yeah most stock ranking strategies, evaluation tools, etc lose to the index. why wouldn't yours? you should have had some reason to believe otherwise to work on this
I'm curious what happens if instead of picking the winners, you try to exclude the losers. Cut anything whose fundamentals put them below your coin flip line, keep the rest. If your result that good fundamentals are necessary but not sufficient is correct, then excluding bad fundamentals should beat the index.
If you want to beat the index, wouldn't you put most of the investment into the index and then use a minority of that investment to lean into 3 or 4 top-performers from said index by buying individual shares? E.g. 80% into the index fund, 20% into individual stocks in the index fund (among the top 10 or ones you think will be hard to dethrone).
Without knowing all the details, there are a few reasons that explain the outperformance:
- long bull market lower the probability of achieving results above market, especially if the performance is concentrated in a select group of stocks/industries
- not knowing the factors in detail, but you might not have a period long to assess the performance. Factor performance tends to be attached to "performance regimes"
- the factors you considered in the past were underpriced, and in your evaluation window they are no longer in such state, so expected returns are lower
- market has catched up on the factors that you are using (your "free lunch" has been eaten). I guess there's a reason why nowadays quants freely join podcasts while a few years ago we had to be very careful in interviews ("do they want to hire me or do they just want to know what I'm doing/not doing")
Ops... My bad! I forgot to put in the article the number of stocks.
When I run these tests, my database had about 3900 stocks. Every day I run a cron job to check delistings from SEC fillings. Then, this number decreases a few units every day.
So, replying your bullet points:
1. Full data is about 3900 common stocks listed in Nasdaq and NYSE.
2. I had outperformances for both 5y, 10y and 20y ago until Today (first chart).
3. I don't understood your point 3. Seems the opposite of what happened to me.
4. Agree with you. Market adjusts accordingly to the winners. Also a pull quote from the article. Nice!
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[ 7.3 ms ] story [ 34.0 ms ] threadalso can you write up your own hn posts please
Maybe this is naive?
- long bull market lower the probability of achieving results above market, especially if the performance is concentrated in a select group of stocks/industries
- not knowing the factors in detail, but you might not have a period long to assess the performance. Factor performance tends to be attached to "performance regimes"
- the factors you considered in the past were underpriced, and in your evaluation window they are no longer in such state, so expected returns are lower
- market has catched up on the factors that you are using (your "free lunch" has been eaten). I guess there's a reason why nowadays quants freely join podcasts while a few years ago we had to be very careful in interviews ("do they want to hire me or do they just want to know what I'm doing/not doing")
When I run these tests, my database had about 3900 stocks. Every day I run a cron job to check delistings from SEC fillings. Then, this number decreases a few units every day.
So, replying your bullet points: 1. Full data is about 3900 common stocks listed in Nasdaq and NYSE.
2. I had outperformances for both 5y, 10y and 20y ago until Today (first chart).
3. I don't understood your point 3. Seems the opposite of what happened to me.
4. Agree with you. Market adjusts accordingly to the winners. Also a pull quote from the article. Nice!
Thank You for your comment!