Meb Faber and John Bollinger - you spend 80-90% of the time in drawdown?

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arcticpineapplecorp.
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Meb Faber and John Bollinger - you spend 80-90% of the time in drawdown?

Post by arcticpineapplecorp. » Wed Feb 08, 2017 9:40 pm

Just listened to a Meb Faber podcast with guest John Bollinger. Around 35:43 minutes into the podcast it was roughly said (from http://mebfaber.com/2017/02/01/episode- ... nt-damage/)
This leads John to reference the trading concept of “regret” – the percentage of time you’re in a drawdown. Turns out it’s about 80% or 90% of the time you’re invested. The only times you’re not in a drawdown are when you’re setting new highs, and that’s pretty rare. But most investors hate drawdowns and just don’t do well with this reality (part of the reason why investing is so hard for most of us).
Bollinger said people think the amount of time you're in drawdown is 10-15% of the time, whereas in reality it's 80-90% of the time.

and then Meb stated (paraphrasing):
To be a good investor you have to be a good loser. There are only two states--new highs and drawdowns and there's nothing in between.
My question is this (while acknowledgeing maybe it's merely that I have a different definition of drawdown):
Just because the market reaches a new high (say Dow 20,000 for example forgetting for a moment that the Dow is not the market) and then falls the next day (say to 19,990), does that really put you in a drawdown period? Sure your portfolio value is no longer "as high" as it was the day before but is that really a drawdown?

I would think a drawdown would be if you bought stock (or a fund/etf, etc.) when the price per share is (for example) at $50 and then it falls below that. You would be in drawdown until the price got back to $50 a share.

But if you bought at $25 a share and years later it gets to $50 a share and then falls to $40 or $30, is that really a drawdown? Aren't you still positive (up from where you bought)?

Maybe I'm just equating drawdown with "loss" and that's not what's intended. Any input is appreciated. Thanks.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: Meb Faber and John Bollinger - you spend 80-90% of the time in drawdown?

Post by nisiprius » Wed Feb 08, 2017 9:53 pm

I'm not sure, but I wonder what time scale they are talking about. For example, if your portfolio is lower today than it was yesterday, are you in "a drawdown?"
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arcticpineapplecorp.
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Re: Meb Faber and John Bollinger - you spend 80-90% of the time in drawdown?

Post by arcticpineapplecorp. » Wed Feb 08, 2017 9:56 pm

yes, i believe that's what they were saying. Inother words, that UNTIL your investments reach a NEW high, then you are in drawdown. Meb said there's no in between. It's one or the other (new high or drawdown). I just think it's silly to look at it that way, but was wondering what others thought. Bollinger and Meb seemed to be in agreement. But then again, they are also both technical analysts.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: Meb Faber and John Bollinger - you spend 80-90% of the time in drawdown?

Post by JimInIllinois » Wed Feb 08, 2017 9:57 pm

arcticpineapplecorp. wrote:But if you bought at $25 a share and years later it gets to $50 a share and then falls to $40 or $30, is that really a drawdown? Aren't you still positive (up from where you bought)?

Maybe I'm just equating drawdown with "loss" and that's not what's intended. Any input is appreciated. Thanks.
Drawdown, which I have never even thought about until now, seems to be defined as the interval between record highs:
https://en.wikipedia.org/wiki/Drawdown_(economics)

So during drawdown there is a point in the past where you would have been better off selling, and you may regret not doing so.

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Re: Meb Faber and John Bollinger - you spend 80-90% of the time in drawdown?

Post by whodidntante » Wed Feb 08, 2017 11:25 pm

Contact Meb and ask. I don't know what he meant.

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Re: Meb Faber and John Bollinger - you spend 80-90% of the time in drawdown?

Post by AlohaJoe » Wed Feb 08, 2017 11:34 pm

arcticpineapplecorp. wrote:Maybe I'm just equating drawdown with "loss" and that's not what's intended. Any input is appreciated. Thanks.
Yep, you're equating things that are usually meant to be different things.

A capital loss is different than a drawdown for a couple of reasons:

Drawdowns are usually used when talking about the historical record of an index or an asset class. If you go to Portfolio Visualizer it will tell you the maximum drawdown for Vanguard's Total Market was -50.89%.

Your concept of capital loss requires knowing a precise time of purchase. Which can vary quite a lot depending on the actual person. Did you buy on January 15th or January 28th? That will make a difference.

The other reason is that behavioural finance has taught us that people aren't always perfectly rational calculating machines. You see it all the time here on Bogleheads when people talk about how they "lost" $20,000 or $50,000. People are almost never mean that relative to their purchase price; they mean it relative to a (somewhat) arbitrary point in time: since the beginning of the year or over the past 3 years or since the bear market started or something similar.

Drawdowns tell us about the wealth effect -- people feel richer when their asset values are higher (even if they're not actually tapping into those assets).

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