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Big Drawdowns Are Part Of The Game


People desperately want to make money in the stock market with little or no risk. Unfortunately this is just not possible. If you want big returns, you need to be prepared for big drawdowns along the way. For example, Warren Buffett’s Berkshire Hathaway lost over 50% from June 1998 to March 2000.  

Pension Partners published an excellent study about relation between big winners and big drawdowns.

 

Big Winners And Big Drawdowns

By Charles Bilello of Pension Partners

 

Apple, Amazon, Microsoft and Alphabet…

  • All among the largest and most revered companies in the world.
  • All have returned unfathomable amounts to their shareholders.
  • All have experienced periods of tremendous adversity with large drawdowns.

When thinking about big winners in the stock market, adversity and large drawdowns probably aren’t the first words that come to mind. We tend to put the final outcome (big long-term gains) on a pedestal and ignore the grit and moxie required to achieve that outcome.

 

But moxie is the key to long-term investing success, for there is no such thing as a big long-term winner without enduring a big drawdown along the way…

 

Apple has gained 25,217% since its IPO in 1980, an annualized return of 17%.

 

big1

 

Incredible gains, but these are just numbers, masking the immense pain one would have endured over time. Apple investors from the IPO would experience two separate 82% drawdowns, one from 1991 to 1997 and another from 2000 to 2003.

big2

 

Amazon has gained 38,882% from its IPO in 1997, an annualized return of over 36%. To put that in perspective, a $100,000 investment in 1997 would be worth just under $39 million today.

 

big3

Breathtaking gains, but they were not realized without significant adversity. In December 1999, the initial $100,000 investment would have grown to $5.4 million. By September 2001, less than 2 years later, this $5.4 million would shrink down to $304,000, a 94% drawdown. It took over 8 years, until October 2009, for Amazon to finally recover from this drawdown to move to new highs.

 

big4

 

Bill Gates is the richest man in the world, having amassed his $80 billion fortune as the founder of Microsoft. Microsoft has returned 25% a year over the past 30 years, a remarkable feat. 

 

big5

 

The path to riches in Microsoft looks deceptively easy on the surface. The calendar year returns from its IPO in 1986 through 1999 were incredibly high and consistent, masking significant underlying volatility. In 1987 Microsoft advanced 123% but would suffer more than 50% decline in October during the stock market crash. It would not recoup those losses for two years, until October 1989. Its largest drawdown in history occurred over a 10 year period, a 70% decline from 1999 through 2009.

big6

 

Alphabet (formerly Google) has been one of the great growth stories in recent history, returning 26% per year since its IPO in 2004.

 

big7

 

It did not achieve these returns, though, in a straight line. Its largest drawdown: a 65% decline from 2007 through 2008.

big8

It should be clear from these four examples that large drawdowns are an inevitable part of achieving high returns. If you haven’t yet experienced such a gut-wrenching decline, then you probably haven’t owned something that has appreciated 10x, 20x or more. Or you simply haven’t been investing for that long.

 

I know what you’re thinking. There has to be a better way. You want that big juicy return but without the big drawdown. Yes indeed, as does everyone else. 

 

The problem, of course, is in trying to hedge or time your exposure to big winners, you will likely miss out on a substantial portion of the gains. Or your emotions will cause you to sell at precisely the worst time (after a large drawdown). Your volatility and drawdown profile may be lower, but that tradeoff will come at a price. As I wrote earlier this year the price for hedge fund investors seeking lower volatility/drawdown in equities has not been a small one, with the HFRX Equity Hedge Index (an investable index of Long/Short equity funds) posting a negative return since 2005 while the S&P 500 has more than doubled.

 

Many investors in these funds were seeking the Holy Grail, a high return (often 15-20% in their “mandates”) with little risk (no large drawdowns). They expected their managers to pick the Apples and Amazons of the investment world without incurring the inherent volatility that comes along with it. As we know, that is a complete and utter fantasy.

 

All big winners have big drawdowns. Accepting this fact can go a long way toward controlling your emotions during periods of adversity and becoming a better investor.

 

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Kim - this is random but this is the best way I could find to quickly let you know that Dan Zanger has another person who has recently been using his twitter account. The evidence is in an early August exchange - think it is August 12 - where he is challenged and he reveals it is not Dan Zanger tweeting but "his protégé." This person's style of bragging and salesmanship is a shame as it reflects poorly on the real Dan Zanger.  I figure if you did not know this you should be made aware as I saw a recent interaction you were having with him a week or so ago.  That said - I would encourage you to challenge him again and more or less force him to say straightforward that he is not the real Dan Zanger.  A lot of people in the trading world are getting pretty peeved at the stuff coming out of Zanger's twitter feed.

