The Cost of Getting Even

It’s more and more commonplace to have a discussion with someone who must come to grips with what Dennis Gartman calls the “viciousness of percentages.” This is simply the average one needs to obtain to regain from a loss, “the cost of getting even.” Remember, a loss of -25% one year and a gain of +25% the next year does not get you back to even. Instead, this leaves someone a good bit behind “par” and the greater the loss, the greater the required return on capital to get back to even. Therefore, find below a chart that illustrates the average gains necessary to regain from a loss:

In summary, the lesson here is really quite simple: keep your losses to a minimum. In other words, what is your risk tolerance level and how long do you have to invest? Make sure these match up accordingly and don’t put too much at risk without the proper amount of time necessary to ride out short-term volatility in the market.