This week the energy sector of the S&P 500 stock index reached price levels last seen 20 years ago.
These are not little companies, but big, blue chip, household names that have fallen, in some cases, 90% from their peaks!
They are a cautionary tale that embodies the expression, “Don’t try to catch a falling knife!”
You can think about a 90% drop like this. At one point, the stock had fallen 50% and you have thought that was a great time to buy.
After buying down 50%, the stock fell another 50% for a total peak-to-trough decline of 75%.
If you liked it down 50%, you love it down 75%, so you double down and buy more.
From there, the stock falls another 60% to land at its total decline of 90%.