What are some of the potential pitfalls in using this historical data to make stock picks?
There are a lot. For example, we note that over the period 1998-2003, a great way to invest was simply to buy cheap stocks, sell at a higher price, and buy yet more cheap stocks. Obviously, if this focus on cheap stocks is merely a long term cycle, and it reverses next month, you could lose a lot of money by buying cheap stocks. The whole web site operates under the assumption that history (short to mid-term history in particular, since we usually don’t look back more than 25 years) repeats, to some extent. If it doesn’t, or it reverses, our historical data is less than useless. Look at our investment tests…while we’ve outperformed the market over the long haul, there certainly have been periods where following our historical data resulted in losses that exceeded those of the general market. Hopefully, our “risk-adjusted” data can mitigate some of the dangers of a major reversal in the trends we look at.
