Reading a drawdown without letting it steer you

"When they get fearful, it happens all at once — when people get scared, they all want to leave at the same time."

When they get fearful, it happens all at once — when people get scared, they all want to leave at the same time.

A drawdown tells you how far a stock has fallen from its recent high, but on its own it doesn't tell you whether it's worth buying or staying away: you need the context of what's happened, historically, in similar cases.

A drawdown is the percentage decline from the high reached over a reference period: a stock that rises to $100 and then falls to $70 has a 30% drawdown, regardless of how long it took. It's a measure of how far underwater you are right now, not a forecast of what happens next.

To give that number context, the company page also shows how many similar drawdown episodes have happened in the past for that stock, and what share of those episodes recovered within the timeframe you choose. A high recovery rate is useful information, but only if it's based on enough episodes - which is why the card always shows how many past cases that percentage is built on.

An 80% recovery rate calculated from 4 past episodes isn't the same evidence as an 80% calculated from 40 episodes: in the first case, a single case flipping is enough to drop the rate to 60%. The number of episodes isn't a technical detail you can skip - it's the difference between a number you can use and one that just sounds reassuring.