Percent Returns and Witty Headlines [Post 28]

Stock performance over the past few years may look a bit like a rollercoaster for investors holding individual stocks. Big names such as Meta (Facebook), Disney, and Nvidia being among the names that experienced considerable volatility since COVID began.

Large fluctuations in stock prices viewed as percentages can be deceiving to the untrained eye and is frequently how the media cites returns in headlines.

Let’s look at an example and assume an investor, Seth, owns $1,000 of a hypothetical stock designated as “FAKE”.

In 2020, investor Seth speculated that FAKE stock was destined to change society and invested $1,000 in the company. FAKE stock then fell by 70% right after his purchase before reaching its lowest point during the COVID market crash.

No problem, he thinks… believing FAKE stock is the future, he chooses to hold onto it.

A few weeks later, Seth sees the following headline…

Upon checking his brokerage account, Seth expects to see gains well above his original investment since 100% is greater than 70% but is shocked to find only a $600 balance.

What happened?

Seth started with $1,000 in FAKE stock.

The stock fell 70%, making it worth $300.

The 100% return from its low wasn’t based on a $1,000 starting value… it was based on $300 doubling, resulting in the stock being worth $600 in the end. A total unrealized loss of $400 for Seth as of that day.

Individual stocks can experience large fluctuations in price since risks arise from factors specific to that company rather than the broad market. Understanding the actual impact of percentage gains and losses on investments can be tricky and is necessary to not to be misled by witty headlines.