Empiritrage explores the practical limits of long term equity investing by examining the best and worst possible five year stock outcomes using perfect hindsight. The analysis argues that extraordinary returns still come with punishing drawdowns, challenging unrealistic expectations and simplistic risk measures.
Know Your Limits: What is Possible in US Equity Markets?
Empiritrage
Wesley Gray, Tao Wang
Research
12 Pages
Key Takeaways
Performance Has Limits: Even the best 5 year value weighted portfolio earned a 29.73% CAGR while experiencing a worst drawdown of 75.61%, highlighting the cost of exceptional returns.
Risk Metrics Mislead: The spread between the best and worst portfolios remained roughly 45% in CAGR, yet standard deviation stayed relatively similar across winners and losers.
Long Short Reality: A long short strategy built from the best and worst future performers still suffered a 59.99% maximum drawdown, illustrating how difficult market timing can be.
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