No. of Recommendations: 22
In a well written piece, our friend Bill Mann outlines the reasons why he believes technical analysis is an "inferior way to invest." His chief premise lies on, as he terms it:

"The fact is that there are no truly successful long-term practitioners of technical analysis. Where's the massively successful guru whose methods for utilizing technical analysis have worked for decades?"

For the casual reader the above argument appears to hold some water. After all, Warren Buffett is one of the richest people on earth and he is a buy and hold type of guy.

Unfortunately, like many misconceptions abound in investment lore, an apparent lack of evidence is not proof that the evidence does not exist. Specifically, there ARE "truly successful longterm practitioners of technical analysis" and have posted market beating returns. Most technical analysts know of them, have heard of them, and study their techniques. Why proponents of fundamental analysis or those that claim TA has no value whatsoever don't seem to acknowledge them is beyond my understanding.

Of course, the question quickly comes back, "Who is so successful?" Ever heard of Schwarger's best selling books? "The Market Wizards" and "The New Market Wizards?" Ever taken a chance to read either one? In them you will find profiles and information on some of the most successful technical analysts: investors who have achieved 40% annual returns for 15 years or more. The books are not dedicated to technical analysts (rather, successful investors) but at least 75% of individuals interviewed use TA solely or in conjunction with fundamental analysis. Ironically, one trader in the book, Marty Schwartz, laughs at investors who say "I've never met a rich trader." And yet somehow these best selling books escape the knowledge of some of the most well informed individuals.

Mr. Bill Mann further challenges any investor to take the "Train Wager." Hey, I would. But I would also challenge fundamental investors to a similar feat. I will give them balance sheets, income statements, and statements of cash flows for companies in the 1980s, without the company's name mentioned or the dates. Then, all I ask is that fundamental investors tell me whether the stock will be higher or lower after a certain time period.

An intelligent investor would say, "That's not possible. As fundamental investors we need to monitor the company as things change and watch earnings quarter after quarter, year after year so we can assess changes in the company's situation." An intelligent technical analyst would answer, "SO DO WE." You see, technical analysts can't predict whether it will be higher over the next week or month or year. They can make an assessment (like buy) but they have to monitor the situation just as fundamental analysts monitor a company's earnings.

I submit that investment professionals or journalists are not ignorant of the data, they merely ignore that which is counter to their point. This practice, a fallacy known as "special pleading" in logic, occurs when individuals gather all information confirming their points of view and hide or ignore that which might cast shadow on their arguments. Others simply embrace one "expert" who has condemned TA and believe whatever he/she says.

A member on this board posted the following:

>>And yet the studies cited in Random Walk suggest that TA does not provide any advantage over chance to beating the market averages. <<

A nice argument. Unfortunately, our friend fails to acknowledge or is not familiar with the academic studies which confirm TA's value. You can read about one study conducted recently by doctoral candidates at MIT (a fairly reputable university) who concluded TA does have value in indicating price directions. The study was cited in the most recent issue of Individual Investor (in an article on TA).

Furthermore, the argument that Dr. Malkiel does not find any value in TA was made by a proponent of fundamental analysis. How convenient! Dr. Malkiel finds no value in it either (hence the title of his book, "Random Walk"). For some strange reason, Dr. Jeremy Siegel's work on this subject (an author, I might add, highly regarded by the Motley Fool) is not considered. He is a highly respected professor at the Wharton Business School. In his book, "Stocks for the Long Run," Dr. Siegel shows evidence that using the 200 day moving average on the Dow Jones would have produced superior returns to a buy and hold strategy (all the way back to the inception of the index).

I personally like Dr. Van Tharp's view on this matter. He has coached some of the best traders in the world and says if one can simply find a strategy that can perform better than randomly picking stocks, one can use it to profit. Indeed, he shows in his books how an investor can beat the market by simply buying stocks blindly IF one practices sound money management.

Hey, I can attest that it's true. But what's my word worth?

Conservatively Yours,
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