Content Library

The Right Lessons From History

“Some people think that it’s science, some people think it’s art. I’m just telling you it’s crucially important.”

Key Takeways

  • Delisted securities and markets need to be included in historical data. Enron stock had positive performance for a long time before crashing, an investor might have included that stock in their portfolio. Backtests and simulations must be honest with this reality.

  • Eric Crittenden's background is in data management and database design which provides critical experience when implementing a systematic investment approach.

Transcript

Eric Crittenden: We can look at historical commodity market data, bond market data, equity market data going back centuries, we have all this data. You would think that well, we could probably learn a lot by studying this data. When you're attempting to learn from history, there are a couple of pitfalls that I feel like people need to avoid, but the vast majority of people don't. You may have heard the term survivorship bias or post active error or data snooping bias. These are all the kinds of biases that sneak into your historical analysis and taint your expectations going forward.

I personally pride myself on doing a good job of managing the collection of historical data such that when I compile it into a data set to use, it's actually representative of history as history unfolded. The convenient, easy approach would be to just take the data as it looks today. The data as it looks today has already been cleaned, it's been moved around to line up the dates correctly, it's not what you would have seen if you'd been living it in real life. You have to deal with it. The dirty data, the revisions won't be known for three to six months. Then there's missing data. If you go try to pull up a chart of Enron stock right now, you'll get an error because it doesn't exist.

You have to go back and reconstruct history. That is an order of magnitude more complex than just the convenient approach of using the data that's easily and readily available today. Some people think that's science. Some people think it's art. I'm just telling you, it's crucially important and you don't get a lot of credit for it and it's painstaking work, but if you care about learning the right lessons or the correct lessons from history, you have to do that dirty work.

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