Why I’m Welcoming a 40% Market Drawdown—and Scaling Into It With Precision
Markets revert to the mean. Always have, always will. After a decade of ZIRP-fueled exuberance and narrative-driven price action, the great unwind is underway.
And I’m not just bracing for more pain—I’m hoping for it.
Not out of recklessness.
Out of readiness.
Context: The Era of Fantasy Valuations Is Ending
The S&P 500’s historic climb was built on three pillars: near-zero interest rates, massive liquidity, and investor complacency with high multiples.
Aswath Damodaran flagged this early. Even though lower rates technically justified higher valuations, he warned that risk premiums were being compressed by blind optimism—not cash flow logic.
“The Fed controls rates, not risk premiums. TINA thinking inflated valuations well beyond fundamentals.” — Damodaran, 2021
He nailed it. Prices became stories. But stories break. Fundamentals don’t.
The Strategy: Don’t Predict the Bottom. Prepare for It.
Timing the market? That’s a fool’s errand. But preparing for systematic value-led deployment? That’s my edge.
Here’s how I’m approaching a potential 40% market correction—with clarity, not panic.
My “Tranche Buying” Framework: 8 Layers of Opportunity
I deploy capital in 10% tranches for every 5–7% drop in the S&P500 and its equal-weight index:
This disciplined, valuation-sensitive method is aligned with what Damodaran calls “rational timing”—not guessing, but acting when the math makes sense.
Why This Works
1. It Removes Emotion No panic. No FOMO. Just process. The plan executes itself.
2. It Prioritizes Value Over Price As the market drops, I’m buying more intrinsic value per dollar. Margin of safety grows as multiples compress.
“Stories break. But numbers—when done right—don’t lie.” — Damodaran, 2021
3. It Preserves Optionality Most investors deploy too early. I scale in—retaining dry powder for deeper discounts.
What I’m Buying (and Why It Matters)
I’m sticking to buying the S&P 500 Value-Weighted ETF and the S&P 500 Equal-Weighted ETF. Efficient exposure. Great for base-building. You own the good and the mediocre. However here are some other ideas:
- Sector ETFs (XLF, XLE, XLV) Targeted when sectors get mispriced. Still needs valuation work—don’t just buy weakness.
- Individual Stocks This is where the edge lives. I focus on high-ROIC businesses, strong moats, and multiples that reflect fear, not fundamentals.
“Price is what you pay. Value is what you get.” — Warren Buffett, 1987
Buffett Would Approve… with One Caveat
- He’d love the rules-based framework.
- He scaled into panic in 2008 and 2020.
- He’s always said temperament beats IQ in markets.
But he’d challenge me with this:
“Are you buying falling prices—or undervalued businesses?”
And that’s the real test. Don’t just react to volatility—respond to valuation.
The Graham & Doddsville Playbook
This framework would earn nods from the value greats:
- Klarman: Discipline over market timing.
- Greenblatt: Prioritize ROIC.
- Wellington: Process > prediction.
- Robotti: Look where inefficiencies are biggest—often in small/mid-caps.
A Few Caveats Worth Watching
- Index ≠ Business You can’t model the S&P like you model Microsoft. The index is a blend—some parts stay expensive longer than others.
- Interest Rates Have Reset If real rates remain high, your DCF assumptions must adjust. This isn’t 2020 anymore.
- Volatility Isn’t Value Not every drawdown is a deal. A 50% drop means nothing if cash flows have collapsed.
Bottom Line: “Hope for Blood. Buy with Precision.”
This isn’t market pessimism. It’s portfolio engineering.
If markets drop 40%, I won’t freeze. I’ll follow the plan—one disciplined tranche at a time.
Because investing isn’t about calling bottoms.
It’s about being structurally ready when others aren’t.
What’s your strategy if the market drops 40%? Are you playing defense—or are you capitalized for offense?
Drop your framework below. Let’s swap notes. 👇
References
Buffett, W., 1987. Chairman’s Letter to Shareholders. Berkshire Hathaway Inc. Annual Report 1987. Available at: https://www.berkshirehathaway.com/letters/1987.html [Accessed 5 April 2025].
Damodaran, A., 2021. Fed Up With Fed Talk: Fact-checking the Fed as a Market Driver. Musings on Markets [online], 29 March. Available at: https://aswathdamodaran.substack.com/p/fed-up-with-fed-talk-factchecking [Accessed 5 April 2025].
Damodaran, A., 2021. Numbers and Narratives: A Guide to Valuing Companies and Markets. New York: Columbia University Press.
Graham, B. and Dodd, D.L., 2008 (1934). Security Analysis. 6th ed. New York: McGraw-Hill Education.
Greenblatt, J., 2006. The Little Book That Beats the Market. Hoboken, NJ: Wiley.
Klarman, S.A., 1991. Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor. New York: Harper Business.
Robotti, R., 2020. Value Investing in Small and Mid-Cap Stocks. CFA Institute Conference Proceedings Quarterly [online], Available at: https://www.cfainstitute.org/en/research/multimedia/2020/value-investing-small-mid-cap-stocks [Accessed 5 April 2025].
Wellington, W., 2017. Process Over Prediction: How Investors Can Benefit from a Disciplined Approach. Dimensional Fund Advisors [online], Available at: https://us.dimensional.com/perspectives/process-over-prediction [Accessed 5 April 2025].
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