Hi Mike. Do you only focus on a draw down % when you evaluate risk? I do not think that solely focusing on draw down % as a measure of ‘risk’ makes much sense.
IE:
System 1 has a total return of 25% over the past 6 months, with a maximum draw down of 25%.
System 2 has a total return of 150% over the past 6 months, with a maximum draw down of 40%.
Which system is better? Which system would a subscriber be currently happier in? Which system is ‘riskier’?
A System 1 subscriber started trading with $25,000, and now has $31,250 after his 6 months of trading the system.
A System 2 subscriber started with the same $25,000, and now has $62,500 after his 6 months of trading the system.
Is system 2 still the ‘riskier’ system? Is it only ‘risky’ because a subscriber is more likely to panic and sell the bottom after buying in at the top?
It seems a bit asinine to lump ‘risk’ into a neat category without accounting for ‘reward’. You see, without factoring in the reward, risk is as meaningless as the moon cycle with regard to investor profitability.
I assume everyone is on C2 to make money, period. The only way you fully experience the pain of a max draw down is to buy at the exact top, and then sell at the exact bottom. Even a room full of 50 retail investors would mathematically have a very low probability of accomplishing this feat.
To assume that a max draw down % is a stand alone measure of risk without considering many other factors is overly simplistic in my view.
Consider, at the launch of my fund with $25,000, the ‘low water mark’ for any investor was right north of $18,000 with the initial draw down I experienced. This is a rather painful 28% haircut, and likely tough for many of my initial investors to stomach. Everyone that stayed the course however, saw their equity value soar to $34,000 within 6 weeks time.
The next ‘low water marks’ you can see on my equity graph, are represented by pullbacks to $29,000 & $33,000. Never once did those pullbacks go below an investors original ‘buy in’ price.
I realize that my system is obviously more volatile than many could handle, and that putting all of one’s investable assets into any single strategy is obviously a dangerous game. My point is that any investor who has stuck with my system despite draw downs, has been well rewarded for their strong dispositions. The idea of C2 (in my opinion) is best suited for long term portfolio management that rivals a hedge fund’s returns, that is, truly beating the market indices, and allowing those investors who ‘hang in there’ to sit back, relax with a margarita in hand and cheers to ‘Draken ETF’ as they watch their initial investment increase 3X over 2 years time.
I do recommend anyone starting off in Draken scale into their ultimate size to minimize fluctuations, and to realize in order to destroy market returns by only trading stocks, there is a modicum of risk trade-off to finish up a year over 150%.
At the end of the day, I know my subscribers will be happy, and I will be happy making them money. There will always be some bumps along the road in this game, but keeping a level head and remaining logical with a game plan will keep us in the game long enough to reward all that are involved.
Thanks for your inquiry Mike, best of luck trading!
Draken