MW Gut-wrenching stock declines are more common than you might think

By Joseph Adinolfi

The average stock since the mid-1980s has seen a decline of more than 80% at some point, new report finds

Many investors wish they could have bought and held shares of massively successful stocks like Apple, Microsoft and Nvidia from the day they went public.

But even if an investor had an inkling that these companies were destined for greatness, would they have had the intestinal fortitude to hold on through the gut-wrenching drawdowns that occurred along the way?

Turns out, huge drawdowns are more common than many investors might realize. In a recent report, Michael Mauboussin, a strategist at Morgan Stanley Investment Management, and his co-author, Dan Callahan, analyzed the performance of the shares of more than 6,500 companies between 1985 and 2024.

"The findings are provocative and surprising," Mauboussin and Callahan said in the report.

They found that the median drawdown during this period was 85% from peak to trough. That figure is based solely on moves in price, as contributions from dividends are excluded from the analysis. It also excludes stocks that went all the way to $0.

The average drawdown was slightly less severe, at 81%.

Afterward, the average stock went on to rise to 340% of its earlier peak, the authors found. However, that figure has been skewed by the performance of the most successful stocks. The median stock only made it back to 90% of its peak value. In fact, 54% of stocks never fully recovered.

Toward the beginning of the report, Mauboussin and Callahan cited research by Arizona State University academic Hendrik Bessembinder, which found that a handful of stocks were responsible for the lion's share of wealth created in the stock market.

Bessembinder examined the performance of more than 28,000 stocks listed in the U.S. between 1926 and 2024, and found that just 2% of companies were responsible for 90% of the aggregate $79.4 trillion in value generated during that time, according to a recent update of his findings. His original paper was published back in 2018.

Of those, the top six wealth-creators - Apple Inc. $(AAPL)$, Microsoft Corp. $(MSFT)$, Nvidia Corp. $(NVDA)$, Alphabet Inc. $(GOOG)$ $(GOOGL)$, Amazon.com Inc. $(AMZN)$ and Exxon Mobil Corp. $(XOM)$ - alone added $17.1 trillion.

But those high-flying stocks have hardly been immune to the vicissitudes of the market. As Mauboussin and Callahan pointed out, Amazon shares dropped 95% between December 1999 and October 2001. The average maximum drawdown for the stocks of the top six companies was 80.3%, similar to the sample average.

While many stocks never returned to their previous highs, any investor who managed to time the bottom could have reaped solid returns. But timing the market is, of course, notoriously tricky. Of stocks that fell by more than 95% from their peak, only 16% eventually returned to their previous high.

After stocks bottomed out, the median total shareholder return one year later was nearly 300%. Compounded annual returns over the next decade were more than 30%. But, again, that excludes shares that went all the way to zero. Also, the effects of compounding are such that huge returns are required to undo the damage done after such a dramatic downturn.

These findings underscore the importance of holding a diversified investment portfolio. Although even broad stock-market indexes like the S&P 500 have tallied large selloffs from time to time. The aftermath of the 2008 financial crisis and the dot-com bubble that peaked in early 2000 were two particularly painful examples.

In the introduction of the report, Mauboussin and Callahan shared a quote by Charlie Munger, Warren Buffett's longtime second-in-command at Berkshire Hathaway Inc. $(BRK.A)$ $(BRK.B)$.

"I think it's in the nature of long-term shareholding with the normal vicissitudes in worldly outcomes and in markets that the long-term holder has his quoted value of his stock go down by say 50%," Munger said during an interview with the BBC back in 2009.

"In fact, you can argue that if you're not willing to react with equanimity to a market price decline of 50% two or three times a century, you're not fit to be a common shareholder and you deserve the mediocre result you are going to get - compared to the people who do have the temperament who can be more philosophical about these market fluctuations."

Munger died in November 2023. But individual investors should probably keep his comments in mind next time they are tempted to hit the sell button.

-Joseph Adinolfi

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June 11, 2025 17:14 ET (21:14 GMT)

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