Drawdowns Are Not Defeat: What Smart Investors Do When Markets Turn Against Them

Author: Zion Zhao Real Estate | 88844623 | 狮家社小赵 | wa.me/6588844623

Author’s note and disclaimer: For general education and market literacy only. Not financial, investment, legal, accounting, or tax advice, and not an offer, solicitation, or recommendation. Information is general and may be inaccurate or change. No liability accepted. Investing involves risk, including loss of principal; past performance is not indicative of future results. 

When Portfolios Fall: The Disciplined Investor’s Playbook for Surviving Drawdowns

Drawdowns do not invalidate an investment process! I forgot how many times I have emphasized it over the years. They expose whether the process was ever real in the first place. That is the central insight of this essay, and it deserves to be stated plainly. Too many investors claim to want long-term compounding, yet what they actually want is long-term upside without interim pain. Markets do not offer that bargain. Morgan Stanley’s review of more than 6,500 U.S. stocks from 1985 to 2024 found a median maximum drawdown of 85 percent, with a median 2.5 years from peak to trough. Even elite wealth creators were not spared. The top six wealth-creating companies in the study had an average maximum drawdown of about 80 percent. In other words, volatility is not a sign that equity investing has failed. It is part of the admission price.

That is why investor psychology matters far more than most market commentary admits. Kahneman and Tversky’s prospect theory showed that losses are felt more intensely than equivalent gains, which helps explain why rational plans often collapse during falling markets. Barber and Odean then documented the practical consequence: individual investors who traded most actively earned annual returns of 11.4 percent, versus 17.9 percent for the market in their sample. The issue was not merely bad luck. It was behavioral self-sabotage. Investors buy after optimism has already been priced in, then sell when fear becomes unbearable. The market does not merely test intelligence. It tests emotional governance. (Massachusetts Institute of Technology)

This is also why drawdowns should not be confused with permanent impairment. A falling stock price is not, by itself, a verdict on business quality. Serious investors must separate cyclical pain from secular decay. Morgan Stanley is explicit on this point: all great stocks rebounded from bottoms, but not all rebounds come from great stocks. Bessembinder’s work sharpens the argument. Four out of every seven U.S. common stocks in the CRSP database underperformed one-month Treasury bills over their lifetimes, and the best-performing 4 percent of listed companies accounted for the net wealth creation of the entire U.S. market since 1926. That does not prove that “99 percent of stocks are uninvestable,” but it does prove that long-term market wealth creation is radically concentrated. Selling indiscriminately during drawdowns therefore risks cutting oneself off from the very minority of businesses that drive compounding.

The deeper mistake many investors make is believing that perfect foresight would eliminate pain. It would not. Wes Gray’s thought experiment is devastating precisely because it strips away excuses. In his hypothetical “God portfolio,” built with impossible look-ahead knowledge of future winners, the best long-only portfolio still suffered a worst drawdown of nearly 76 percent. Even perfection would have looked intolerable in real time. That is the real editorial lesson here. Many investors do not fail because they picked weak assets. They fail because they demand a smooth journey from an inherently jagged asset class.

Warren Buffett’s record reinforces the same truth. Berkshire Hathaway’s 2025 annual report shows a compounded annual gain in per-share market value of 19.7 percent from 1965 to 2025, versus 10.5 percent for the S&P 500 with dividends included. The overall gain over the full period was 6,099,294 percent, versus 46,061 percent for the index. That is one of the greatest compounding records in financial history, yet it did not come in a straight line. Nor did Buffett’s famous wager with Protégé Partners support the fantasy that sophisticated protection is always superior to disciplined simplicity. In Berkshire’s 2017 letter, the S&P 500 index fund posted a final gain of 125.8 percent, while the five funds-of-funds chosen by Protégé ranged from 2.8 percent to 87.7 percent. The conclusion is not that hedging is foolish. It is that risk reduction always has a cost, and that cost must be justified by a mandate, not by panic. (Berkshire Hathaway)

For investors staring at a red screen today, the practical conclusion is straightforward. Do not outsource judgment to price action. Re-underwrite the business. Review revenue durability, free cash flow, balance sheet resilience, competitive advantage, and management credibility. If the decline reflects short-term fear, valuation compression, or temporary earnings pressure, a drawdown may be an opportunity rather than a verdict. If the decline reflects structural deterioration, then patience is not discipline. It is denial. Historical context can help steady nerves, but it is not a substitute for analysis. First Trust’s long-run review of midterm election years found an average intra-year pullback of 16.7 percent, followed by an average 36.5 percent return one year after the low date. Useful context, yes. Mechanical forecast, no. Mature investing begins when we stop treating drawdowns as humiliation and start treating them as a test of process, temperament, and business judgment.

References

Barber, B. M., & Odean, T. (2000). Trading is hazardous to your wealth: The common stock investment performance of individual investors. The Journal of Finance, 55(2), 773 to 806. (SSRN)

Berkshire Hathaway Inc. (2018, February 24). 2017 annual letter to shareholders. (Berkshire Hathaway)

Berkshire Hathaway Inc. (2026, February 28). 2025 annual report. (Berkshire Hathaway)

Bessembinder, H. (2018). Do stocks outperform Treasury bills? Journal of Financial Economics, 129(3), 440 to 457. (ScienceDirect)

First Trust Portfolios. (2024, April 8). Midterm election client resource kit. (FT Portfolios)

Gray, W. (2016, February 2). Even God would get fired as an active investor. Alpha Architect. (Alpha Architect)

Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263 to 291. (Massachusetts Institute of Technology)

Mauboussin, M. J., & Callahan, D. (2025, May 21). Drawdowns and recoveries: Base rates for bottoms and bounces. Morgan Stanley Counterpoint Global Insights. (Morgan Stanley)

Market Drawdowns, Investor Discipline, and the Decisions That Shape Long Term Wealth

Drawdowns do not disprove an investment thesis. They test process, temperament, and analytical discipline. History shows exceptional businesses and investors endure severe interim declines before long term wealth creation emerges. The edge lies in separating volatility from permanent impairment, then acting with evidence, patience, and conviction under pressure.

In Singapore property, drawdowns are not just a stock market concept. They are a powerful reminder that every serious asset class moves through cycles, sentiment shifts, and periods of uncertainty. For buyers, this means the best opportunities often appear when confidence is weak, not when headlines are euphoric. For sellers, it reinforces the importance of pricing strategy, positioning, and timing rather than reacting emotionally to short term noise. For landlords and tenants, it highlights why rental decisions should be anchored in affordability, location quality, tenant profile, and long term sustainability instead of temporary market fear. For investors, it is a timely lesson in distinguishing between temporary volatility and permanent impairment, which is exactly how prudent property portfolio decisions should be made.

That is why working with the right real estate agent matters. In today’s environment, you do not just need someone who can open doors and process paperwork. You need someone who understands macroeconomics, market cycles, risk management, asset allocation, and how Singapore real estate fits into a broader wealth preservation and growth strategy. Whether you are buying, selling, renting, or investing, the real advantage comes from making calm, informed, evidence based decisions when others are distracted by emotion.

If you want clear strategy, disciplined analysis, and guidance tailored to your goals in Singapore property, engage my services. I help clients cut through noise, assess risk properly, and position their real estate decisions with confidence, clarity, and long term purpose.