What is survivorship bias?
It a selection process which biases the result. For example, back-testing with data that omits failed companies would bias the results.
As investors, however, we can also use the concept of survivorship bias to our benefit. We want our portfolios to be structured so that they contain healthy companies and drop unhealthy ones (i.e. are biased to survive).
How can I bias my stock portfolio?
There are two ways you can do this:
1. Invest in index funds.
Index funds are inherently survivorship biased. That is, they are constructed by a set of rules which makes it very difficult for the fund to be holding a company which is about to fail. This is part of their genius.
2. Construct a portfolio with rules.
For example, you could restrict what you invest in by having a threshold for company size, revenue, liquidity, efficiency etc. These rules should be created so they bias your portfolio towards the survivors and away from the ones which may fail.
No, not really. It is difficult to follow these rules for a number of reasons.
For example, you may like the company which has dropped below your portfolio’s company size limit and therefore decide to ignore your rule. Or you may forget to monitor your portfolio only to find that a company you’ve invested in has exceeded your leverage limit.
What to do?
Use Forwardcaster to build a strategy. Once you’ve created a strategy with the rules you want, link it to a model portfolio to track it forward.
Our portfolio tracker won’t care if you ‘like’ the company. It won’t forget to monitor the market. It will help you to stick to your investment rules.
Each day, week or month (depending on the frequency you want), you will receive a tracking report. The report tells you which companies are entering or leaving your model portfolio based on the rules you have created. It is as simple as that.
Using Forwardcaster, you can capture the benefits of survivorship bias and directly own stocks you want, while operating within a rules-based, risk management framework.