On March 23, Mike from UglyChart.com announced that he had “Absolute proof that the Efficient Market Hypothesis is incorrect, that Technical Analysis works, and that I wasted too much time on inspectd.com“.

Here’s a bit of a time line before and since:

March 20, 2008: Inspectd.com is listed in the “links for” post at UglyChart.com.

March 21, 2008: TechCrunch posts an article about a new “Time Waster” called Inspectd.com, and the rest of us notice this site that “has been around for a while”.

March 22, 2008: Ugly posts How to turn $100,000 into $6 Billion+ on inspectd.com, including this video:

Mike gives these 3 tips:

1) I hit the skip button A LOT.
2) I only went long (bought) – and never shorted (sold).
3) I simply waited for a chart with an uptrend before buying

March 22, 2008: Later that day, Mike posts that he broke inspectd.com – can’t go over one trillion.

March 23, 2008: Mike creates a new account on Inspectd and takes that to 1 Trillion+, claiming victory in a post entitled Absolute proof that the Efficient Market Hypothesis is incorrect, that Technical Analysis works, and that I wasted too much time on inspectd.com.

I thought by doing it again, I would show anyone that might have thought I was just lucky on my first trillion, that it wasn’t just luck – it was technical analysis. Technical Analysis really works. A lot of us traders already knew this.
Q.E.D.

Some Arguments

No more fun and games. We’re talking serious economic theory here. And so comments on the Uglychart blog bring up some counter arguments.

Brad says, “To invalidate the efficient market hypothesis, you would have to show that randomly selecting the points would have done significantly worse than your selections.”

Ugly says, “I’ll make a few accounts and make the exact number of trades as I did to make a trillion, but make them totally random – without looking at the chart. I am sure the performance will be much worse. Will that then invalidate the efficient market hypothesis for you?”

I commented:

Do you know how many charts Inspectd has? Do you think you either consciously or unconsciously recognized charts from earlier Inspectd runs … or even real life?

Ugly replied:

I think inspectd just pulls random charts from aol – random timeframes. I never noticed it repeating once…

…I did not recognize any charts from real life. Even if it was a stock I traded, you have to remember that it is only pulling a certain timeframe out. So even if it were HANS or something, I probably wouldn’t recognize it, because it would be a snapshot of a random time on HANS…

…The thing people need to remember is that this is not meant to replicate real live trading. Yes, there are a lot of other factors that come into play with real live trading. It is a practice tool. BUT, in my opinion, it proves that the efficient market hypothesis is wrong. And that TA works.

JZYCRZY points out what we all know about how trading $100,000 differs from trading $1Billion, commenting “Do you really think it will be possible to invest 100% of, lets say, a $5 million portfolio into a single stock without massively affecting volume and causing a huge price change/mkt reaction?”

Ugly correctly replies:

thanks for your comments, but I think you are wrong. I think it is a perfectly acceptable argument against the efficient market hypothesis. I know it is not the same as real live trading. As I have said many times before, there are a lot of other factors that go into real trading. HOWEVER, it provides clear proof that future prices CAN BE predicted from past prices. And that alone is enough to disprove the efficient market hypothesis. Do you not agree?

To be clear here, I agree with Mike that it doesn’t matter that trading $1Trillion dollars on a penny stock for 100% profit isn’t something that is possible in real life. However, the fact that he can consistently make +E/V bets is. The question (to me) is to figure out if his bets are more +E/V than someone simply buying everything and holding forever. That’s harder to tell. We’ll get back to this…

I wanted to also highlight a comment by Mike that puts the “can’t trade so much money” argument on its head by turning a statement like “TA doesn’t work because investing super large sums of money will impact the market” into “TA works because folks investing super large sums of money impact the market and I can take advantage of that with my less than super sum of money”. Something like that…

TA is logical if you think about it for a minute. If Warren Buffet is buying up shares of a company because it is a good investment – don’t you think that will have an impact of the chart? If Warren Buffet is selling shares because he thinks a company is overvalued, don’t you think that will have an impact on the chart? Don’t you think this kind of inside information on Warren Buffet’s trades would be valuable? This is why TA is logical.

March 25, 2008: Ugly gets to 1 Quadrillion dollars.

