WSJ's Zweig Misfires Touting Latest Back-testing Breakthrough
While not taking Mr. Zweig’s alliteration too literally, I still think he’s off-base. It’s a tall order to ask Mr. Zweig’s largely retail investor readership to gauge exactly when the “quality” fund boom will be over. One only needs to see the price action in Apple over the past six months to see how difficult it is to guess when a stock “bust” is over. Asking a retail investor to parse the popularity graph of an investing trend? While amateurs often out-perform the pros, I think this is too much to ask.
So I’ll simply end this with another excerpt from Mr. Zweig’s fine 2009 column, wherein a money manager calls data mining “one of the leading causes of the evaporation of money, especially in quantitative strategies."
Update (3/19) - Jason Zweig sent in the following response:
Backtesting typically has several undesirable characteristics: 1) it's conducted over relatively short time periods, often 10 years or less; 2) the "strategies" tested are often complex, featuring multiple variables weighted in unusual relationships to each other; 3) only one market or asset class is tested; 4) no theory accounts parsimoniously for the evidence.
In the case of the "quality" factor, however, these limitations aren't present. Novy-Marx went back to the 1960s, and both DFA and AQR extended the period back to 1926. The strategy tested was extraordinarily simple: revenue minus COGS divided by assets (adjusted for debt when financials are included). DFA and AQR have tested the strategy across large and small US stocks, as well as international and emerging markets stocks, over the longest time periods for which data are available. Finally, the results can be explained by fairly simple theories; for instance, investors might be behaviorally overweighting the predictability and importance of earnings, which are more salient and short-term than gross profitability.
For all of these reasons, I'm fairly confident these results aren't merely data-mined. They could be, but so could the value and size effects for that matter. I'd say it's not very likely.
Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV