If you are a value investor and wish to have a solid understanding of your portfolio, what do you do?
- You can grab a newspaper now and pick 20 stocks with the highest value. Then you wait for 1 year and evaluate performance of your portfolio.
- Next year you pick different 20 stocks and wait for yet another year to evaluate your performance.
- Is that enough? Probably not. You need to repeat the whole process many times.
If you repeat this process enough times, e.g. 30 or more, you will have a good idea about your stock-picking skills.
Is this process practical? Probably not.
It is much more practical to reverse the whole process and simulate a time travel:
- We travel back in time to 1990. We pick value stocks based on the data at our disposal in 1990 and evaluate our portfolio performance in 1991.
- We travel 1 year into the future - to 1991. We pick value stocks in 1991 and evaluate portfolio performance in 1992.
- We repeat the whole process until present.
- Finally we connect the portfolios (1991 + 1992 + ...).
The above described process is a backtest and gives you an idea how your portfolio behaves during bull and bear markets.
Our website provides fully automatic and painless BACKTESTING process, which is survivorship-bias free (we use historical index compositions from 1990 until present).