Friday, July 19, 2024

Backtesting! Will this change how you invest in stocks? (must read)

Have you ever come up with a stock picking strategy and wondered how well it has worked in the past? A backtest is a simple way to find out. One way to do this would be to pull historical data and do the calculations in Excel for example, however getting historical data can be tricky and/or costly.

Luckily there are a few sites out there that can quickly run the data for you and backtest stock strategies.

Will this change how you invest in stocks? Well it’s certainly changed how I do. After hours of running different variable tests on ratios and financial stats, I realised that some of my tactics needed refining.

It’s really important that here we point out that past performance is no guarantee of future performance.

 An example of backtesting

In today’s article we are going to show you the GuruFocus Backtesting facility on the All-in-one screener.

This can be found under the Screeners > All-IN-One Screener

Our demonstration is best seen on our Youtube Video >>>>

As you can see from our Screenshot below, once in this screener you can filter stocks by Country, Industry and a wide range of statistics under headings including Fundamental, Valuation, Profitability, Growth & Insiders.

Before running a backtest just underneath the screener you need to click ‘Backtesting’. This will the come up with some new dropdowns for the number of stocks to show, the dates for your backtest and a rebalance.

GuruFocus allows you to backtest for 4 years for free. Beyond this requires premium membership. However you can do a 7 day free trial for this. The downside of the free version is also that you cannot see the tickers or company names or download your results. For testing a general strategy though it’s still very useful.

You can choose from a wide range of filters just like other screeners under the headings of fundamental, valuation, profitability and more.

Rebalancing is a key part of backtesting stock strategies. Rebalancing will basically realign your portfolio with your original objective. It will basically sell stocks which don’t fit your criteria and replace them with ones that do.

To start the backtest just click ‘Go’. It can take a few minutes to run, but once done you can see your test results at the bottom of the page.

The most useful tab is the ‘Performance’ tab. Here you can see an annual performance of your backtest compared against popular markets such as the S&P500.

Having played around with this for days and doing the 7 day free trial, allowing me to run my tests for 20 years I found some really surprising results. Some figures which I thought really defined stock valuation had a lesser impact and other the opposite. I am now running live tests on some of these strategies.

I can’t vouch that all the data is perfect on this site and would definitely recommend trialing a few backtesting sites (although there aren’t many) before committing to strategies.

Hope you’ve enjoyed this post, have fun backtesting and let us know if you find any great strategies.