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The Power and Pitfalls of Back-Testing - Views on News from Equitymaster

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The Power and Pitfalls of Back-Testing
Mar 5, 2018

Did you know the approach Microcap Millionaires' is inspired from has been back-tested extensively?

And not just by us.

Benjamin Graham first set out to test the data historically. He analysed the performance of his approach over a period as long as 50 years and the results were extremely encouraging as per him.

The portfolio created based on his approach consistently showed returns of more than 15% per annum, nearly twice the record of the US stock market index, the DJIA, during this long time period.

Our results

While Benjamin Graham's approach had the track record to show for it, we wanted to do our own historical testing in the Indian share markets.

And we are happy to say that we weren't disappointed.

In 2014 when this service was started, sticking to the broad framework that Graham had outlined, we went back in time to December 2006 and evaluated how the strategy would have performed over the next six years.

While we knew that the portfolio would do well, we weren't quite prepared for what transpired.

During this six year period, the portfolio gave more than four-fold returns. In other words a point to point return of 320% and CAGR of 27%. These are impressive numbers whichever way you look at it. And to put things even more in perspective, it comfortably outperformed the Sensex which returned just 40% point to point on account of great volatility in its performance.

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