Survivor Bias

If you had invested Rs. 10,000 in Wipro and kept all the shares with yourself, and spent all the dividends, your portfolio would be worth Rs. 300 crores (ok it does not matter whether it is 100, 200 or 300 crores) – it is just a gigantic figure! If you had invested in Reliance, Hdfc, Cipla, L&T, Infosys….we could say this story over and over again.

This is perfectly accurate and totally useless information because you cannot repeat it! Just try turning the clock back H G Wells would tell you! What is wrong with the abovementioned statement is what is called in Finance as a ‘Survivor’ bias or a clever selection of sample. What is to be seen is how does it work if you said “Apply in all IPOs of companies in technology” or “apply for shares in all companies from Bangalore – remember you would have got Wipro, Infosys, MindTRee and Biocon” . Selective sampling is survivor bias.

On Sunday ET (9th August, 2009) did a story saying “Cos. born in 1947 do better than Sensex” – Mr. Anand Rawani had done the article. This article said ‘Companies born in 1947 …outperforming the benchmark sensex by almost 45% in the last five years”. The companies from 1947 vintage which have been selected are the biggies which have survived for the past 62 years! Obviously only the best survive so long – so to come to such a conclusion is wrong and amusing. The better part of the article is that they have found experts to say why this has happened. One expert says “in the years after independence ….the main focus was on infrastructure…”. Aw bull.

The correct way to do it is to see how many companies were FORMED in 1947 …buy shares in them whenever they were listed and held it till today..surely there would be as many dud as they would have found in 1946, 1948 or 1950. It is just statistics – please use it well.

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2 Responses to “Survivor Bias”

  1. hi shubra
    new look is great

  2. Top 3 Blogs which I would recommend to you in Personal Finance on May 2nd, 2010 at 10:11 pm

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