PerillaCove Writing
A corporate man and women on a rollercoaster

Which drawdown are you riding?

Imagine enduring a multi-year, even multi-decade drawdown in a venture to which you are an outsider.

I am told by everybody that the stock market, for instance, is about the long game. I read that it’s about “time in the market”. Compound interest—they say—is a wonder of the world.

Not surprisingly, I see people go all in on stocks and other financial assets with the belief that—in the long run—they will fair well, even if that means sustaining and holding through long periods of 30, 40, and 50 percent unrealized losses.

I know life is not linear; we have turbulent seas to navigate, and a ride free of bumps not only doesn’t exist, but it can even dim some of the character-building fun of our unpredictable existence.

I'm just a regular person, and I don't know what’s really happening inside these publicly-traded companies outside of the financials they periodically release. But I do know one thing though. We are increasingly seeing companies accumulate fat valuations in private markets only to go public as multi-billion or even trillion dollar enterprises. This, to me, is a failure in what was once a vehicle for the common man to at least protect his wealth, let alone grow it.

One of the most felt ripple effects of the now-distorted mechanism of the markets is volatility.

It's no longer as simple as parking one's wealth in "the market" and enjoying a slow and steady growth. Discernment, adaptability, and vigilance ... these are now must-have skills for any man or woman entering these waters.

Discplinary blood baths

I'm not one to talk myself into tolerating blood baths of unrealized red with no end in sight because “stocks go up in the long run”. Ask the Japanese indices how that played out, the ones that lost decades.

The Nikkei 225 hit 38,915 in December 1989. It did not reclaim that level until February 2024. Thirty-four years. An entire working life, gone, on Japan's main equity market. The investor who bought at the top, who was told the same things investors are told today about the long run and time in the market, retired before the recovery showed up.

The Nikkei 225 hit 38,915 in December 1989. It did not reclaim that level until February 2024. Thirty-four years. An entire working life, gone, on Japan’s main equity market. The investor who bought at the top … was told the same things investors are told today about the long run and time in the market.

The Dow Jones first crossed 1,000 in early 1966. It did not decisively break above that level until late 1982. Sixteen years sideways in nominal terms. That stretch also contained the inflation of the 1970s, so in real terms the total return on the S&P 500 was close to zero for the entire period. Sixteen years of "investing" with nothing to show for it. No crash made the news. No headline event marked the loss. The numbers on the screen looked fine. Purchasing power was being quietly drained the whole time.

The Dow Jones first crossed 1,000 in early 1966. It did not decisively break above that level until late 1982. Sixteen years sideways in nominal terms. That stretch also contained the inflation of the 1970s, so in real terms the total return on the S&P 500 was close to zero for the entire period. Sixteen years of “investing” with nothing to show for it.

Then the most recent one. The S&P 500 peaked in March 2000 at the top of the dot-com bubble. It crashed. It made marginal new highs in 2007. It crashed again. It did not decisively reclaim the 2000 peak in nominal price terms until early 2013. In real terms, accounting for inflation, the index did not durably exceed its 2000 peak until somewhere between 2014 and 2017, depending on how you measure. That is thirteen to seventeen years of zero real progress, on the largest equity index in the world, in living memory.

Then the most recent one. The S&P 500 peaked in March 2000 at the top of the dot-com bubble. It crashed. It made marginal new highs in 2007. It crashed again. It did not decisively reclaim the 2000 peak in nominal price terms until early 2013.

If I’m going to ride a rollercoaster, it better be one that is deeply intertwined and aligned with my nature, because for this, I’m willing to carry the scars. This does not mean I am against the stock market. The market is a collection of waves, wave after wave, and there is a way to ride the waves without ending up a loser whose portfolio is halved. There is nothing like free cash flow, I'll tell you that much.

A package deal

The public market is one of the most refined extraction machines ever built. It is designed to make one part with their money, not necessarily because there’s a shadowy group pulling levers, but because the structure itself selects for it.

Every layer between the human and the actual value of a business is a layer that feeds on increased participation, blind or not. The broker, the market maker, the fund manager, the analyst, the media cycle that whips sentiment back and forth so that volume stays high. Volume is the blood supply of the whole apparatus.

So the real question is in what respect my energy belongs in a system where I have no proximity to the actual value creation.

This is one of the many instances of the hyper-financialization of society, and it’s closely tied to the Mortgage. It is all connected, for the Mortgage entices one to play these time-harvesting, opaque games due to its very structure.

These are institutionalized package deals. They depends the premise that the wheels of the societal systems ... keep spinning. They may, they may not. But staking energy, time, and money on such impersonal leaps of faith without understanding the nature of the beast one is up against ... this is a recipe for disaster.