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Start here: five ideas, from zero
4 min read · Start here
In everyday words
Learning a few words before a trip abroad. These are the five to start with.
An example in pounds
A result can say: £1,000 became £1,900 with the rule and £2,400 by simply holding, with a worst fall of 40%. This page explains each part of that sentence.
The short version
Five ideas in plain words: a share, a fund, a backtest, simply holding and a worst fall.
This page assumes you know nothing about investing. It takes about four minutes. Each idea builds on the one before it.
- A share: one slice of a company.
- A fund: a basket of many shares.
- A backtest: a rule replayed on past prices.
- Simply holding: bought on the first day and kept.
- A worst fall: from a high to the low after it.
What a fund is
In everyday words
A basket with a little of everything in it, bought in one go.
An example in pounds
You put £100 into a fund that holds 100 companies in equal parts, so you have about £1 in each. If one of them halves in price, you are down about 50p. With the whole £100 in that one company, you would be down £50.
A fund is a basket of many shares, bought in one go. You buy a piece of the basket and get a small piece of everything in it.
Many funds follow a list. The FTSE 100 is a list of 100 of the largest companies on the London market. A fund that follows it holds those 100 companies and nothing else.
Next: what a backtest is
What a backtest is
In everyday words
Replaying an old football season to see how a new tactic would have done. You learn something, and next season is still a different season.
An example in pounds
A rule is replayed on ten years of real past prices. It turns £1,000 at the start into £1,900 at the end. That is all it says: it does not say the next ten years look the same.
A backtest is a replay of a rule on past prices. You write down a rule. One example is: hold this share while its price is above its average of the last 200 days. The computer goes back through years of real prices, day by day, and does what the rule says. At the end it shows what would have happened to the money.
Running backtests is what the Quantis strategy agent does.
A backtest describes the past. It is not a forecast and it is not advice.
What simply holding means
In everyday words
Tasting a new recipe beside the plain version. If the plain one is as good, the extra work added nothing.
An example in pounds
A rule turned £1,000 into £1,900 over ten years. Over the same ten years, buying on the first day and doing nothing turned £1,000 into £2,400. The rule ended £500 behind doing nothing.
A result means little until it is set beside something. The plainest thing to set it beside is doing nothing clever: buying on the first day and holding until the last. Quantis calls this simply holding.
In the example, £1,900 sounds good until it is set beside £2,400. The rule traded many times and still ended behind.
A Quantis result sets the rule beside simply holding, usually the same shares or a fund that follows the market. The full report has another word for that comparison: the benchmark.
Next: what a worst fall is
What a worst fall is
In everyday words
The biggest drop you would have had to sit through.
An example in pounds
You put in £1,000. It grows to £1,500, drops to £900, then climbs to £1,900. The worst fall is from £1,500 to £900. That is £600 off £1,500, a fall of 40%.
Prices do not climb in a straight line. There are drops along the way. The worst fall is the biggest drop from a high point to the low that followed, as a percentage. The full report also calls it the maximum drawdown.
It is the part of a result people feel. A test can end well and still contain a stretch that would have been hard to sit through.
In the example the test ended up 90%. On the way it was down 40% from its high. Both are true.
A Quantis result shows the worst fall for the rule and for simply holding, side by side.
Next: more on the worst fall
Where to go from here
- Yearly growth (CAGR): how a result's growth is turned into one yearly figure.
- The Sharpe ratio: growth set against how bumpy the ride was.
- Overfitting: why a good backtest can still be wrong.
- The risk warning: what can go wrong with real money.