March 27, 2008: I missed the Zimbabwe reference when he posted this video of him making loads of fake cash at 3x speed.

April 1, 2008: Mike’s up to $1 Sextillion. No fooling.

April 6, 2008: Last post at Uglychart as of this writing this article. Mike’s now at $1 Septillion, a number Inspectd doesn’t recognize. (Inspectd usually abbreviates your earnings to something like 1.6 Trillion, etc, but shows all the long de dong digits on Ugly’s entry in the leader board.

Some More Arguments

Okay, back to the “is this better than a buy and hold strategy” issue. The reason this question comes up is because Inspectd.com allows you to make a trade that takes place over 20 days in about 2 seconds. And so when Ugly was up to $1 Septillion dollars, he had been pretend trading for about 250 years. Compounded over 250 years, any return would get big… but how big.

I pointed this idea out in a long comment. I roughly calculated:

Even so, 100k compounded annually at 13% would turn into only $174m in 100 years. I think you trounced that number pretty good in your first 100 “years” of Inspectd trades.

Sam Sanders from Inspectd chimed in saying that the charts were from a period between 1987-2007. So we all

Oracle used that info to get a little more precise:

You have actually proved that TA does not work. You have traded 70,120 days on the market and since there are roughly 250 trading days in the market this means you have traded for a total length of 280 years. Compounding for 280 years with 12.8 percent which is the average yearly return of DOW your account would have been worth 303868671812220900000. A DOW index fund would have over performed you 68 times to 1, my friend. Stop wasting your time

Ugly thinks the return during that period was a little lower: “If my calculations are correct, the DOW has returned an avg of 10.53% during this time period (1987-2007), while my annual yield on inspectd.com would be 11.8%.”

Then Mike closes out with this comment:

And I’ve come to conclude that the average return of the DOW really plays no part in the argument that I was trying to make (i.e. TA works and the efficient market hypothesis is wrong).
But I’m glad oracle brought it up because the power of compounding does make my results (now up to $30 quintillion) looks a lot more impressive than they really might be.

Is Your Head Spinning Too?

It’s obvious that this math is tough. We’re talking about big numbers. So any discrepancy in the inputs, no matter how small, has a huge effect on the output. And so knowing what the exact rate of return was during that time period… or specifically for the stocks in the Inspectd database is important. Also, I still think there’s something to the fact that Mike was able to skip charts that may have come up in a bear market. This could explain his outsized returns, due to his ability to sit out bear runs when in real life his would have missed out for 20 days. However, this would imply that he’s able to detect a “bear market” or a -E/V stock to skip and so proving TA works. Don’t we say that “there’s always a bull market somewhere”, meaning even in bear markets there are nice stocks setups.

You must prove that TA techniques beat the index funds.

To be honest, I’m not entirely sure how Mike is disregarding the “does it beet the index” argument now. Sure he could prove that TA works, but because of the upward bias in the stock market, you should have to prove that it works better than an index fund. Never mind the fact that if you are actively trading, you’ll want it to outperform a zero-work strategy like buying an index fund… otherwise it’s not worth the effort.

I’m kidding. TA Works.

For what it’s worth, I do believe that future prices can be predicted based on charts. Charts are just a compacted way to describing the market emotions at a given time, and experts can read them with greater than 50% accuracy… all that’s needed to be a profitable trader. It is very intuitive to me. It’s intuitive to me that doing this won’t be overly easy, and only top traders will be able to outsmart the competition out there.

From what I can tell, I’d give Mike credit for proving by example that TA works and EFT is bullocks. It’s very fascinating and should be making bigger waves in mainstream media. That means you, Erin Burnett.

Remember, even index funds aren’t truly passive. There is still an element of stock picking and timing as companies are added and removed from the index, or as weighting factors change (if they are involved).

The markets are not random, and it is possible for some participants to win consistently with skill. I maintain that the smaller the time frame, the more accuracy a skilled trader has in being able to predict future price action. However, in the very long run, it’s 3% GDP growth + inflation (and we’re all dead).

BTW Jason… I made money by simply clicking on BUY, BUY, BUY… I lost money when I clicked SELL, SELL, SELL…

What does that tell us? There is a statistical bias to stocks going up…

Gee who would have known…

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