How to back test your investment strategy - Real world example
As you know the Quant Investing stock screener also allows you to back test your investment strategy.
This article shows you how to back test your investment strategy with a real world example.
You can also download the spread sheet containing all of the back test data and calculations – it’s at the bottom of the article.
Back test of the Magic Formula Momentum investment strategy
This article shows you the back test of the Magic Formula combined with momentum ( Price Index 6 months) investment strategy in Europe over the four year period from January 2016 to December 2019.
It is a further back testing of this investment strategy: Magic Formula investing & Price Index 6m momentum investment strategy
The exact screener settings
Here are the exact details of the back tested investment strategy:
- Countries - 17 Eurozone countries (Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain)
- Exclude banks, insurance companies, investment funds, certain holdings companies, and REITS
- Exclude companies with an average 30-day trading volume of less than €10,000
- Portfolios formed on the first trading day of the year (Because the back test database is point in time there is not risk of look-ahead bias)
- Returns were compounded on an annual basis
- Select the 20% best ranked Magic Formula companies
- Sort the list by Price Index 6 months from high to low
- Buy the top 50 companies by Price Index 6 months on an equal weight basis
- Rebalance after one year
This is what the screen looks like.
How to screen the past
This is how you can start using the historical point in time back test
I expand on all these points below but here are the steps if you know the
and go to the screener
Set up or load a screen
the Historical Screener icon
Select the date
in the past from where you want the screener results for
Select the future closing price date
to where you want to calculate returns
Click Confirm to get the historical screener results
Here are the detailed steps
Here are the detailed steps for you to back test your investment strategy
using the back test point in time database.
1. Login and Set up or load a saved screen
For instructions on exactly how to log in and set up a screen look at this
How to run your first screen with the Quant Investing screener
2. Get historical results of your screen
Once you have run your screen and you have a list of companies that
currently fit the screen criteria you are ready to go back in time.
To do this click on the Historical Screener icon to open
the Historical Screener date selector.
A window will the open where you can select two dates.
The first date is the date in the past you want to the
screener to run and give you investment ideas. The closing stock prices on
this date will automatically be loaded.
You can also (you do not have to) select a second closing price date.
If you add a second date the Historical Screener will automatically
calculate the stock price percentage change from the past screener date to
the second closing price date.
, if you choose to run the historical screener on 3 January 2016 and enter
30 June 2016 as the second date the screener will automatically calculate
the stock price return from 3 January 2016 to 30 June 2016 for you.
This makes it easy to see how your investment strategy has performed.
To select the past date you would like to screen for click the top date
To select a date you can either click the blue left arrow
or click on the date heading as shown below.
Next select a second closing stock price date.
The Historical Screener will calculate returns from the above selected
screener date to this date.
After selecting the date click the Confirm button to start the historical screen.
That is all you have to do to screen past results.
If there is No Data
As you saw you can only select weekdays in the above date selector. However
it may be that the day you selected was a market holiday with no closing
If it was a market holiday you will see a "No data"
message like this:
If you do get the No data message simply select a day
before or after the date you selected.
What were the returns of your back test?
The results of your back test will look like this:
- Shows you what saved screen you are back testing
- Shows you the date you are back testing (companies that fit your screen
on that past date)
- Shows you the saved Template you are using. A Template is a saved
collection of columns displayed with a screen.
- The closing stock price on the date you are back testing. The date shown
- The second closing price you selected when you ran the historical
- The percentage change from the closing price in 4 to the closing price in
If the returns look unusual or funny
If the returns of companies in your back rest look unusual or funny, -100% or no return for example. You will have to do a bit of research as the back test function does not save the last price before a company terminates its listing.
This may happen when a company gets taken over or goes bankrupt.
To find the last price the company traded at simply do an internet search with its name. An article is sure to come up on what happened to the company.
Use this price to calculate the company's back tested return. The easy solution will be to use Microsoft Excel.
Export to Excel for more calculations
If you want to calculate more return numbers remember you can export the
above results to Microsoft Excel.
To export to Excel just click on the Export Data to MS Excel icon.
Clean up the back test data
Remember the past data in the database is just as it actually was in the
past. This means you may have to make a few changes.
For example, if the second closing price is empty it means
the company delisted in the period.
To fix this search the internet for the
company name along with delisted or takeover. Find the last trading price
or takeover price, enter it in your spread sheet and calculate the return.
Stock splits or consolidations
conditional formatting function in Excel
to quickly find the companies with the biggest price movements.
If you see very wild return numbers, positive or negative
there may have been a stock split or stock consolidation. To check the
return numbers go to Google Finance or Yahoo finance and search the company
name and check if the stock prices are correct. You can also search the
internet for company name and stock split or consolidation.
Once you find the information just correct it in the spread sheet and
calculate the return.
Getting back the Magic Formula investment strategy back test
Getting back to how the Magic Formula Momentum investment strategy
Here are the summarised results:
As you can see the strategy performed well in 2016 and 2017 but ended up
not beating the market (
EURO STOXX® Index
) on a CAGR basis.
This was mainly because of the bigger loss of 26% recorded in 2018.
Here is the back test spread sheet
Click on the link below to download the spread sheet with the Magic Formula Europe investment strategy back test:
Magic Formula Europe Back Test
That is how easy it is for you to back test your investment strategy.
Your questions welcome
As always if you need help to use the back tester let us know.
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before it slips your mind?