Every month now, more companies fall victim to the global credit crisis. Some, such as Lehman Brothers and Bear Stearns, are still fresh in our minds, but others that blew up years ago, such as Enron and Refco, have held on in the public consciousness. The sorry endings of these companies are still being unpacked - and they should be, as we try to learn from what happened.
Yet the lessons we can take away are limited by a peculiar situation. With the demolition of these firms, something important is disappearing too: their share price data from the stock exchanges.
Gone are the data of Merrill Lynch and Countrywide Financial, as well as Enron and Refco. Also erased are the data from firms that have been acquired legitimately such as BankBoston, PaineWebber, and Solomon Brothers. One of the creepiest examples is what happened to Bear Stearns & Company. Not only is its data gone, its former ticker symbol has been reassigned. Mutual funds are no better. Many failed funds are "merged" with other funds in the same fund family. According to one study, one out of every six mutual funds merged "out of business" from 1962 to 1999. All together, this is a kind of financial genocide with far-reaching implications.
Let's say ten years ago, you began investing. You created an appropriate asset allocation model, then you selected the managers that, given their past performance, met your needs. You were given three choices: Say, Jim Rogers, Warren Buffett, and Peter Lynch. They had all done extremely well for themselves up to that point. Whomever you have picked, you'd have had great results today.
Let's do it again, except this time, let's make your choices realistically reflect what was going on in the world at the time: Jim Rogers, Warren Buffett, Peter Lynch, Bernie Madoff, and a special fund with holdings only in the large financials like AIG, Lehman, Citi, and Bear Stearns, and another fund invested heavily in the Big 3 automakers. Given these choices, you might well have had a much different set of results, even if you were diversified. Some results could be potentially disastrous.
Whether you're analyzing fund managers or stocks, it serves you poorly to look at a world without any failures and blowups. In the second example, the data is robust, which means you would have been able to choose "expertise" that we know now didn't fare so well. It would be very beneficial to know NOW if your model would have picked what we know to be an abomination such as Madoff.
Likewise, managers of hedge funds, mutual funds, and traders create trading models and algorithms to uncover strategies that consistently make money have a problem when any share price data is missing. All hypothetical results will be statistically biased. Since Enron's data does not exist, it will never again be in anyone's model.
If you think that the data being erased is a good thing, it's not. If your model would have otherwise owned Enron during any part of its implosion, you'll never know what effect it would have on your portfolio. Same goes for Refco or Countrywide Financial. If your model hypothetically owned any of these, you likely would have lost money. If you were a buy and hold investor, you may have lost much more than you would have anticipated. Maybe your strategy would have seen these as candidates for short sales. Or, securities to avoid altogether. You'll never know...that's the problem.
Since your data has been scrubbed of all the blowups, you are robbed of the chance to learn from being wrong. You cannot statistically relive the meltdown in the comfort of your own algorithm or hypothetical asset allocation model. Neither can any of the Wall Street firms, from the large brokerages to the online trading firms, to the hedge funds, to the proprietary traders.
What we're faced with now is called Survivor Bias, and it means the opportunity to learn from the data in its fullness is gone. Without Countrywide Financial and its brethren's data in the mix, you will always choose only from firms that have survived. Every firm in your model is a Rogers, a Buffett, and a Lynch - a survivor.
When you the investor are faced with such fantastic results, you are encouraged to go "open an account" or take some action - which means create revenue for your would be financial suitor. Could that be why the losers have been pulled? Mutual fund firms, brokerage firms, online trading firms, and discount advisory firms may be the only ones who benefit from this situation. If you chose any of the blowups, you might have experienced hypothetical losses over the last decade and that would not give you the confidence to open up a new account or add money to an existing one.
Yahoo Finance discloses that it gets its data directly from the exchanges, so Yahoo is off the hook. But go to the NYSE website itself and you won't find the data there either.
Geez, at least the Pharaohs left us the pyramids. All Wall Street has left us are mouse pads and coffee mugs from imploded firms through the ages. These artifacts may be the only true survivors of the meltdown. The lessons of the subprime meltdown, meanwhile, will be trapped in a pyramid that will never be discovered...a mass grave.