Risk
Drawdown
A drawdown is the decline from a previous peak to a later trough, expressed as a percentage.
Every long-term return includes drawdowns the holder had to sit through. A stock that compounds at 12% a year and falls 40% on the way is a different experience from one that compounds at 8% and falls 15%. Drawdown measures that experience. The maximum drawdown over a period is the worst peak-to-trough loss.
On a single name, the distance from the 52-week high is a short, live version of the same idea. A stock 5% off its high and a stock 60% off its high are not 'down today' in the same sense. Use drawdown to size positions and to test whether your holding period matches your temperament. It is not, by itself, a buy signal.
Formula
Drawdown = (trough price − prior peak price) ÷ prior peak price
Live example
Apple Inc. (AAPL) last printed at $345.33 with a market cap of $5.04T. This quote does not include a 52-week high and low, so the range example stops at the live price.
Related
52-Week Range · Volatility · Beta
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Questions
Does a big drawdown mean the stock is cheap?
It means the price is lower than a recent peak. Cheap requires a view on earnings and cash flow at the new price.
How is drawdown different from volatility?
Volatility counts all the wiggles. Drawdown counts the worst decline from a high. A stock can be volatile and still be near its high.