If 1 lac investment in shares rises by 50% (first year) and then drops by 50% (second year), what will be the return on investment?
Common answer: Zero
1 Lac. First year return +50%, second year return -50% average return 0%.
Correct answer is loss of 25%
1 Lac becomes 1.5 lacs with 50% rise.
1.5 Lacs becomes 75 Thousand with 50% fall.
Following is the picture to show why is it difficult to recover from losses.
Some investors hold stock even when it is down 90%, hoping that it will come back to their purchase price someday. They expect to get 900% return from company that is massively under performing.
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