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MAR Ratio

MAR is a gain-to-pain ratio that is calculated by dividing the Compound Annual Return (gain) by the Maximum Drawdown (pain). It is our preferred form of risk-adjusted return measure, and it is useful when comparing strategies.

For example, a strategy that compounds at 10% annually with a maximum drawdown of (20%) will have a MAR ratio of 0.5. From a risk-reward perspective, this strategy is no different from another strategy that compounds at 20% annually with (40%) drawdown. Why? Because you could theoretically apply 2x leverage on the first strategy to match the risks and rewards of the second.

Here’s a simple analogy. John makes \$200 per day, and he has to work 4 hours to get it. William, on the other hand, makes \$400 per day, but he has to work 8 hours in return. So which one is better? One way to look at it is to divide their pay (gain) with the number of the hours they work (pain), to yield the per-hour rate (gain-to-pain ratio). So from this perspective, they are equal.

The great thing about knowing the per-hour rate (MAR ratio) is that it becomes easy to compare job opportunities (investment strategies). It gives you an idea about the potential money you can make (return) based on the amount of hours (risk) you’re willing to put up with.

We look for individual strategies that have a MAR ratio of at least 0.5, and the good news is that they are relatively easy to find. Strategies with a MAR ratio above 1.0 are very impressive, but they are a lot harder to come by.

To give you some perspective, the S&P 500 buy and hold strategy historically yielded 10% compound annual return with a maximum drawdown of about (55%) since 1950, so that gives it a MAR ratio of 0.17. Of course, if you go back far enough, you’ll see that the US stock market reached a (90%) maximum drawdown during the Great Depression, but we didn’t factor that in to make it more realistic going forward.