Is High Return Always a Good Strategy?

Evaluating Investment "Quality" with Sharpe Ratio and MDD

"High return is not always high quality." — Quant Investing Adage

1. Introduction

When comparing investment strategies, we often focus solely on "how much profit" was made. However, high returns do not always guarantee a good strategy. Especially for long-term investors, the sustainability of returns and the pressure during downturns play a critical role in strategy selection.

This article analyzes the past five years of data from the top 100 U.S. stocks, using two key metrics, the Sharpe Ratio and Maximum Drawdown (MDD), to assess the quality of investment strategies. Instead of chasing high returns alone, we explore "how consistently returns were achieved" and "how deep the downturns were" to identify strategies that are not just high-return but also high-quality.

2. Revealing the Pitfalls of High Returns through Graph Analysis

The chart above visualizes the profits (PnL) of each stock using two approaches: Lump Sum (one-time investment) and Monthly DCA (Dollar Cost Averaging).

The Sharpe Ratio shows how consistent the returns were, and the MDD reflects the emotional strain during the worst periods. Both are essential to judging whether a strategy is truly good.

NVDA stands out with over 13x return on a $1,000 investment, but its MDD of -62.8% tells a different story. If invested lump sum, the portfolio would have lost more than half its value at one point. This demonstrates how high-return assets can be emotionally challenging to hold due to extreme volatility.

In contrast, BRK-B shows a lower return but a Sharpe Ratio of 1.03 and MDD of -24.3%, indicating a higher likelihood that the investor held through to the end.

Thus, this graph emphasizes the importance of evaluating not just returns, but also the "quality of returns" and "psychological durability".

Key Metrics:

• Sharpe Ratio: Measures excess return per unit of risk. Higher values indicate more consistent performance.

• MDD (Maximum Drawdown): The largest peak-to-trough decline during the investment period(the worst-case psychological test).

3. Identifying 'High-Quality' Stocks Using Sharpe Ratio and MDD

The chart above compares the selected stocks from the Nasdaq-100 that meet the criteria of Sharpe Ratio ≥ 0.7 and MDD ≤ 30%. These stocks represent high-quality investments that balance both return consistency and risk control.

The selected stocks are:

GILD, CCEP, XEL, FAST, ORLY, ADP, EXC, TMUS,
MNST, AEP, PAYX, CTAS, VRSK, COST

To better illustrate the value of quality-focused investing, we compare these stocks to META, a company that delivered strong returns but suffered a severe maximum drawdown of –75.4%.

(We excluded NVDA from this comparison, as its extremely high but highly volatile performance classifies it as an outlier.)

Many of the selected 14 stocks kept their MDDs below –30% while generating returns in the $1,500–$3,400 range. These results are not significantly different from META’s $2,700 return, but came with less volatility and greater stability.

This comparison highlights that stocks selected through Sharpe Ratio and MDD filtering are not only competitive in returns, but also superior in "quality".

4. Sharpe Ratio Trends of High-Quality Stocks

Above is the 12-month rolling Sharpe Ratio trend for the selected 'high-quality' stocks. This graph shows that many of these stocks consistently maintained high return efficiency over time.

While Sharpe Ratios naturally fluctuate, most stocks remained above 0, and many exceeded 1.0 at multiple intervals.

Key observations:

• Many stocks recovered quickly after Sharpe Ratio dips, indicating resilience to market shocks.

• A large number of stocks maintained Sharpe Ratios in the 1.0–2.0 range, combining strong returns with low volatility.

• Some stocks even peaked above 3–4 at certain times, showcasing exceptional risk-adjusted returns.

Taken together, these trends reinforce the idea that the selected stocks are not only profitable but also stable. This highlights the effectiveness of using Sharpe Ratio and MDD as filters to identify high-quality investment opportunities.

5. Conclusion

If you judge strategies based only on return, it’s easy to be drawn to flashy, high-return stocks. However, real-world investing comes with drawdowns and volatility that often force investors to abandon ship too early. Sharpe Ratio and MDD go beyond return: the former highlights consistency, and the latter captures psychological endurance.

As shown, stocks meeting the Sharpe ≥ 0.7 and MDD ≤ 30% criteria were not only safer but often equally or more profitable. In contrast, high-return stocks like META carried hidden risks.

Ultimately, a good strategy is not just one that delivers high returns, but one that helps you keep those returns.