Drawdowns: A Key Feature of Big Winners

Drawdowns: A Key Feature of Big Winners. Excerpt:

A drawdown is how much a stock price declines from its peak before it recovers.

Drawdowns are part of the life of every investor. Invariably, if you own a stock for a long time, you are going to have to sit through several.

Ever since I wrote my book on 100 baggers (or stocks that return 100 to 1), I've been intrigued – some say obsessed! – with the stock price drops of even the best performing stocks. I like to look back at these winners and see the depth and duration of these drawdowns. It's always somewhat surprising – and instructive.

A few examples from the book, which was published in 2015:

• Apple from its IPO in 1980 through 2012 was a 225-bagger. But you had to sit through a peak-to-trough loss of 80% – twice! And there were several 40% drops.

• Netflix, which has been a 60-bagger since 2002, lost 25% of its value in a single day – four times! And there was a four-month stretch where it dropped 80 percent.

• And Berkshire Hathaway, the best performing stock in the study, was cut in half four times.

What I found affirmed what Peter Lynch once said: "The real key to making money in stocks is not to get scared out of them."

Indeed. Knowing this, I can be more circumspect about drops in my own stocks. As long as the underlying business continues to perform within a band of expectations, I am better off staying put.

Chris Mayer