A Personal Finance Lesson From Facebook’s Bad Day

Your biggest drawdown is always in front of you (which I’m pretty sure I’m stealing from Meb Faber).

20% losses are normal and even expected. Granted, not usually on one day, but certainly over weeks or months when it comes to stocks and even stock portfolios.

A key concept to know here is relative vs. absolute.

It may help to remember it like this: size matters.

Imagine you weigh 100lbs. If you lose 10lbs, that’s your absolute weight loss. Your relative weight loss is 10%.

Now, if we supersize you to 300lbs, the same relative 10% loss becomes an absolute 30lbs loss.

The bigger you get, even if the percentage fluctuations are the same, the bigger the absolute weight loss will be.

The same is true for companies, markets, and our portfolios: the bigger they get on an absolute basis, the bigger the normal relative losses will become.

When Facebook first went public they had a near-record setting valuation of just over $100 billion. Now they’ve lost more than that absolute amount in a single day. 2 day’s in history, 2 very different interpretations of a similar number.

And yes, $100 billion is a big absolute number, but relatively speaking – it’s not that big of a deal.

If the relative numbers keep going up, the biggest absolute drawdown will be in front of you.