May

27

Drawdowns and Recoveries: Base Rates for Bottoms and Bounces
Michael J. Mauboussin
Dan Callahan, CFA

Long-term wealth creation for companies is also heavily skewed.
Hendrik Bessembinder, a professor of finance at Arizona State
University, studied the roughly 28,600 public companies that have been
listed in the U.S. from 1926 to 2024. Key to his definition of wealth
creation is that a stock produce returns in excess of one-month
Treasury bills.

His data show that just under 60 percent of the sample failed to match
the returns of Treasury bills, destroying $10.1 trillion in value
through December 2024. The other 40 percent or so created $89.5
trillion in value. Just 2 percent of the companies produced 90 percent
of the aggregate wealth creation of $79.4 trillion, and the top 6
(Apple, Microsoft, NVIDIA, Alphabet, Amazon, and ExxonMobil) alone
added $17.1 trillion.

Had you been astute enough to buy and hold any of these super wealth
creators you would have suffered meaningful drawdowns. For example,
the lifetime wealth creation of Amazon, a technology company known for
e-commerce and cloud computing, was $2.1 trillion from its initial
public offering in 1997 to year-end 2024. Yet Amazon shares dropped 95
percent from December 1999 to October 2001. The average maximum
drawdown for the stocks of the top 6 companies was 80.3 percent,
similar to the average of the full sample.

Asindu Drileba responds:

This is fairly consistent with the findings of Robert J Frey (former Managing Director of Rentech). He gave a talk titled 180 years of Market Drawdowns. The main point of the talk is that since the 1830s to present, the structure of the market has changed a lot.

- Different political regimes
- Different sets of stocks
- The creation of a central bank (in 1913)
- The advent of electronic trading
- The rise of high frequency trading
- The creation of the SEC (1934)
- Many new regulations
- Different people trading the markets in those 180 years.

But one thing has remained constant in those 180 years: The S&P is in a drawdown 75% of the time. He defines draw downs as a period between the decline from an all time high [where somebody bought] to the point that they break even. So psychologically speaking, 75% of the time, [some] investors in the S&P are in a state of regret. I am thinking that if you can find a way of trading this, the edge will probably last forever.


Comments

Name

Email

Website

Speak your mind

Archives

Resources & Links

Search