It’s 50 years this year since the Beatles’ Abbey Road album was released. Reenacting the Abbey Road cover on the zebra crossing is something I’ve wanted to do for years but have somehow never got round to it. What’s so special about the Beatles, that makes fans crowd around that Abbey Road zebra crossing, much to the consternation of drivers after all these years? Good music of course!
To prove that point, how many Beatles songs can you think of, which are memorable? Not just one or two, right? Off the top of my head I can think of many… Here Comes The Sun, Something, Hey Jude, All You Need is Love, Revolution, Yesterday and many more. Perhaps my favourite (other than Here Comes The Sun), is In My Life from their 1965 album Rubber Soul. Whilst it’s a well known track, it’s probably not quite as well known as some of the other songs by the Beatles that I’ve listed. It’s a relatively simple track, where the lead vocal and harmonies are particularly prominent with a relatively sparse instrumental arrangement. Whilst I’ve listened to it countless times, today is the first time I’ve actually read the lyrics. The track opens with the following lyrics:
There are places I’ll remember
All my life, though some have changed
Some forever, not for better
As you can see from the above, the song is largely about nostalgia and looking back. It’s easy to get subsumed into looking back. After all we know what happened in the past, but the memories of the past are imperfect. Good memories seem to glint in the light, whilst the difficult times wilt and fall away. In practice that might sometimes be good thing for life, in that time heals. However, bad memories which fade are certainly not a good thing for traders and quants!
Quants can be just as guilty of nostalgia as anyone else. We like to look in the past. It is the only real data we have, after all, from the past and it’s only a single path (although, we can also try to simulate data which can sometimes be helpful). Backtests of trading strategies usually look better in the past in-sample. Often the data has been mined too much, so the “bad memories” fall away, so a backtest has that all too familiar 45 degree straight line showing perfect cumulative returns.
But life is all about looking forward, as is, of course trading! The past can inform us about the future, but at the same time we cannot be wedded to the past, when it comes to trading. Optimising for the past can render a strategy less robust in the future. Nostalgia has its costs, and we need to be aware that, when looking back. Now, let me get back to listening to the Beatles back catalogue. What’s your favourite Beatles record?