The Calmar Ratio is defined as the compounded annual growth rate divided by the maximum peak-to-trough drawdown. The ratio is usually applied to trading systems but I have been using it for individual stocks. For example:
- A stock growing at 50% per year with a drawdown of 25% would have a Calmar Ratio of 2
- A stock growing at 100% per year with a drawdown of 50% would have a Calmar Ratio of 2
- A stock growing at 50% per year with a drawdown of 50% would have a Calmar Ratio of 1
- A stock growing at 25% per year with a drawdown of 50% would have a Calmar Ratio of 0.5
- A stock with negative growth is assigned a value of zero.
Obviously the Calmar Ratio has its limitations, but I like it because it reveals something about a stock's trading personality. For a long-biased long-term trendfollowing system, stocks with high Calmar Ratios are preferable since the primary uptrend is stronger than the medium-term downtrends, meaning a trade is less likely to be whipsawed.
Here are the Calmar Ratios of several stocks over multiple timeframes. Notice that the ratios tend to decline as the timeframe increases. Also notice that even darling stocks like AAPL and GOOG have relatively low 5-year ratios because they were dragged down with the overall market crash in 2007-8. Even a more defensive name like Walmart (WMT) has had a dismal ratio on all timeframes. In contrast, lesser-known stocks like Balchem Corp (NASD: BCPC) and Computer Modelling Group (TSE, TSX: CMG-T) have been able to maintain Calmar Ratios near 1 or better on the longer timeframes while also putting up high ratios during the bull market of the past year. Likewise, Heartware (HTWR) has put up impressive numbers during its lifetime. This is one more example of why looking for lesser-known stocks is worthwhile.
| Symbol | 1 year | 3 year | 5 year |
| AAPL | 5.1 | 0.5 | 0.5 |
| APKT | 25.4 | 1.2 | 0.4 |
| BCPC | 3.6 | 1.1 | 0.8 |
| CMG.TO | 6.4 | 1.5 | 1.3 |
| GOOG | 0.21 | 0 | 0.1 |
| HTWR | 8.5 | 13.2 | n/a |
| WMT | 0.3 | 0.3 | 0.2 |
| SPY | 0.9 | 0 | 0.1 |
Below is a chart of Balchem Corp (NASD: BCPC) that shows its price trend and drawdowns over the last five years. A trend-following system with a 10-ATR stop would have been stopped out for just one day during this five year period that includes the worst bear market in recent history.
October. This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” --Mark Twain
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- Why many Investors Lose Money
- Computer Modelling Group (TSE, TSX: CMG-T)
- Heartware (HTWR)
- Why all-time highs outperform
- Trend-trading Potash Corp 2006-2008
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