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That's interesting. But if the real Dan lets "his protégé" to tweet and doesn't stop him, that means he is basically endorsing this style of shameless promotion. 

But my issue with his service was not his tweeting - it's the fact that he does not post a full track record, but only "top picks", and those top picks are based on the high value of the stock, without him giving a specific signal when to exit. Is anyone really able consistently to sell at the top, or even close? And no mentioning of the losers whatsoever.

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I  can't disagree with anything you say.  I do not subscribe and would not subscribe to any of Zanger's services but I have followed his tweet feed for years and years because he definitely mentions fast-moving momentum stocks early in their moves and before other people.  Of course - as you said - he picks the winners and those moving well to mention in his twitter feed.  About 2 or 3 months ago I noticed a distinct change in the types of tweets he was sending and the fact there were many more tweets pushing his service and way too many mentions of his winners ad nauseam.  For example - Zanger did in fact mention ACIA in the 30's to buy it as well as REN in the 8's.  Okay - that's great - to his credit he has been picking winners for years - that's why I follow his stream.  The difference now is - whereas months ago Zanger might have mentioned these winners every now and then - the "new Zanger" has mentioned them hundreds of times in the past month to the point of ridiculousness.  I also -as you mentioned - don't understand why Zanger would let this guy - his chat moderator - tweet the way he does if he didn't implicitly approve of his tweeting style.  One explanation might be that Zanger is in bad health with a bad back and so he let this guy have free reign and doesn't have time to check it or care.  It is my understanding that Zanger did not hold a seminar this year because of his health - specifically, a very bad back.

 

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Here is the problem: when you throw dozens of trading ideas, obviously some of them are going to perform well. But when you don't see all picks, you don't really know how good he is overall. IF he is so good as he says, why he publishes only "top picks" and not full track record? To me it's a huge red flag.

 

Also for someone who claims to make $42M, why he needs to sell a service for $99 per month? Especially considering his health issues that you mentioned?

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Of course - he might answer by saying - how come Michael Jordan didn't just play for free after 3 years since he had enough money for the remainder of his life?  Of course - because he wanted to collect money for his abilities and he loved the game. That said - I agree with you that Zanger is among those traders who throws out a bunch of picks and then brags about those that stick. As I don't subsribe - I don't see the ones that don't stick - only those that he mentions on twitter that are doing well.  On another note - when I saw you interact with him I took interest because I respect your workable steady method and I remember years ago when you called out a number of options traders on Seeking Alpha - one in particular - I can't remember his name -  for following and recommending incredible risky options strategies thar more or less could leave someone in the poor house if they followed the strategies.

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Yep. The guy you mentioned charges 10k for one week of mentoring, and GUARANTEES that you will make money following his methods. If I followed the marketing tricks of those charlatans who tell people how easy it is to trade options and double your account every month, I would be much richer today. But I cannot break my principles.  

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I guess it boils down to the fact I am extremely disappointed with what Zanger's twitter has become and the fact he is coming across more or less as somewhat of a fraud with this new guy tweeting and bragging about his winners again and again and saying odd things. He definitely has instance after instance where he has identified strong movers and played them very well. He rode FB very well - loading big after its summer earnings report in 2013 in the 30's, clearly sold a whole bunch in the 50's a few months later, and then added more later and sold later on in the 70's. He did the same method with BABA during its big run from the 80's to the 120's, SHAK during its run, FIT during its run in the spring and summer of 2015, and many others.  Most recently - ACIA.  When GOOGL IPO'd, he more or less played it to perfection once it started to take off - similar to the FB example.  The guy does have a great method that he uses with momentum stocks and recent IPO's - it is just a shame that the person who is tweeting for him is making him look like a man who is a bragging salesman who is selling a pie in the sky service. 

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The question is: does he tell members when to buy and sell in real time? Or it's all hindsight? Again, he might just throw bunch of ideas - and some of them, including those that you mentioned, stick, and become his flagship ideas.

Like this guy Bob Prechter from ElliottWave who made himself a pretty good name by correctly forecasting the 2008 market crash. What most people don't remember is the fact that Prechter's newsletter had been almost uninterruptedly bearish for the nearly two decades prior to 2008 -- and, as a result, according to the Hulbert Financial Digest, was near the bottom of the rankings for market timing performance over those two decades. 

To me, unless a service tells members exactly which stock to buy and sell and when and records those signals, then publishes ALL of them, it's very hard to know the real performance of the service. 

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