The problem with back testing, says David Leinweber, managing director at First Quadrant, a money-management firm in Pasadena, is that it can be manipulated to show nearly anything. To prove his point, Leinweber came up with the following: Would you believe that in the 10 years between 1983 and 1993 you could have used the production of butter in Bangladesh to predict how well the S&P 500 index would perform? On average, Leinweber found, when butter production was up 1%, the S&P 500 was up 2% the next year. Conversely, if butter production was down 10%, you could predict the S&P 500 would be down 20%.
1-Jan-2013 10:08 pm