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Does the stock data used suffer from Surviver bias? That is a free download of historical data that lacks failing, delisted companies of the past.

• chollida1 10y ago
  This is a good question. The S&P 500 kind of dodges this question by its very nature. The S&P 500 constantly changes the stocks it holds. So if a stock falls out of favor, say Sears, its dropped from the index. It's also important to Note that comparing the S&P 500 from 100 years ago to today is very naive as the methodology for what it holds has changed significantly over the years. Comparing the returns of the S&P 500 from 1900 to now is kind of like comparing the statistics of a baseball player from 1900 and now in isolation and using that as the sole determination of which player was better. http://www.joshuakennon.com/sp-500s-dirty-little-secret/ http://www.joshuakennon.com/sp-500s-dirty-little-secret/
  • ianai 10y ago
    It's also only one statistic (as used). You would find differences for what years were loses 10/15/25 years down in different markets. For instance, Japan.
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• mrb 10y ago
  Yes sometimes companies are delisted from the S&P500, but if you invest in an S&P500 index fund, then your investment is also automatically adjusted to remove that company. Which makes me think: with index funds becoming more and more popular, should we see bigger and bigger crashes of stocks when they are removed from an index?
  • dforrestwilson 10y ago
    Potentially yes, but some hedge funds play the index dynamic by trading into or out of stocks before/after they are added.
  • SilasX 10y ago
    And then that index fund has to take the loss that comes with having bought a stock that failed and sell at a loss, while not capturing the gains of stocks that got big enough to make it on the index. Shouldn't the index "return" thus diverge from the return of an actual index fund in practice given enough years?
    • jonknee 10y ago
      That's not how it works, the return of the index is the actual return of the included stocks while they are in the index. There will be winners and losers, but the return is actually what you get.
      • ced 10y ago
        I'd appreciate if you could expand on that, because I share the same concern as GP. It seems to me that the index fund has to sell a lousy company at a low price (since it's being delisted) and buy a strong one that's being included in the index. Whereas the index, being just a number, can magically perform the swap without taking a hit.
        • jonknee 10y ago
          Sometimes it's OK to sell a lousy company at a low price--it's a lousy company! The beauty of a wide index fund like the S&P is that any one company diving won't hurt you. Companies typically last in the S&P for a long time, so the potential gains of adding companies earlier or selling them at a different time average out. Even Facebook has more than doubled since being added to the S&P and that's the definition of a strong growing company. If you really like a company that is being booted from the S&P you can just go buy it directly after the announcement and you'll most likely be able to pick it up on quite a discount. You can use different indexes if you want to have smaller companies (the Russell 2000 is a good choice), but the whole point of the S&P is that it is made up of established firms. Perhaps lower reward, but also lower risk.
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  • shostack 10y ago
    Likewise, are there bigger potential crashes for Mainstreet Investors in store as more and more of the populace shift to index funds? If there's a critical mass of people on index funds, what sorts of changes are there to overall risk and liquidity in the market?
• qwtel 10y ago
  The survivorship bias applies to the U.S. data as a whole. I've found this paper [1] that adds data from 15 more countries, some of which experienced interruptions (germany) but still excludes those that suffered "permanent interruptions" (eastern bloc) to the sample. Needless to say, the results are not as exciting. Memorable quote form the paper (quoted in turn from Samuelson): > We only have one history of capitalism. Inferences based on a sample of one must never be accorded sure-thing interpretations. When a thirty-five-year-old lost 82% of his pension portfolio between 1929 and 1932, do you think it was fore-ordained in heaven that later it would come back and fructify to +400% by his retirement at sixty-five? How did 1932 Tsarist executives fare in their retirement years on the Left Bank of Paris? [1]: http://merage.uci.edu/~jorion/papers/risk.pdf http://merage.uci.edu/~jorion/papers/risk.pdf