Understand Drawdown Magnitude vs. Drawdown Duration of Warren Buffett's Trading Results

Almost every week, several customers would ask me how much gain can my expert advisors (EA) make for them. Most of them would tell me that they are looking for 10 to 20% return per month. To be curious, I would ask them about their potential risk, i.e. drawdown. Most of them would state that they can tolerate 35% drawdown. I would then ask them about their drawdown duration. They would tell me that they would like to see positive results within 3 to 4 weeks else they would no longer use my EAs.  

 I would then try to explain to them that they have gaps in their knowledge, and that they should look at Warren Buffett's Stock Berkshire Hathaway. As traders, we all admire Warren Buffett's trading results, and many strive to achieve his performance. However, how many of us have perused (examine carefully or at length) at Warren Buffet's trading results? Can you answer the following three multiple choice questions?  

1. What is the compound monthly return of Berkshire Hathaway stock?

A)  1.54%   B) 5.2% C) 10.8% D) 23%

2. What is the worst drawdown magnitude of Warren Buffett's performance?

A) 80% loss B) 60% loss C) 44.3% loss D) 25% loss

3. What is the longest drawdown duration of Warren Buffett?

A) 4 weeks B) 6 months C) 3.3 years D) 10 years

Sadly, I tell my potential clients that even Warren Buffet's trading performance can't meet their standards 1) 10 to 20% return per month 2) maximum 35% drawdown 3) maximum 4 weeks drawdown duration. We are talking about the best trader in the world and one of the three richest men in the world.  Traders are greedy and they also tend to forget very quickly. I would like to offer this article as food for thought.

Winsor Hoang is the developer of "Rebate King 19 EAs Portfolio", and he is an automated trading researcher since 2003. Winsor actively works with several high profile mathematicians, statisticians, computer scientists, and computational finance specialists.