The Law of Parabolic Proportions is a foundational element to everything we do for our clients. Understanding this concept will greatly enhance an investor's ability to avoid catastrophic losses and capitalize on the long-term trend in the capital markets.
The Law is a two-sided coin. Side A states that the relationship between a percentage loss and the return required to recover from the loss is parabolic in nature. Conversely, side B states that there is a parabolic relationship between how inexpensive a stock is purchased versus the ultimate returns realized by the investor. Here is the data for Side A:
Percentage Loss
10%
20%
30%
40%
50%
60%
70%
80%
90%
Required gain to recover loss
11.0%
25.0%
42.8%
66.7%
100%
150%
233.3%
400.0%
900.0%
To better understand the inverse, let's assume a security is currently priced at $50 and will eventually reach $100. However, in the interim, it will decline in price offering the agile investor the opportunity to "buy lower".
Purchase Price
$50
$40
$30
$20
Return assuming a sales price of $100
100.0%
150.0%
233.3%
400.0%
By applying this law to our investment practice, we contend we have a substantial advantage compared to a traditional "buy-and-hold" or momentum trading strategy.