Michael Mauboussin from Morgan Stanley published this paper that looks at drawdowns and recoveries from over 6,500 US listed companies from 1985 to 2024.
You can find the link here - https://www.morganstanley.com/im/publication/insights/articles/article_drawdownsandrecoveries_ltr.pdf
I think this will provide additional context (base rate) if you use the Drawdown Risk Report to analyse your portfolio.
Here are some of the key takeaways:
Drawdown:
- Median: 89%
- Average: 81%
Drawdown period:
- Median peak to trough: 2.5 years (same as the time from trough to previous highs) = 5 years full recovery
- Average peak to trough: 3.9 years (similar as the time from trough to previous highs) = 8 years full recovery
A close relationship between magnitude of the max drawdow, how long it takes a stock price to go from peak to trough, and from trough back to previous high.
- Stocks with large max drawdowns tend to have longer drawdown versus ones with small max drawdown.
- Drawdowns of 95-100 percent take 6.7 years on average. While those of 0-50 percent take only 1 year.
- For the stocks that get back to previous highs, the further they fall the longer it takes to get back to the prior peak: 8.0 years, on average, for the 95-100 percent cohort versus just 1.5 years for the 0-50 percent cohort.
Most never return to their previous highs
- About 54 percent of stocks never return to previous highs after hitting bottom.
- The further a stock falls from its peak, the lower its probability of ever again attaining its past apex.
- The majority of companies that have drawdowns of 80 percent or more never get back to par.
- Only about one in six stocks that decline 95-100 percent ever get back to their prior peak, while four in five in the 0-50 percent drawdown group do so.
The greater the max drawdown, the higher the bounce
- Those that have severe max drawdown also tend to experience greater percentage bounce.
- The median CAGR in TSR for the five and ten years following a stock’s trough is roughly 2x for the largest drawdown bin (95-100 percent) as it is for the smallest bin (0-50 percent).
- The question one should ask when trying to pick a stock that suffers severe drawdown are 1) Whether cyclical or secular factors induced the
drawdown 2) whether the basic unit of analysis is viable 3) how lumpy investments are, 4) the financial strength and staying power of the company 5) whether there is access to capital if need be, and 6) whether management is dealing
with the challenges head-on.
General notes
- Max drawdowns for individual stocks are much larger than those of diversified portfolios such as the S&P 500.
- A perfect foresight portfolio can still experience severe max drawdown.
- To produce great returns, you need to be able to stomach gut wrenching drawdown.