Drawdown

Drawdown, the way I define it, is the difference between the original amount invested in stock plus cash minus the liquidation value plus cash. My acceptable drawdown is 12-24%, the same as my return criteria. My average drawdown since inception has been 12.47%. My current drawdown is 21.68%.

For example, let's say my starting capital is $100,000 and I have have $80,000 invested in stock and $20,000 in cash. If the liquidation value is $56,000, the current account value would be $76,000 ($56,000 + $20,000) for a drawdown of $24,000 ($100,000 - $76,000) or 24%, and a loss of $24,000 ($100,000 - $76,000) or 24% of the starting capital.

Another example, let's say I started out with $100,000 and brought in $50,000 of income, so now I'd have an account value of $150,000. Now let's say $100,000 was invested in stock and $50,000 was in cash. If the liquidation value was $64,000 the current value would be $114,000 ($64,000 + $50,000), for a drawdown of $36,000 ($150,000 - $114,000) or 24%, but an actual gain of $14,000 ($114,000 - $100,000) or 14% of the starting capital.

My current account is more like the second example in that I've never been below my original starting capital. I run with a constant drawdown every month, but don't let it bother me. It's just part of the system. I hold positions for the long term and eventually exit at either breakeven or a profit, with an occassional loss, and over time my account has continued to go up in value.

Some people can't stomach drawdowns or watching their account balance loss value. I don't worry about it because I know that over time my method is profitable. I don't concern myself with short-term account balance fluctuations, since I have no intention of liquidating my account. This is money that I have committed for the long term and have other funds available for emergencies.