Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
The cruel truth of big losses
The COVID-19 share market collapse of 2020, referred to as the Coronavirus Crash, was a sudden global stock market crash that began on 21 February 2020 and ended on 20 March 2020. It was one of the largest stock market crashes in history. In the space of just four days, the Dow Jones Industrial Average tumbled 6,400 points, or roughly 26 per cent. The S&P/ASX 200 Index fell from an all time high of 7,139 points to 4,816 points. That’s a 2,322 point fall (or 33 per cent) from top to bottom.
Some of the largest constituents of the ASX fell quite significantly in the Coronavirus Crash. Companies in the aviation, real estate, shopping centres and airport sectors were directly affected by COVID-19 and saw some of the largest plunges. For example Unibail-Rodamco-Westfield (ASX: URW) fell from $10.12 all the way down to $2.43: that’s a 76 per cent fall, top to bottom.
With the Reddit-GameStop fiasco still fresh in our minds and the likelihood that increasing retail investor trading will see heightened levels of volatility, I thought it worthwhile taking a look at the downside risks in markets.
With URW in mind, the big question is, what percentage is required to make back the $7.69 that was lost?
Many people instinctively say 76 per cent, but that’s wrong. If a stock’s price starts at $10 and loses 50 per cent or half, it is now $5. From there gaining another 50 per cent (or $2.50) would put it only back up to $7.50. To get back to $10, the stock would have to gain 100 per cent, twice as much as it lost in percentage terms.
So, for URW at $2.43 to get back to $10.12 it will need its share price to rise by 316.7 per cent – which is now a mammoth task. The price at the time of writing is $4.26.
Looking at the table above, recouping losses always requires a larger percentage gain than the loss itself. But the gap becomes larger after the losses push past 20 per cent. A stock that falls 25 per cent requires a 33 per cent gain to get back to its original position. A 50 per cent fall requires a 100 per cent gain, and 75 per cent fall requires a near 300 per cent quadrupling.
This is why some investors choose to incorporate stop-loss orders in their investment strategy. This is an order placed with your broker, or simply a level at which you can sell a specific stock once the stock reaches a certain price. This limits your loss on a share position. For example, setting a stop-loss order from anywhere between 10 per cent-20 per cent below the cost price is an effective way of managing risk. That way, if the stock drops by 15 per cent, to regain amounts lost you will only need to gain 17.65 per cent. That’s a lot better than watching a stock fall by 75 per cent and then realising it will take a 300 per cent rise to return to “normal.”
No stop-loss is perfect, however, which was shown in 2020 when some high-quality companies were moving by as much as 10 per cent-15 per cent in a single session. In some cases you could be “stopped- out” of a high-quality company immediately before a staggering rally. So as always, discretion is required.
