The History of Technical Analysis by Buff Dormeier

Author:Buff Dormeier
Language: eng
Format: epub
Tags: Personal & Professional Development
Publisher: PH Professional Business

Also at this time, Alfred Cowles, 3rd at Yale came out against market forecasters. Cowles specifically targeted William Peter Hamilton’s work with Dow Theory. Gazing down from his ivory tower, Cowles thought stock market forecasting methods used at the time were crude. He believed that highly educated economists were better suited for such tasks. He wanted a more scholarly approach to “the best guesses” of the market prognosticators of his day. That is to say, at the time, Cowles did not much respect the market. His views would later change, however, leading others to develop efficient market theory, the notion that stock prices are always correct and no one can predict them.

Cowles’ initial efforts, though, focused on discrediting the establishment. Although Hamilton was dead, his ideas were still very much alive and highly venerated by the public, representing a perfect target for Cowles’ attacks. In 1934, he produced the paper “Can Stock Market Forecasters Forecast?” In this foundational work, Cowles reconstructed Peter William Hamilton’s 255 market forecasts, providing his own assumptions about how Hamilton would have invested and the underlying investments Hamilton might have chosen.

Cowles compared Hamilton’s fictional portfolio to his own, self-created index of stocks. The results showed that Hamilton’s esteemed performance would have underperformed a fully invested index. Whereas Cowles work was quite substantial, indeed foreshadowing the notion of indexing and efficient markets, his critique caused irreparable harm to technical analysis.

Then, in the aftermath of the Great Crash, many investors abandoned stocks entirely. As a result, equity investing became a business left to a small number of professionals. At the same time, the SEC was changing the rules of how the stock game was played. The investment community felt the need to be perceived as being more responsible. Meanwhile, academics elevated the fundamental approach while assaulting technical thought.

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