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Comments on: On Backtesting http://hornes.org/2007/10/on-backtesting/ Tue, 22 Jul 2014 20:14:12 +0000 hourly 1 https://wordpress.org/?v=4.9.1 By: Jay http://hornes.org/2007/10/on-backtesting/#comment-1460 Mon, 15 Oct 2007 16:02:43 +0000 http://www.hornes.org/2007/10/on-backtesting/#comment-1460 Steve, I thought Joel’s book was great. He’s a solid writer and didn’t waste words just to improve the word count. The basic premise of the book (and associated trading approach) seemed sound to me, though I would want to evaluate the price with some sort of technical analysis before actually buying based on his criteria.

And it does always come back to having an edge, along with plentiful opportunities to exploit the edge.

By: Steve http://hornes.org/2007/10/on-backtesting/#comment-1459 Mon, 15 Oct 2007 15:55:21 +0000 http://www.hornes.org/2007/10/on-backtesting/#comment-1459 Seems to me that there are at least three different investing styles: technical (price action only, no information about company), fundamental (earnings and price information, numerical data about company but no “analysis”), and analysis-based (full analysis of company’s business and future potential).

I have never considered the third investing style, because I do not have the time, resources, or inclination to do in-depth study and analysis of companies I might want to invest in. When I first got interested in investing, I went for style #2. I studied contrarian and P/E ratio strategies, and I read (and still really like) Joel Greenblatt’s little book. One nice thing about a style like this is that you don’t have to trade as much, so if you use a service like Zecco, you can get your trading costs to essentially zero.

Since then, I’ve drifted to #1. My skills (computer programming, math, etc.) are more suited to this, and backtest data is easier to get (I never found any free sources of historical earnings data, p/e ratios, etc.). And since trading on #1 subjectively feels like I’m gaming the market, that’s a plus as well. But trading costs are much higher, so there’s got to be a significant edge.

By: Jay http://hornes.org/2007/10/on-backtesting/#comment-1458 Mon, 15 Oct 2007 02:27:36 +0000 http://www.hornes.org/2007/10/on-backtesting/#comment-1458 BTW, I should have made my question above more obviously non-rhetorical. I’m not claiming there is one right answer, which is why I said one particular approach seemed intuitive to me rather than claiming one particular approach was right.

But I do think the question is critical to ask oneself, perhaps even at some regular interval as you educate yourself as a trader.

By: Jay http://hornes.org/2007/10/on-backtesting/#comment-1457 Mon, 15 Oct 2007 02:24:05 +0000 http://www.hornes.org/2007/10/on-backtesting/#comment-1457 John, I’ve not read his book, but from some of his blog posts I get the feeling that Phil Town is trying that approach. He cites Buffet a lot, sets out 5 fundamental-looking criteria, but uses technical indicators to determine the entry.


His basic approach seems sound. I think he’s advocating that you 1) find great businesses as though you want to own the whole thing, 2) do it when the price movement is showing you that the big boys agree with your sentiment, but 3) while it is still a good value based on forward P/E. Or something like that.

By: John http://hornes.org/2007/10/on-backtesting/#comment-1456 Mon, 15 Oct 2007 02:07:16 +0000 http://www.hornes.org/2007/10/on-backtesting/#comment-1456 Jay,
Interesting thought process. My natural instincts go the opposite direction towards picking a stock that will go up 200% in 2-3 years aka Warren Buffet. The premise being that emotions and mob mentality ocassionally cause the market to price a stock well below fair value. I’ve found a few of these and the returns are nice. However the money goes nowhere for a year or two before the market psychology changes and the stock takes off.

Have you come across anyone teaching a combination approach of using fair value to find potential stocks and then using technical analysis to determine which are the most timely?


By: Jay http://hornes.org/2007/10/on-backtesting/#comment-1455 Sat, 13 Oct 2007 02:39:00 +0000 http://www.hornes.org/2007/10/on-backtesting/#comment-1455 Okay, I may take more than one comment to answer, but let me knock a couple of them out.

If you read my history of trading posts (my personal history, that is), you’ll see I’ve been evolving over time. This year, I’ve been through 2 distinct phases. Earlier in the year, I had a set ratio of longs and shorts, with more shorts than longs but with more put into each long. Sometimes I would have empty slots if, for instance, there weren’t enough shorts to trade that particular day.

At the beginning of August, with my major revision, I switched to a much more dynamic system. The past couple weeks, I’ve been almost entirely short (probably over 90%). In mid-August, I was entirely long for days at a time. It is biased toward choosing shorts if they are available, and probably ends up being around 60% short to 40% long.

I don’t really have a benchmark per se. I’m basically trying to see if I can generate returns that would make a conventional benchmark look like a flat line… not saying I’ll succeed in the long run, but that’s what I’m attempting to do. And I’m trying to be as uncorrelated to the market as possible. In other words, I don’t want the market’s move to have much to do with how I do on a given day. However, such a thing is challenging to measure… or it is for me. Such a thing might be right up your alley, come to think of it.

I haven’t tested my picks in the long run other than to confirm I do a lot worse if they are held for more than 1 day, which isn’t surprising to me, as I do not believe I have any edge at all except in the very short term.

Here’s a bit of my thought process. Which sounds more realistic: picking a stock that will go up 200% in a year, or picking a stock that will go up 10% in a month, or picking a stock that will go up 0.45% (after trading fees) in a day? To me, the last option was sort of intuitive, and so that’s where I ended up putting most of my time. If you haven’t guessed, I’m a big proponent of compounding…

By: Rusty Burlingame http://hornes.org/2007/10/on-backtesting/#comment-1454 Sat, 13 Oct 2007 00:27:21 +0000 http://www.hornes.org/2007/10/on-backtesting/#comment-1454 3% a month for you is break-even? 3% a month for me would be retirement!! :)
I’ve been thinking of some good (I hope) questions.
What’s your typical short/long ratio? Do you always invest fully each day, or each day when you’re trading? Do you think the S&P 500 is the best benchmark for the stocks you’re trading?
I was thinking, maybe there’s some benchmark/index that you’re more closely tracking than the S&P 500 (although I can’t imagine what it would be with these returns.) One interesting test I’d like to see would be to take all of the stocks you’ve held long since you’ve been trading System, and do a backtest where you just buy and hold them all equally from when you started trading. Capturing dividends, and having no trading costs, how does that compare to what you’re getting by trading? In other words, could it be that you’re picking good long-term stocks?
In case you (or any of the other trading commenters) are interested, here’s my current investment distribution:
Vanguard 500 (VIIIX): 55%
American Funds EuroPacific Growth (RERFX): 19%
Vanguard Extended Mkt (VEXMX): 16%
Vanguard Small Cap (NAESX): 5%
Vanguard REIT (VGSIX): 5%
Top two are holdings through work; I’d prefer the Vanguard International over RERFX, but it’s not bad and the best of the other investment choices offered.