From: ajayshah@alhena.usc.edu (Ajay Shah)
Newsgroups: misc.invest,sci.econ
Subject: Re: Chartism -- charlatans?
Date: 15 Apr 1992 00:53:48 -0700
Organization: University of Southern California, Los Angeles, CA
NNTP-Posting-Host: alhena.usc.edu

cjkuo@locus.com (Chengi Jimmy Kuo) writes:

>>How do you deal with the fact that _every_ single time an academic has
>>carefully investigated claims by any chartist of "systematically
>>beating the market", those claims have been proven false?

>[stuff deleted.  Summary: Ajay does not like chartists.]
Yes.  They offend the part of me which respects human intelligence  :-)

>>Considering what is known about prices being a random walk, [...]

>The random walk theory is not "known."  It is a theory also.  I'm sure
>if you were in a specialist's seat, you would not abide by the random
>walk theory.  Or, are you going to tell me that when the futures minus 

No; it's not "just another theory".  It is a theory which makes very
nice _falsifiable_ propositions which can be tested with data.  
Dozens of capable econometricians have examined the testing from different
statistical perspectives.  They have run the tests on data from different
stock markets at different points in time.  The consensus: it is not
possible to reject the null hypothesis that stock prices are a random
walk.

It is (obviously) possible that some more fiendish test will be able
to reject this null, but lets say a generation of work by some darn
good statisticians has not been able to do it.  I would respect the
broad conclusion, and the broad implications.

This does not mean you give up and die on your investing.  E.g. Malkiel's
book has some very commonsense ideas for how to invest effectively
in a way which suits your needs.  It does, however, considerably reduce
the need for investment consultants.  Specifically, it does trash all
chartist claims.

>All of these things are theories.  By stating that technical analysis is 
No.  A theory becomes special when it is brought under the "unrelenting
gaze of data".  This is a theory which does emerge with falsifiable
propositions, and it has been tested by dozens of the best statisticians
known to man.  


Earlier I alluded to the systematic and depressing debunking of chartist
claims.  That was done in an even more convincing manner: you simply
keep careful track of the money you would make if you followed chartist
scheme X.  The best (read: highest priced) chartist consultants have
been examined.  None of them do zilch.

The ONLY unusual proposition to come out of the literature (to my
knowledge) is that the Value Line "timeliness" measure does have
some value.  For the rest: trash them chartists is the only conclusion
supported by evidence.  

>Everyone should realize that all these things are theories.  My purpose
You make it sound religious.  It is not.  There is enough data from
the past performance of stock prices, of chartist claims and (e.g.)
Value line recommendations.  We can discriminate good from bad.
Chartism has been subjected to such systematic evaluation, and
it has been found wanting.

I'm convinced chartism and investment consulting is exactly like
Microsoft and the PC rags.  They feed on and sustain mass-scale
ignorance.  It is not in their interest to have smart consumers.
It is said that when the modern theory of finance starting emerging
out of academics in the early 70s, there were howls of protest and
criticism from "wall street pros".  Makes sense -- it does threaten
their cozy racket.

Not MHO -- just the facts.

        -ans.
-- 

Ajay Shah, (213)749-8133, ajayshah@usc.edu