Quote from gmst:
From yahoo, I see CSCO split adjusted closing price for 3/26/1990 to be 0.08 whereas real price matches with what you have at 24.25.
Where did you find the value of 0.002
I just threw in that particular number. I didn't bother looking that one up. My database does show the .08, however, but it's still useless because the real value is rounded to 2 places. That would be fine if all splits were 2-1, 3-1, 4-1. But they're not. Some stocks split 4/3, 5/4, 6/5. And some reverse split some ungodly number, like 1/10000, 1/2500, etc.
Do I understand you correctly here:
1) When you are using adj_lower, you are starting from TODAY's real OHLCV and dividing for splits and dividends to compute adjusted prices while moving backward in time.
2) When you are using adj_higher, you are using real OHLCV from trading day#1 and then multiplying it with splits and dividends to compute adjusted prices moving forward in time.
Yes
However, my question is for "Most Correct" backtesting, don't you think we should use real OHLCV and not assume dividend reinvestment (which is an assumption when we are using adjusted prices of any type). Since in reality, as I gave the example in my post above, 300$ received in dividend most likely won't be invested again, rather it will sit in the account as cash. What are your thoughts on this particular aspect? Also, if we are using real OHLCV prices as they prevailed historically for backtesting, we would measure the real Drawdown as experienced historically. On the other hand, using adjusted prices will result into a different drawdown. The main point of using adjusted prices is that you get the correct log returns over your investment period. However, drawdowns won't be correct. Am I making sense here?
If all the data is multiplied/divided by the factor, every value will be proportionate to the original - shares purchased, purchase price, liquidation price, etc.. Just re-multiply or divide by the inverse of the factor to get the appropriate prices for your stats. Or keep 2 arrays of prices - adjusted and unadjusted - and reference each with the same index.
But the real question is - how important is it the imaginary CAGR and DD generated by the backtest(s) are 100% correct?
They're just numbers that tell you what you can expect if the future plays out perfectly like the past.
What would be more enlightening is running a Monte Carlo simulation so you can see the range of all possible outcomes. If you dig deeper, you'll see how dependent the final numbers are on the timing of the trades. And you'll see how severe the DD could be in the worst case scenario...
As an example, if Warren Buffett started his career 6 or 12 months earlier or later, there's a good chance he'd be living in his starter home by necessity instead of by choice... and BRKA would be the delisted symbol of a bankrupt textile company.
