Is 30% rise in price equivalent to 30% drop--Miat

Price movementquizz: Is 30% rise in price equivalent to 30% drop

 

This is a simple question. But don't underestimate theunderstanding of this question. A lot of people may not totally understand it.What do you think? Is it equivalent or not? If not, is the rise of 30% more inseverity than the fall in 30%? 

 

 (1+0.3)*(1-03)=0.91

Generally speaking, the same percentage drop is more severeto cause you damage than the rise because the drop will wipe out all thecompound growth of past years.

 

 

Let's say 2 years ago, you bought the house at 1. Yourdownpayment is 10%, that's 0.1. One year later, it rises to 1.9. Another oneyear it drops 90%, 1.9 * (1 - 0.9) = 0.19. At the end of the drop, your houseof original value of 1 becomes value of 0.19. Now the trouble is bank will haveto foreclose on you because all bank's money is gone. Your original downpaymentof 0.1 is not enough to pay for the bank's loss. So, it's also gone. You end upbankrupt and with nothing left.

Leverage may worsen the situation in real estate.

 

Thinking of how Shanghaimay drop 40-50% and how it would devastate the market over there. I thought ofthis +30% vs. -30% brain exercise. We must be very clear that when in marketcollapse, the same percentage may have different meaning when in rising years.A simple -30% drop could wipe out 2, 3 or even 4 years of total gain in oneshot. The bigger the one year drop percentage, the bigger the damage. I don'tthink I personally ever had this kind of mental exercise, but it also enforcedsome simple risk management concept.

More importantly, we will understand how much damage it had caused to peoplewho didn't survive 2001 stock market crash. If one didn't exit the market atthat time, all 4-5 years of total gain was wiped out in one year.

The point is not to depress anyone, but to set our expectation correctly, thenwe can better see the market, see the world and control the risks.