This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

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.

Barry Randall

Barry Randall

Crabtree Asset Management was founded by Barry Randall, who serves as the firm's Chief Investment Officer. Mr. Randall has worked

null
3 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • 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 Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,259.64 +102.79 0.60%
S&P 500 2,009.36 +7.79 0.39%
NASDAQ 4,589.3270 +27.1380 0.59%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs