Yet this contention, once supported nearly unanimously by aca-
demic economists, is cracking. Recent econometric research has shown
that such simple trading rules as 200-day moving averages or short-term
price momentum can be used to improve returns.^19
Despite the ongoing academic debate, technical analysis and trend
following draw huge numbers of adherents on Wall Street and among
many savvy investors. The analysis in this chapter gives a cautious nod
to these strategies, as long as transactions costs are not high. But trading
on the basis of charts requires full-time attention. In October 1987, the
Dow fell below its 200-day moving average on the Friday before the
crash and gave a sell signal. But if you failed to sell your stocks that Fri-
day afternoon, you would have been swept downward by the 22 percent
nightmare decline of Black Monday.
Furthermore, as I have repeatedly noted throughout this book, ac-
tions by investors to take advantage of the past will change returns in
the future. As Benjamin Graham stated so well nearly 70 years ago:
A moment’s thought will show that there can be no such thing as a scientific
prediction of economic events under human control. The very “dependabil-
ity” of such a prediction will cause human actions which will invalidate it.
Hence thoughtful chartists admit that continued success is dependent upon
keeping the successful method known to only a few people.^20304 PART 4 Stock Fluctuations in the Short Run
(^19) See William Brock, Josef Lakonishok, and Blake LeBaron, “Simple Technical Trading Rules and the
Stochastic Properties of Stock Returns,” Journal of Finance, vol. 47, no. 5 (December 1992), pp.
1731–1764, and Andrew Lo, Harry Mamaysky, and Jiang Wang, “Foundations of Technical Analy-
sis: Computational Algorithms, Statistical Inference, and Empirical Implementation,”Journal of Fi-
nance, vol. 55 (2000), pp 1705–1765.
(^20) Benjamin Graham and David Dodd, Security Analysis, 2d ed., New York: McGraw-Hill, 1940, pp.
715–716.