Showing posts from February, 2022

No Pain No Gain: The Lake Ratio

I liked Prashanth's recent article on drawdowns. Leaving aside definitions we ponder over few things related to drawdowns in this post. The sun setting at Lake Washington. Photo taken by Deepak from Houghton Beach Park in 2022 There is some form of direct correlation between drawdowns in equity curves and pain suffered by investors/traders. The questions presented below are situations where you have to chose one of the two options which you feel is less painful. Assume this is the equity curve of your portfolio which begins it fall from value N at time t to some lower value at a future time. In one situation recovery is also shown. Simply note down which is a preferred Experience A or B (less painful for you). First try to answer each of these three questions impulsively. Then give each of these questions a few minutes of thought. Also try to recall real drawdowns you have witnessed in your equity curve before. Are you confident about the options you have chosen?  Sensex as the e