A major problem with historical data is the presence of survivorship bias that distorts historical averages, unless we weigh companies entering the index by volumes. Even then, there are some issues arising.
Here are few links providing a primer on survivorship bias (we will discuss this in more depth on the class, of course):
- “Morningstar Takes a Closer Look at Survivorship Bias” https://www.ifa.com/articles/morningstar_takes_closer_look_survivorship_bias/
- “SURVIVOR BIAS AND IMPROPER MEASUREMENT HOW THE MUTUAL FUND INDUSTRY INFLATES ACTIVELY MANAGED FUND PERFORMANCE: http://www.etf.com/docs/sbiasstudy.pdf
- “When It Comes to Fund Performance, History Is Often Written by the Winners” http://www.wsj.com/articles/SB10000872396390444025204577545460615317218
- An example from actual data on construction sector activity: http://trueeconomics.blogspot.com/2010/08/economics-9810-irelands-construction.html