Beware of Data-Mining

Jason Zweig has an excellent article in the Wall Street Journal warning investors about careless data-mining on Wall Street. This is the practice of trying to find any correlation that seems to explain stock market returns. One study even found a relationship between the stock market’s performance and the number of nine-year-olds there are.

I highlight this article because as a quantitative analyst this is an issue we struggle with every day. Just because there seems to be a relationship between one variable and the overall market doesn’t mean the two are connected. This is why my team and I spend so much time testing and retesting our research.

Zweig mentions the classic “sell in May and go away” rule, but that hasn’t worked out very well this year since the market has rallied. The lesson for investors is to avoid simple rules and correlations because those rules are constantly changing.

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