You have probably heard about some stocks that have been on a tear this year. Nvidia, Meta, basically tangentially related to AI… And then there is a little company called Carvana. They build those futuristic glass towers near the interstate and sell cars out of them. “Vehicle vending machines” they’re called. Cute. Their stock price is up 900% this year.[i]
Before I share a short story about Carvana, a quick note on math. I know you’re not here for a math lesson, but people get hung up calculating relative change. It is one of those things where the intuitive answer your brain wants to tell you is wrong. It can have very nasty ramifications for investors. It is better to learn this lesson in a blog post than in your investment portfolio. Relative change:
If your portfolio loses 20%, by what percentage must it increase to return to its previous value?
20%, right?
Wrong.
If you have a $100K portfolio, a 20% decline brings your portfolio value to $80K. Not fun.
A 20% return from there is nice, but it won’t get you back to $100K. 20% return on $80K is $16K, which gets you to $96K. Better than $80K, but still a 4% loss from your original $100K.
So you have a (seemingly) strange scenario where you lost 20%, then made 20%, and are still 4% down. That’s how relative change works.
To return to $100K after that 20% loss, you’ll need a return of 25%. A 25% return on $80K is $20K, bringing your portfolio back to its original $100K.
Back to Carvana. It was one of those “pandemic stocks” that caught fire in 2020 and 2021. I guess people thought car salesmen were old news. Why buy from a person when you can buy from a vending machine? I suppose?
Carvana hit a pandemic low of $29.35/share on March 20, 2020, a nasty 73% decline in about 30 days.[ii]
From there, Carvana stock went on an absolute tear during the pandemic stock melt-up of 2020 – 2021, hitting an all-time high of $370.10 on August 10, 2021. An impressive return of ~1,160% from the pandemic lows.[iii]
I wonder how many people bought Carvana late in that cycle. Certainly more than a few. 2021 was the year of pandemic/meme stocks, crypto, NFTs, SPACs, triple levered ETFs… diversified portfolios were boring. 1,000% returns tend to attract investors... Unfortunate. Carvana’s stock price closed at $3.72/share on December 27, 2022. A drawdown of 98.99% in less than 1.5 years.[iv]
In dollar terms, $100,000 invested in Carvana at the high in August of 2021 was worth a paltry $1,010 16 months later. Brutal.
But there is good news for Carvana shareholders. Since December 27, 2022, Carvana stock is up 902%.[v] Nearly quadruple digit returns in just under seven months!
Back to bad news, even after the 902% runup this year, Carvana stock remains down 90% from August 2021.[vi]
That’s the thing about being down 99%. You can enjoy a 900% runup and still be down 90%.
Relative change. Better learned in a blog post than in your portfolio.
Sean Cawley, CFP®
Neither asset allocation nor diversification guarantee against investment loss. All investments and investment strategies involve risk, including loss of principal.
Content here is for illustrative and educational purposes only. It is not legal, tax, or individualized financial advice; nor is it a recommendation to buy, sell, or hold any specific security, or engage in any specific trading strategy. Results will vary. Past performance is no indication of future results or success. Market conditions change continuously.
This commentary reflects the personal opinions, viewpoints, and analyses of Resolute Wealth Management. It does not necessarily represent those of RFG Advisory, clients, or employees. This commentary should be regarded as a description of advisory services provided by Resolute Wealth Management or RFG Advisory, or performance returns of any client. The views reflected in the commentary are subject to change a
[i] YCharts, CVNA Price Fundamental Chart, 12/27/2022 – 7/17/2023
[ii] YCharts, CVNA Price Fundamental Chart, 02/21/2020 – 03/20/2020.
[iii] YCharts, CVNA Price Total Return Fundamental Chart, 03/20/2020 - 8/10/2021.
[iv] YCharts, CVNA Price Total Return Fundamental Chart, 08/10/2021 – 12/27/2022.
[v] YCharts, CVNA Price Total Return Fundamental Chart, 12/27/2022 – 07/17/2023.
[vi] YCharts, CVNA Price Change Chart, 08/10/2021 – 07/17/2023.
