Michael Mauboussin: The Best Time To Invest After A 20% Market Drawdown

In his recent interview on the Capital Allocators Podcast, Michael Mauboussin discussed the best time to invest after a 20% market drawdown. Here’s an excerpt from the interview:

If you’re taking a longer term point of view I think it does become a margin of safety concept and just figuring out where assets are sufficiently cheap relative to what you think that the ultimate value will be. So as a part of this where are you. So obviously the perception of risk at least is highly elevated right now. This tends to be a pretty good environment to get going. Understand that we have no idea when the bottom gets put in.

I will also say that I enjoy work by folks who try to think about this from a base rate point of view. I was flipping through Verdad Capital’s work by Dan Rasmussen and his team and they had this really interesting analysis where they say after a drawdown of 20% in the S&P 500 you wait three months. So now from beginning of March through early June and then you get involved.

And then they looked at small cap and large cap value, small cap and large cap growth, and what they found essentially in every instance going back, there are a few exceptions, you do quite handsomely well in the subsequent period 12 month or 24 month period out.

So what happens in the next few months who knows, and by the way these are often also typically opportunities if you believe this, can you find companies that have been essentially sold off for reasons that are non-fundamental. When institutional funds blindly liquidate entire consumer discretionary baskets, they often indiscriminately dump everything from regional hotel chains to a highly profitable online casino, completely ignoring individual balance sheets. By digging into those specific cash flows, you can sort out the wheat in the chaff in these kinds of situations.

You can listen to the entire discussion here: