Unfair Investment world

If I tell you that investing is all about roses and sunshine then I would be lying. This article will tell you how unfair investment world is.

Charlie munger, the second man whom I admire most after Warren buffet, once said that to be successful you just don't have to be stupid. They achieved this by sticking to their circle of competence.

The advice can be applied to the stock market investing. To be successful in investing, you need to avoid big losses. Risk management is important when you are putting your hard earned money at stake.

Let me put what I mean through numbers. Numbers won't lie and this truth has been hidden from most of the retail investors.

If you lose 10% of your investment, you need 11% of the returns just to breakeven(no loss, no gain).

And this keeps getting worse as the loss percentage increases. For 25% loss in your portfolio, your investments should return 33.33% to breakeven.

A 50% drop in your portfolio should provide 100% return to breakeven.

And this might be more surprising, loss of 80% portfolio gain should be equal to 500% to breakeven.

This is because we are calculating on the percentage terms. This requires starting and ending value of your portfolio.

If we invested 100rupees. And that amount becomes 110 or 90 rupees then the gain and loss percentage is 10 respectively.

Now to calculate the return percentage required to breakeven from loss. Our starting value will be 90 rupees. 10% increase will only be 9 rupees and add that to 90 you are still at a loss of 1 rupee. You need more than 10% profit to breakeven the loss of 10%.