All of us like success. and that too without any bouts of failure. We love to live with this idea that each day, each month takes us to new heights of success in career, health and wealth.
Sadly, that is not the natures’ design. It just doesn’t happen that way. Failure (or Draw-downs in the market context) is a integral part of the natures process. Failures instill a sense of reality (back) into us and many a times, it may be actually good to experience some. As the wise men have said there is no gain without any pain.
In context of the returns on momentum portfolios ( and other investing styles too) this theme is more than relevant. Enclosed a snapshot of a small cap oriented study that yields great returns over the years but one has to bear the turbulence on the way.
It is easy to see that about 40 percent of the time (months as per red marked) in the last 11 years, the strategy has stayed in a Draw-down mode (calculated as % drop from the recent peak). Yet, the overall the returns have been desirable.
The point of this blog-post is simply to drill home the fact that embracing Draw-downs is the only way to stay invested and be ready to bear the fruit when the tide turns. While the message is commonplace and simple, many a times even veterans would do well to brush up the investing basics when the tide is against them.
Have a great weekend!