No. of Recommendations: 5
Elan,

I can understand why someone would choose to ignore the Maximum Drawdown, but why would you consider it bad information if assessing a screen? It would seem to provide some real world information of how painful a screen can be.


Eric took the words right out of my mouth -
http://boards.fool.com/Message.asp?mid=17743901

To illustrate the point, I ran a little experiment with Excel's random number generator. I simulated 150 monthly returns of a screen with CAGR=42 and GSD=35. (The respective monthly average return is 3% and standard deviation is 10%). I then identified the maximum drawdown. I repeated the same exercise ten times. Here are the max drawdowns from each of the ten runs -
-48
-39
-35
-35
-58
-50
-31
-38
-37
-39

As you can see the numbers are all over the place. But they were sampled from identical distributions. The 'screen' with -31 is statistically identical to the one with -58. Their chances of reaching a particular 'max drawdown' in the future are identical.

Elan
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement