Let’s cut to the chase: if you can’t stomach big drawdowns, you shouldn’t be investing in stocks. As Michael Mauboussin and Dan Callahan put it in their latest Morgan Stanley report, Drawdowns and Recoveries, Charlie Munger’s take on this is brutally clear:
“I think it’s in the nature of long-term shareholding with the normal vicissitudes in worldly outcomes and in markets that the long-term holder has his quoted value of his stock go down by say 50 percent. In fact, you can argue that if you’re not willing to react with equanimity to a market price decline of 50 percent 2 or 3 times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you are going to get—compared to the people who do have the temperament who can be more philosophical about these market fluctuations.”
Ouch. But here’s the kicker: even the best investments suffer massive drawdowns. Mauboussin notes: “The partnership that Munger managed produced a compound annual growth rate of 19.8 percent from 1962 to 1975, but it suffered a 53.4 percent drawdown in the 2 years ended in 1974.”
The data is staggering. “The median drawdown was 85 percent and the time from peak to trough was 2.5 years.” And here’s the real gut punch: “About 54 percent of stocks never return to par after hitting bottom.” So, more than half of the stocks that crash never recover to their former highs.
But wait—there’s a twist. “The average recovery, at nearly 340 percent of par, is a lot higher than the median recovery because of the skewness in the data. This tells you that some stocks produced very high returns off of the bottom.” In other words, a few outliers skyrocket, pulling up the averages while most languish.
Mauboussin drives this home with a stark example: “Assume a stock peaked at $100 and draws down 77.5 percent… to $22.50. If the stock recovers to the median of that cohort, 122 percent of par, the stock would be up 5.4 times ($122 ÷ $22.50 = 5.4).” Sounds great, right? But here’s the catch: “The unrealistic assumption is the ability to buy at the bottom.”
Even the best stocks punish you. Take NVIDIA: “From January 4, 2002 to October 8, 2002, NVIDIA’s stock dropped 90 percent… The median time back to par for all companies is 2.5 years. NVIDIA shares fell more quickly and recovered more slowly than the median stock within the S&P.” Yet, long-term holders were rewarded—if they didn’t panic.
Contrast that with Foot Locker: “The stock had a maximum drawdown of 91 percent… It took 13.6 years… to return to par.” And even then, “In May 2025, Foot Locker agreed to be acquired… for $24.00 per share. That price is 30 percent of the stock’s all-time peak price.”
The lesson? “Trying to pick a bottom is a fool’s errand.” But if you’re going to try, Mauboussin offers a stark reminder: “The first step in the path to recovery is acknowledgement of the hurdles the business faces.”
So, can you handle the truth? Because as Mauboussin puts it: “Big drawdowns are a price to pay for superior long-term investment returns.” If you can’t take the heat, stay out of the market.
You can find the paper here:
Drawdowns and Recoveries – (Mauboussin, Callahan)
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