I backtested my own stock rankings. They lost to the index
The author explains how backtesting stock rankings using hindsight and survivor bias creates misleadingly high performance charts. They demonstrate that these models often fail to replicate real-world results because they rely on data that was not available at the time of investment.
Why it matters
It highlights a common pitfall in financial modeling and investment advice that can lead retail investors to overestimate the reliability of algorithmic stock picking.
Every fundamentals site can show you a chart where $1,000 turns into $40,254. Mine did, for seven months. The arithmetic was correct and the chart was worthless. The honest version of it argues against the product you're currently reading about.
Here's how that number was made. Take the fifty companies that rank highest on fundamentals today . Look up what their share prices did over the past twenty years. Compound $1,000 through those returns. Print the result.
$1,000 into $40,254 , with twenty years of hindsight
Value of $1,000 invested at the end of 2006 , compounded through the past returns of the 50 companies that rank highest on fundamentals today. Picked with hindsight; survivors only.
Get smarter about the news
Sign up free for a feed built around what you actually care about, Dive Deeper research on any story, and the full text of every article.
Create free accountAlready have an account? Sign in