I have recently started thinking about investment strategies. My current investments are based on a strategy that I came up with many years ago before I understood religion or much of how the world really works. With my current understanding, can I do better?
I developed my old strategy by reading many books and generally researching investments, and then choosing what I thought made sense. The result was not horrible but not great. It was somewhat below average. I think most other non-professional investors do the same, with the same results.
Of course the very rich do things differently. They are generally sociopaths who are well connected and manipulate people or use inside information to get an advantage over the rest of us. So they do well, but this isn't a strategy for the average investor.
After thinking about this problem for a few days, last night I just couldn't sleep and kept tossing and turning. This morning I woke up with an answer. My answer is based on my understanding of religion which I have applied in many areas of my life. The key point is not to let arrogance cause bad decisions. Truth only comes from God which means from the real word which means from empirical data. Everything one reads about investing is just someone's opinion, comparable to an idol, with no basis in reality. What no one does, and what I plan to do, is to choose an investment strategy purely based on empirical data. No speculation at all.
The idea is to test investment strategies against historical data. So each investment strategy must be a simple algorithm (formula) that I can implement in software. Then I need to get the relevant historical data to test the algorithm. The test must take all factors into account, factors that are often ignored. This would include things like dividends, taxes, mutual fund expenses, etc. With all this in place, I would test all plausible strategies and then just choose whichever one performs best.
This is simple in theory but I think it will require some effort to implement properly. As a programmer, I will write the code and I will make it open source. I could use help finding the data, getting all the factors right, and coming up with investment strategies. But in my experience, humanity is generally useless, so I don't expect any help regardless of how useful this project would be. But if anyone is interested in this, they can contact me.
But isn’t that “postdicting” rather then predicting? Just because the market has performed in a certain way in the past doesn’t mean it will in the future. I think you have got the wrong idea. This has been tried in the past and failed.
If you believe in inductive reasoning then the past is useful from predicting the future. A key is to test many different past time periods because just one time period isn't enough to judge. So one can test against times of inflation or depression or whatever conditions one worries about. A good strategy should do okay under all conditions.
It is true that there is currently a fundamental change happening. Humanity is going insane and the world will become much poorer as a result. But it is the poor (and former middle class) who will suffer from this, not the rich. The investments of the rich should do fine while the poor starve, so this shouldn't really have much effect on investment strategies.
If this has been tried in the past and failed, please give a reference. I haven't seen anything like this.
I recall reading one of Victor Niederhoffer’s books where some young guy came to him with a theory that the stock market followed the ups and downs of some symphony and he had come up with an investment strategy to capitalise on it. Being knowledgeable about both music and statistics, Niederhoffer verified that the guy was right and lent him $100k to test his theory. The guy lost that and more and left town with the shirt on his back. He didn’t do anything wrong. If he could have gone back in time and started investing earlier he would have made a fortune. It is just that with the benefit of hindsight it is always possible to impose a pattern on the past at any given point. That doesn’t necessarily mean it will apply to the future.
This is a good idea but the problem is the APIs for getting historical earnings data only work for a brief period of time before the fickle software developers change it or take it offline. I find that this is by far the biggest obstacle to writing financial software.
I will say though that a few years ago I wrote a simple script for valuing stocks using basically just the PE ratio with net assets factored in, and this resulted in me buying a stock that has more than doubled in value since I bought it in 2020. So I do think that it is possible to write software that beats the market without being a scholar of finance.