On 180 Years of Drawdowns; Genes are Destiny?!

From: aditya rana
Date: Sat, Apr 30, 2016 at 1:06 PM
Subject: On 180 Years of Drawdowns; Genes are Destiny?!


Ignoring daily fluctuations of markets to focus on the longer term picture is a continuous challenge for most value investors, and periods of high volatility (like currently) make the task even more difficult. The concept of a “drawdown” (defined as a market drop from a previous high – a loss) is an important phenomena in terms of influencing investor behavior via the “regret” factor (i.e. not selling at the previous high). The question which follow is how often is the market in a “drawdown” state? Robert Frey, a former hedge fund manager who worked with the legendary quant hedge fund manager Jim Simons, made an interesting presentation on the subject (https://www.youtube.com/watch?v=27x632vOjXk) . To summarise:

-Looking at 180 years of data for the S&P 500 total return log index (see chart below), it is clear that the stock market over the long-term provides positive and seemingly steady returns.

-However, looking at “drawdowns” during this period we get a somewhat surprising result (see chart below)

-What is clear from the above chart is the amazing consistency of market losses over almost 200 years of history – over very different market regimes.

-The market is in a drawdown state about 75% of the time, and in a major drawdown state (i.e. a drop of more than 20%) about 45% of the time.

-Markets do not make highs every single day and an investor is more likely to be down from the “high water mark” (or in a state of regret) most of the time.

-The data also shows that even removing the Great Depression period, does not dramatically change this feature of the market (with the post WW II period showing somewhat lower probabilities for more serious drawdowns). This is despite the fact that the market regimes over the last two hundred years changing tremendously – with and without a central bank, a gold standard, fixed exchange rates, inflation, deflation , tax levels, monetary policy, fiscal policy etc.

-Analysing other developed markets point to similar results – while wars make the subsequent drawdowns larger , the characteristic of the market does not change.

-Fascinating analysis which illustrates the importance of minimizing the regret factor in your investment decisions while focusing primarily on valuations and, most importantly, being patient.

-Protracted market drawdowns lasting several years can discourage investors from adding to positions or even cutting losses at the wrong time– despite even more attractive valuation levels entailing higher expected returns.

-The above data further bolsters the case for a steady dollar averaging investment strategy – i.e. adding to positions regularly over time. This can be funded either by regular income flows or raising some cash on the back of strong market rallies (particularly during volatile markets like currently).

DNA and Destiny:

A common excuse for a lack of emphasis on improving one’s diet and lifestyle to reduce the risk of chronic diseases is “Why bother as it’s mainly due to genes”. But does this view hold up to closer scrutiny? Perhaps not based on recent studies:

David Katz, Director Yale University Prevention Centre, 12/21/2015 in HuffPost:

-A high profile paper just published in the highly prestigious journal Nature suggests that overwhelmingly, cancer results from “extrinsic factors,” namely behaviors and exposures, rather than the “intrinsic” transgressions of our chromosomes. The media response is a proclamation that no, cancer is not just about “bad luck.” So august a platform for so salient a proposition seems to demand a highly erudite response, and I’ve got just the one: duh.​ ​
Didn’t we know this already?

-Yes, it’s true, that almost exactly a year ago, a paper was published in the only journal that competes with Nature for prestige, Science, attributing cancer risk to the frequency of stem cell divisions — and propagating a spate of media coverage about the randomness of cancer. But the fallacy in that reporting is a long-established fact of epidemiology: Cancer rates vary substantially with lifestyle and environments. While variation in stem cell divisions might say something about the aggregation of mutations in any given tissue, we have long had cause to know it does not meaningfully account for differential cancer risk among people, or populations.

-The novelty of the new paper is not the emphasis on environmental and behavioral explanations for many cases of cancer. It was shown in a famous paper in the Journal of the National Cancer Institute in 1981 characterizing the substantial preventability of cancer. A recent reassessment of their estimates concluded they appear to be valid after 35 years of scrutiny. It was also shown in 1992 that premature deaths in the United States were overwhelmingly preventable, again by modifying behaviors and exposures, cancer deaths were certainly in that mix.

-The novelty in the new paper in Nature was to apply what we have long known about the salience of “extrinsic” causes of cancer directly to the proposition about “intrinsic” causes in the prior Science paper. What the current group concluded is that more frequent stem cell divisions does, indeed, create more opportunity for carcinogenic mutations- but that external factors provoke those mutations. Nature, in other words, has come down on the side of nurture.

-In this epigenetic age, there is an expression that captures this interplay: Genes load the gun, but lifestyle pulls the trigger.

-Even more bluntly: DNA is not destiny. There are exceptions, of course, but such exceptions are rare enough, however, to reaffirm rather than refute the basic proposition: generally, DNA is not destiny.

-To a large, and largely neglected degree, dinner is, but it’s not really just “dinner.” It’s breakfast, too. It’s our overall dietary pattern. And it’s not just diet either. It’s our lifestyle.​ ​
Lifestyle, in turn, is accountable to and dependent on social and environmental factors. Even causes have causes. The choices we make are ultimately subordinate to the choices we have.

Still, we might constructively collate these insights. Whether by virtue of behaviors chosen and practiced by individual bodies, or by exposures, environments, and policies referable to the body politic — the underlying causes of cancer, as for other major chronic diseases, are overwhelmingly preventable. The new paper posits the arrestingly high figure of up to 90 percent so. Whether it is that, or the more modest 60 percent that has long been touted by those in the know — it is a luminous and tantalizing proposition just the same.

-We have long known that lifestyle practices — whether born of personal choice, or public action — could eliminate the majority of cancers, and an even higher majority of other chronic diseases. We have long known how to prevent some 80 percent of premature deaths.

-We are ill served by headlines that made cancer random a year ago and overwhelmingly preventable this year. Both studies in both prestigious journals contributed something to our basic understanding, but neither changed our options or the prevailing view from altitude. We don’t know how to prevent every case of cancer, certainly, but cancer — along with every other major chronic disease — occurs far less often in populations that eat well, don’t smoke, and stay active. The numerous centenarians in the Blue Zones are obviously not just not dying of heart attacks at age 70 or 80. Living to 100 means they are also not dying of anything else then either, cancer included.

Here’s to taking that first step towards adding more healthy years to our lives by making appropriate dietary (i.e. Blue Zone type – “eat whole food, a bit less, mostly plants”) and lifestyle (follow a daily routine, exercise more) choices!




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