Drawdowns
And how to deal with when lambo syndrome.
Drawdowns
And how to deal with when lambo syndrome
So I decided to write something about drawdowns because I feel that it is a timely subject to address this week.
Considering that the never-ending doom and gloom narrative is as pervasive as Disney’s ability to juice the shit out of the Marvel Cinematic Universe. I think it would be a good time to talk about it because I can sense that there are some folks who have never seen drawdowns before in their life.
So let’s go.
Fact.
I had a perfect record when it comes to drawdowns. Whenever the market heads down largely, my portfolio has drawdowns that are larger than whatever the S&P500 showcased.
The problem is not the drawdown. The problem is most people simply have a hard time understanding that investments are not a linear path towards the upside.
I still remember March a few months back. When Bitcoin hit a high of $64,000 and it had a hard crushing downslide all the way towards $28,000. The people who had hopes that “this time is different” had a major reality check that when a system is based on over-collateralization, drawdowns of 50-60% magnitudes are simply a result, not cause.
And that right there. This is the biggest difference between a successful investor and the ones who aren’t.
Successful investors simply expect drawdowns and accept the fact that drawdowns are part of the journey.
They accept the fact that market volatility is the norm and something which isn’t in their control. So they focus on what they can control.
The tenants of unsuccessful investors tend to fall into 2 broad categories.
Unsuccessful investors try to either 1. Predict drawdowns or 2. When Lambo Syndrome.
For folks belonging to category 1.
I have yet to see a single person who tries to predict a drawdown who actually acts when the drawdown occurs. I see it often. 2008. 2010. 2012. 2014. 2016. 2020. 2021. Every single time a drawdown occurs. They want to wait for the drawdown to get bigger. So they either completely stay in cash or bonds or they put 1% of their liquidity into an idea.
facepalm.
History never repeats but it rhymes. I have full faith that the same exact people who keep bitching and warning about a drawdown is coming will inevitably not pull the trigger when the drawdown occurs. I have seen this pattern repeat so many times, the storyline is as predictable as the Fast and Furious movies.
I see it amongst my peers when I was 20. I see it in my mid-20s. And I still see it in my 30s whenever I speak to new investors.
NEWSFLASH. YOU CANNOT PREDICT THE DRAWDOWN. DEAL WITH IT.
For folks belonging to category 2.
These folks enter positions expecting to earn a shit ton of money within a week. And in most cases, they do in the short term and thought they were right. But when reality sets in that investing requires time for a business or idea to work, emotions tend to take over and people wonder if their decisions were right.
So they often question themselves. The good thing about this is that at least these people have the balls to put money and act on their investments. The problem is that they think they have the god-given ability to predict that it’s going to moon the very next day.
Nahhhhhhhhh.
Put it this way. If anyone had such an ability. They wouldn’t be working for a living. Often, the problem with this category of people is that they got into a position without doing adequate homework. They invested in the idea just because some random guy on youtube or Instagram whisper a good idea. And they ape their entire net worth into the idea in hopes that it changes their fortunes overnight.
Facepalm
If it were that easy. No one would need to work.
Here’s what you need to do to overcome drawdowns.
First. The most important step you need to do is to first understand VERY CLEARLY WHY you got into that investment in the first place. My mantra is simple. If you cannot explain your investment clearly and simply to your Asian parents (achievement unlocked) then you need to seriously have not reached a point where you are able to say with certainty that you actually know what you are doing.
I don’t care what kind of high-tech shit the business or investment idea does.
A true hallmark of a person who understands his investment is that he is able to articulate very clearly and simply his investment idea such that even a 12-year-old can understand it.
I find over time that it simply does not matter how well I know SEC filings, balance sheets, or income statements. Because it’s easy to read all that stuff. What is difficult and tough is coming up with clear and simple articulation as to what the investment can do in the future.
“In the business world, the rearview mirror is always clearer than the windshield.” — Warren Buffett
Even a monkey can tell you how well a business has done in the last 10 years. What is tough and what you should be doing is focusing on the future - NEWSFLASH - people do not make money in the past. They make potential investment gains in the future.
And the final important thing to note on this is. IF THE FUNDAMENTALS CHANGE. CHANGE YOUR MIND.
Too much money has been lost on people who live in delusions.
Second. You need to be MENTALLY PREPARED that drawdowns WILL HAPPEN.
I find that people who tend to expect things to go up perpetually are just delusional. For one, nothing goes up forever without retracing.
I would like you to take a good close look at this graph I stole from my google search.
It might not be obvious. But on 17 Dec 1999, Amazon hit a high of $94.06.
On 28 September 2001, the share price fell to $5.97.
That was a drawdown of 93.65%.
Fucking hell. Even if I was the world’s greatest. Imagining such a drawdown on my investments would have been a tough experience for me to live through. You would have needed to be an insane person to have gone through that and still believed that the investment would work out.
And one person did just that.
And he’s now regularly amongst the world’s rich list.
His name is Jeff Bezos.
I quote Jeff Bezos on his experience,
“I said, ‘look, when the stock is up 30% in a month, don’t feel 30% smarter, because when it’s down 30% in a month, then you’re gonna have to feel 30% dumber, and it’s not gonna feel as good,’” Bezos recalled at the forum.
During the dot-com crash, Amazon had a “brutal year,” as Bezos said in his letter to shareholders in 2000. Shares were already down 80% from the previous year at the time he wrote the letter, but he still wrote that “the company is in a stronger position now than at any time in its past.”
“It was good that I laid that groundwork because, in the year 2000, the whole thing came tumbling down,” Bezos recalled at the forum. “The stock went down to $6″ in 2001.
Despite this drop, Bezos never doubted Amazon’s business model.
“I had all the internal metrics on how many customers we had and I could see,” he said at the forum. “People thought we were losing money.... I just knew it was a fixed-cost business, and as soon as we reached a sufficient scale, we would have a very good business.”
Knowing this concept, according to Bezos, was what kept him calm during the ups and downs.
“That understanding of the fixed nature of our expenses, relative to physical retail, is what led us to have the ‘get big fast’ strategy. We knew that our economics would be improved if we had sufficient scale,” he said.
If you want to know how a person does the best during a 95% market crash in his net worth. Take a read on Jeff Bezo’s 2002 shareholder letter.
Jeff just didn’t give a flying fuck about Wall Street. He just focused intensely on the business operations and executed to perfection when the rest of the idiots on Wall Street got absolutely fucked to death from all their leveraged margin positions.
And that. This is what I want you to take away from this article.
Anyone who thinks that making money on investing has honestly not understood that their wealth is due to luck. Not skill.
The true hallmark of an investor who has earned their wealth in the investment game is measured on the pure fact that when they add 1 zero to their net worth.
They feel absolutely NOTHING.
No hype.
No sense of genius.
No sense of glory.
Because a person who is READY to truly make money in investing does not see that multiplication as a WIN. It’s simply the result of all the hard work on STAYING INVESTED.
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