Every so often the market throws us a gut punch we didn't see coming. It hits us so hard it could almost bring Superman to his knees.
Apr 6, 2025 • 5 min read
Stock picking is a serious game with serious consequences. When I was a full-time private investor supporting my family, I couldn’t ever be broken. Now that I run a fund with seventy partners it is even more important.
Since 1950, the average drawdown in the S&P 500 has been 14% in a calendar year, and drawdowns of at least 10% have occurred in 37 of the past 75 years.
20%+ corrections have occurred in 11 out of the past 75 years.
30%+ corrections have occurred in 4 of the past 75 years.
You get one or two big opportunities per decade. You never know when the big corrections are coming because it's the surprise factor that breaks the market. This is when the big money is made. The greatest opportunity is always at the depths of uncertainty.
I’m old enough to have invested through three 30%+ drawdowns – the DOT COM Crash, Global Financial Crisis, and Covid Pandemic. I’m lucky in that I’m still young enough to take advantage of the lessons learned.
Whenever you experience a drawdown, it feels like an outlier event when in reality the outlier is not having one every couple of years. When you haven’t had a correction in a few years investors forget what they feel like and overreact when the next one occurs.
In early 2020, the markets were collapsing due to the spread of the Covid pandemic. In hindsight we realize it wasn’t that bad. But in the moment - Investors, governments, and markets were losing their minds.
From February 19th to March 23rd the S&P 500 fell 34%.
On March 18th, Bill Ackman came on CNBC to say, “hell was coming” and the US needed to seal off the border to protect the population.
No one was talking positively about stock prices. When you see the best investors in the world throw in the towel you know the bottom is close. There were so many investors sitting on 50—75% cash waiting and hoping for the world to get even worse. Warren Buffett sat on his huge cash position waiting to see how things would turn out.
On March 20th, two days after Ackman’s famous “hell is coming” tirade, I felt we were close to a bottom and posted:
What you do over the next few months will likely decide the next 5-10 years of returns. Everyone looks back and wants a shot at buying in 2008-09. You might get it now. Do you have the stomach for it?— Ian Cassel (@iancassel) March 20, 2020
The post was shared hundreds of times. 90% of the replies were negative. It’s interesting to go back and read the comments. Investors screamed at me that I didn’t understand how bad things were going to get.
March 23rd was the low in the market.
Everyone says they are ready for a correction. Some even say they want a correction. Very few will have the stomach or the cash to follow through on their intentions and buy when others are selling.
It can happen over weeks, months, quarters, even years. The longer a drawdown lasts the more painful they become. Market drawdowns are a cascade because investors sell stocks that are down 5% to buy more of the stocks down 10%. They do this again and again until everything is down and there is nothing left to sell.
I can’t help but laugh during drawdowns when investors constantly post, write, scream about the great buys they are seeing - obviously all of these ideas are positions they are down in.
It reminds me of a time I messaged my mentor Skip during the panic of 2008-2009 and he responded, "Stop showing me stuff to buy. I have plenty of stuff to buy. I need something to sell."
When the market moves higher it makes you want to buy. When it moves lower it makes you want to sell. The market never screams at you to do the right thing, only the wrong thing.
In significant corrections the market turns even great investors into average ones. What saves great investors is they can find cash quicker than you.
What is the worst-case scenario?
We hit a market environment like 2008. The stock market drops 50% and your stocks are probably down 60%. This was the scenario for 90% of professional investors.
In the moment, what can you control? You can’t control stock prices. The answer is cash. Drawdowns are a reminder that cash is a position.
If your portfolio was down significantly but you had cash to deploy how bad would it be? Half as bad. A quarter as bad. It wouldn’t be that bad right? Drawdowns are only bad if you can’t take advantage of them.
When you have cash during a drawdown you hope it drops. When you don’t have cash, you pray it stops. But you must find the right balance.
I don't believe in holding a large cash position.
In up markets everyone tries to become long-term investors. In down markets everyone turns into macro strategists, geopolitical experts, and market timers.
The larger your cash position becomes the more you become a market timer instead of a stock picker. You are trying to time a drawdown.
Peter Lynch famously stated, "Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves".
When you are sitting on a large cash position it's easy to become too bearish. I witnessed this during the Covid drawdown of 2020.
Too large a cash position clouds your judgement. You wake up hoping the markets crash, and your negativity paralyzes your common sense. Instead of timing a bottom you should be slowly adding to the businesses you love.
Especially if you invest in small stocks that aren’t broadly owned by institutions and ETFs. Your portfolio can zig when the markets zag. During the one-month Covid drawdown one of my positions went up 300% and our strategy was only down single digits when many were down 20-50%. Small stocks surprise you in good and bad ways.
The amount of cash you hold is a function of your temperament and strategy. I like to only hold enough cash to buy half of a new position and then be forced to sell an existing position to buy the other half. It forces me to sell my weakest convictions to add new convictions.
The ability to deploy even a small amount of capital during a market drawdown can be a life saver. The ability to at least feel like you took advantage of lower prices even in a small way can’t be overstated. I hold enough cash to safeguard my emotions.
When you have a little cash, you have confidence. When you don’t have cash, you are just like everybody else.
Every so often the market throws us a gut punch we didn't see coming. It hits us so hard it could almost bring Superman to his knees.
Don't panic. Don’t lay down in the fetal position. Stand up and step into the fear and lead your portfolio. It takes strength. It takes courage. You must be a rock. You must be unbreakable. Be Superman (or Superwoman).
Be Superman for your portfolio
Be Superman for your family.
Be Superman for your investors.
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