A 50% Loss Needs a 100% Gain: How to Write a Stock Sell Rule
A stock falls from $100 to $50. How far does it have to climb to get you back to $100? Not 50%. It has to rise 100%, because the gain is measured against a smaller base. That single asymmetry explains more damaged portfolios than any bad stock pick, and it is the reason I think every position deserves a written exit before the first share is bought.
My claim is narrow and, I think, defensible. Losses should be cut while the required recovery is still ordinary, somewhere around a 20% to 25% decline, and the decision about where to cut should be made in advance, on paper, when nothing is at stake. The rest of this piece shows the arithmetic, why it is not a rare event, what a sell rule should contain, and where such a rule fails.
The table nobody memorizes
The formula is short. If a stock loses a fraction L of its value, the gain needed to recover is 1 divided by (1 minus L), minus 1. Most people can repeat the 50% and 100% pair. Fewer have seen how fast the curve bends past that point.
| Loss from your cost | Gain needed to break even | Years to recover at 10% a year |
|---|---|---|
| 10% | 11% | 1.1 |
| 20% | 25% | 2.3 |
| 30% | 43% | 3.7 |
| 40% | 67% | 5.4 |
| 50% | 100% | 7.3 |
| 60% | 150% | 9.6 |
| 70% | 233% | 12.6 |
| 80% | 400% | 16.9 |
Look at the third column. A 10% annual return is a good long-run result for a stock portfolio, and at that pace a 50% loss takes more than seven years just to return to zero. A 30% loss takes under four. That difference is the practical case for acting earlier: the years are the real cost, not the percentage points.
Half off happens to good companies
Some readers will say that this only applies to bad companies, and that a solid business will always come back. Two things are wrong with that. First, a solid business coming back is not the same as your shares coming back to your cost. Second, large and well-regarded companies lose half their value more often than intuition suggests.
Calendar 2022 gave a clear example. In the growth-stock selloff that year, several household names lost roughly half or more of their share price over the twelve months, including Meta, Amazon, Netflix and Tesla. Those were companies with excellent products and enormous customer bases. Nothing was wrong with the businesses in the sense a lazy screen would catch. The price had simply assumed a future that rising interest rates made less valuable, and buyers at the top found themselves needing a double.
I am not saying those companies were bad buys at every price. The point is narrower. A good company bought at the wrong price, with no plan for what happens if the price is wrong, can still do serious damage to a portfolio, and the damage compounds because the recovery math is cruel. A recent example of a new listing dropping fast is in my piece on how to judge a post-IPO drop, where I lay out the questions I would ask before treating a slide as an opportunity.
Sizing comes before the sell price
A written sell rule only works if the position size is set with the rule in mind. Consider two hypothetical holders of the same stock. One puts 5% of a portfolio in it, the other 20%. If the stock falls 50%, the first holder has lost 2.5% of the portfolio and can shrug it off. The second has lost 10% and now needs the rest of the portfolio to gain about 11% to make up the difference, before counting anything the fallen stock does next.
That is why I like to start from the loss a holder can absorb and work backward to the size. If a 25% drop in one name is the most that should ever cost 1% of the portfolio, the position size is 4%. High-volatility stocks need smaller slots for the same reason; my note on sizing when beta is above 2 works through that arithmetic with a two-position example.
The four parts of a rule
Here is the structure I would use if I were writing a rule for a stock I expected to hold for a few years. It has four parts, and each one covers a failure the others miss.
The price rule is a number at which the stock gets sold if it closes below it, usually 20% to 25% under cost for a long-term position. Past 25%, the recovery math starts to bite, since the required gain climbs above 33%. A trader with a shorter horizon would use a much tighter number, and a very volatile stock needs a wider band or it will be shaken out by ordinary noise.
The thesis rule is the specific fact that would make the original idea wrong. Revenue growth falling below a stated level, gross margin declining two years in a row, or debt maturing without a refinancing plan would each qualify. If the fact shows up, the position is sold whatever the price is doing. This is the rule that covers the case where a stock has not fallen much yet but the reason for owning it has gone.
The time rule handles the stock that goes nowhere. If a holding has traded flat for a set period, say twelve to eighteen months, and the reason it was bought has not played out, it gets reviewed. Money tied up in a dead position is money that could have earned a return elsewhere, and that opportunity cost never shows up as a red number on a statement.
The size rule, as above, caps how much any one rule failure can cost.
Notice that the price rule and the thesis rule can disagree. A stock can fall 25% with the thesis intact, and a stock can hold its price while the thesis breaks. I would rather have both rules, and follow whichever triggers first, than rely on one.
Why put it on paper
Behavioral finance has a name for the reason a written rule beats a mental one: people weigh losses more heavily than equal gains and tend to hold losers hoping to get back to even. A stock down 30% feels different from the same stock at the moment of purchase, because the price you paid becomes an anchor. Nobody decides to hold a loser for seven years. They decide, one day at a time, that today is not the day to sell.
Writing the rule before purchase removes the daily decision. The note says the exit is $78, or that a margin decline is the trigger, and on a bad day the task is to read the note and not the news. Headlines on a falling stock are written to explain the fall in the most convincing way, and they will always seem to justify staying.
Where the rule breaks down
A sell rule costs something, and I want to be direct about that. It will sometimes sell a stock that then recovers. A price-based exit at 20% below cost guarantees some of those, especially in volatile names and in sharp market-wide drops that reverse within weeks. A rule that never cost anything would be too loose to protect anyone.
That is the honest trade. Every stop-loss has a false-positive rate, and every holder has to decide how many small losses they will accept in exchange for avoiding the rare large one. If the rule triggers often and most of those exits turn out to have been wrong, the band is probably too tight, and it can be widened. What should not happen is deleting the rule in the middle of a drawdown, which is exactly when it is doing its job.
There is also a real counter-case. In a market that falls broadly, a stop on every position can lock in losses at the lows, and a diversified buy-and-hold investor who never sells anything can come out ahead of one who follows exits mechanically. Index investors who hold through drawdowns have historically been rewarded over long periods. My view is that a written rule fits best for individual stocks where a specific company can fail, and matters less for a broad fund where the whole market would have to fail.
Three lines to write tonight
Before buying the next stock, write three lines and put them where you can see them: the price at which you sell, the fact that would make you wrong, and the number of months you are willing to wait. Add the position size as a fourth line if you can. It takes about two minutes.
My working threshold is simple. If a position has fallen 25% and I cannot write down, in one sentence, a reason to own it that is still true, I would sell. If I can write that sentence and the thesis is intact, I would hold, but I would not add until the price recovers above the exit level, because averaging down without a plan is how a 25% loss turns into a 50% one.
Analysis and opinion only, not investment advice. This is a general discussion of risk management and not a recommendation about any security. Figures come from my own arithmetic; the 2022 examples are approximate calendar-year price declines, checked on September 22, 2026. For background on investment risk, see the SEC and FINRA.