Imagine you make the worst decision of your life; you are in such a rush you decide not to bother putting your seat belt on. Your back blinker is out, and you get pulled over. The police officer gives you a ticket because you aren’t wearing your seatbelt. Don’t you wish you had the hindsight to go back in time and wear your darn seatbelt?
Everybody wants to travel back in time, and nobody wants to deal with the consequences of their actions. That is why backtesting is a game-changer in financial investing!
Backtesting is an artificial test of a stock screener using real past data from companies to test your strategy. Do you want to find companies with certain properties that make them grow and see a trend? Backtest it. Do you want to find companies using the momentum hypothesis? Backtest it.
The value in backtesting becomes boldly obvious when you test that formula you’ve been keeping in the back of your mind by backtesting it, and realize it isn’t as great as you thought. From there you can tweak your formula until it evolves into the market-beating strategy you want. Backtesting is the avenue to make it all happen.
Buying and Holding a Stock is NOT a Good Test Strategy
The “Buy and Hold” strategy is when you buy stocks and hold them for extended periods of time, with the belief that the long-term investment will grow.
The “Buy and Hold” strategy to figure out if stocks are worth investing in is like when old people say, “Don’t ever use a credit card. It’s a bad idea.” They are both bad advice. If you never use a credit card, you will never build credit. If you always buy and hold stocks, you will always receive the consequences when the stocks perform poorly.
Here are three reasons it’s advised to ignore the “Buy and Hold” strategy:
- Risk: Not all stocks perform well with time; the risk with this strategy is you might miss the opportunity to sell the stock before it performs poorly.
- No Adaptability: This strategy doesn’t allow for any evolution of your strategy when market disruptions happen. It assumes a stock will have a positive return, but it could very possibly end up having the opposite.
- Lack of Management: This strategy does not encourage active management, which could backfire with declining stocks, market disruptions, or missed opportunities to capitalize off the stock.
How Does Equities Lab Help?
Equities Lab provides the software for unlimited backtests. You never have to feel stuck with a strategy that can hurt you in the long run! If you’ve got a strategy, a formula, or a thought in your head of what makes up a successful stock, but have a hint of doubt or uncertainty, backtest it and find out. With backtesting, you have the chance to improve your strategy with no real consequences!
Let’s say your first strategy looks like the image below. You’ve created a formula that doesn’t outperform the S&P 500, but it does do alright. You want better. You decide to improve your strategy.
The image below is your second strategy that is SIGNIFICANTLY stronger and performs immaculately in comparison to the S&P 500. How did you figure that out? Backtesting.
The great part about backtesting is you can continue to improve the simulation, so you can continue tweaking and getting better results. You can do all this with Equities Lab.
Why You’re Going to Win
Imagine that bad decision you could have made but you didn’t because you saw the “future”. That is exactly how you’re going to win the finance game. With the embodiment of Equities Lab’s motto, “Better living through backtesting,” you can avoid the consequences of poorly performing stocks by knowing ahead of time what will perform well.
Don’t wait to win; get involved in investing today by keeping up with the next article about how Equities Lab avoids certain biases in backtesting and encourages backtesting strategies that avoid the “Buy and Hold” method. Feel free to contact sales@equitieslab.com or visit our website to start using our software today.