that this topic of discussion will never be closed. It's a revolving door, and like everything else, there is always time for new wisdom. The point, mostly, is that there is always different ways of looking at things, and sometimes someone new will surprise everyone. And that's why sometimes, it's nice, to disgress away from what is considered to be "normal" or "majority" every once in a while.

Then again, I'm happy for you to call me weird.

I don't think the issues you raised about the value of a company or the mathematics behind time series computations and skewness of returns are weird or a topic not worthy of discussions. whether returns are skewed or even if the normal distribution is the right model or maths vs guts; all useful.

burglar said:
If you lose 20% of your capital, you need a 25% increase to get back to where you started.

and

burglar said:
My ADN Adelaide Resources shares rose 187% in the first hour of trade.

This percentage is based on yesterday's Last Price.

I did not buy them yesterday at this price.
The percentage (whilst valid) is useless to me.

This is my calculation of "Return on Seed Capital":
($0.135/$0.265-1)*100=-49.06%

being refereed to as misuse of percentages in the beginners lounge is a recipe for confusion for beginners.

BTW burglar, if you say stock A went up by 25% today, it is generally assumed that it was against yesterdays closing price. There is a generally accepted implicit convention to what the percentage is relative to (yesterdays price because you said today) or it is explicitly given like in your return on capital.

burglar · 30 April 2013

craft said:
Burglar

Have the losses been crystallised?

Is the chart attached to your post relevant to your point?

Who's losses are we talking about?

Half of my net accumulated losses have been crystallised.

burglar · 30 April 2013

FlyingFox said:
... BTW burglar, if you say stock A went up by 25% today, it is generally assumed that it was against yesterdays closing price. There is a generally accepted implicit convention to what the percentage is relative to (yesterdays price because you said today) or it is explicitly given like in your return on capital.

Understood!

burglar · 1 May 2013

craft said:
... Is the chart attached to your post relevant to your point?

Yes.

It visually demonstrates how the Share Price rises as easily as it falls!
It rises 100% as easily as it drops 50%.

craft · 1 May 2013

craft said:
Burglar

Have the losses been crystallised?

Is the chart attached to your post relevant to your point?

burglar said:
Yes.

It visually demonstrates how the Share Price rises as easily as it falls!
It rises 100% as easily as it drops 50%.

Ok - so this is the 20% Margin = 25% mark up argument – to say there is a difference because of the differing size of the percentage is a misuse of percentages.

Some have presumed this is what you were referring too.

burglar said:
Who's losses are we talking about?

Half of my net accumulated losses have been crystallised.

I was asking in relation to the original post, the basis of this thread.

If you are applying this to a situation where the base has been reset by buying and selling OR the underlying exposure has changed because of a change in the real circumstances and value of the underlying asset the other side of the argument applies, best described in this thread by Lone Wolf.

This thread would have to be the most confusing on percentages I have ever seen - But compelling on human nature and how people make assumptions in the absence of explicit information to support their predetermined views.

white_goodman · 1 May 2013

burglar said:
Yes.

It visually demonstrates how the Share Price rises as easily as it falls!
It rises 100% as easily as it drops 50%.

no it really doesn't..

FlyingFox · 1 May 2013

white_goodman said:
no it really doesn't..

That is for another thread ...

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