As an engineer by training, I’ve always been comfortable with the use of historical numbers in decision making. From empirically tested yield strengths that inform design specifications to segmented sales numbers that inspire new product ideas, making wise choices is all about putting good data to productive use. And as one can see by perusing the deep data focus of Portfolio Charts, I naturally apply that same mindset to investing.
So one of the things I admit I’ve had to adjust to over the years is something that I never really experienced in my engineering career. When it comes to finance, some people are just really dismissive of historical data.
It’s common in some circles for people to quickly shut down any discussion of past returns as the foolish discussion of unrepeatable events. Some reflexively point to specific timeframes that surely skewed the numbers in deceptive ways. Others explain how current events are very different than the past and proclaim that the old results are ancient history. And a surprising number have developed an outright distrust of math and statistics as the tools of unsophisticated investors and financial snake oil salesmen.
To be fair, these opinions are often born of legitimate examples of data abuse. Lots of people misuse statistics all the time or naively apply them out of context, and I totally understand how backtesting gets a bad name. But in my experience, the problem is not with backtesting but with backtesters. It’s super valuable when done correctly, but you have to know what you’re doing and approach it in the right way.
So to cut through the financial cynicism, I’d like to share three short stories about real-world situations where the use of historical data is widely accepted. By exploring how data is used well, perhaps we can learn a thing or two about how to also apply it effectively it in our personal portfolio decisions.