By Dinesh Kumar · Adapted from my session “Framework for Consistent Wealth Creation” at an investor meet
Every investor plans for returns. Almost nobody plans for losses. Yet the arithmetic of losing money is the single most important maths in wealth creation — because it is brutally asymmetric.
The recovery table
Lose 10%, and you need 11.1% to get back to even. Manageable. But watch what happens as the hole gets deeper:
| Drawdown | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
| 70% | 233% |
| 90% | 900% |
A 50% drawdown doesn’t need a 50% rally to repair it. It needs a 100% rally — a doubling of your remaining capital. At 90% down, you need a ten-bagger just to reach where you started.
Drawdowns cost time, not just money
Here is the part that truly changed how I trade: even at a healthy compounding rate of ~30% a year, a 25% drawdown takes roughly a year to recover. A 50% drawdown takes close to three years. Those are years in which your money worked hard just to return to zero progress.
This is why every system I build puts risk before reward. A deep drawdown does not only cost money — it costs the years that capital would otherwise have spent compounding, and those years are the part you can never earn back.
What to do about it
You cannot avoid drawdowns entirely — anyone who promises that is not being honest. The goal is to avoid the drawdowns you cannot recover from. In practice that means: define your worst-case loss before entering any position, not after. Cap the risk on any single day or trade to a small percentage of capital (1–2% is a widely used discipline). Diversify across strategies and asset classes so one bad idea cannot sink the ship. And respect the maths above every time you feel like “averaging down just this once.”
As I told the audience at the session: you can’t compound if you’re always trying to recover. Take care of the downside, and the upside will take care of itself.
This article is for education only and is not investment advice or a recommendation. Investments in securities markets are subject to market risks. Read all related documents carefully before investing.