Developer Kills Trading Hypothesis Early by Testing Core Assumption Before Backtesting

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A software developer exploring automated trading strategies proposed that undervalued small-cap stocks are more likely to be acquired via tender offer bids (TOBs), potentially generating returns. Instead of building a full backtest, he chose to first verify the core premise directly using raw data on roughly 582 real TOB cases. He compared TOB occurrence rates between an 'undervalued small-cap' group and all other listed companies, using market capitalization and price-to-book ratio below 1x as defining criteria. The analysis revealed no meaningful difference in TOB rates between the two groups, disproving the central mechanism of the hypothesis. By attacking the most uncertain assumption first, he avoided weeks of wasted development work on a fundamentally flawed strategy.

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