I found this Wall Street Journal article by Jason Zweig discussing why data mining or “back-testing” isn’t a reliable way of outperforming the market.
Zweig says..
“The stock market generates such vast quantities of information that, if you plow through enough of it for long enough, you can always find some relationship that appears to generate spectacular returns — by coincidence alone. This sham is known as “data mining.”
Those assumptions are completely unrealistic, of course. But data-mined numbers can be so irresistible that, as Mr. Leinweber puts it, “they are one of the leading causes of the evaporation of money, especially in quantitative strategies.”
This article is worth reading if you’re thinking about using one of these strategies. I see advertisements everyday promoting “proprietary software” that lets you consistently profit in every market; but in reality, the only one profiting from this type of investing is the person selling you the system or software. Remember, if it sounds too good to be true it probably is.
