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Random Walk

 

            
            
            
             Random walk is a movement in which future steps or directions cannot be predicted. Applying random walk theory to stock market simply means short run gains/loses in stock prices cannot be predicted. Hence, advisory services, earnings predictions, and forecast analysis are obsolete, not to mention, costly. Eliminate the middlemen!.
             B. Malkiel promotes "The Get Rich Slowly but Surely- method that advises investors to stay even, meaning, investments must secure a rate of return equal to inflation. Ideally, most investors would want holdings that have rate of return higher than inflation. Rate of Return > Inflation.
             C. Firm-Foundation Theory states that assets rely on their present conditions and future prospects in order to establish an intrinsic value. The prospective dividends are then factored into the stock's market price; hence, it's intrinsic value rises/falls.
             D. Castle-in-the-Air Theory is one that focuses on the dreams and wants of masses. For example, the Tulip Bulb Craze was a classic example of a self-fulfilling prophecy. The prices of the bulbs skyrocketed because the buyers made them by way of DEMAND. There were not enough bulbs to go around and those individuals lucky enough to have them doubled their equity in tulip bulb holdings. However, the bubble burst when the price of bulbs got to high holders wanted to sell but to their dismay, there were no buyers "bulb prices then plummeted. Res tantum valet quantum vendi postest "A thing is worth only what somelse will pay for it. Similar lessons are depicted in The South Sea Bubble and The Florida Real Estate Craze.
             Chapters 3 & 4.
             A. Determining the value of a stock is not easy. Companies can manipulate the value of shares outstanding with misleading announcements. For instance, General Electric's 1955 venture into diamond production resulted in a $400 million dollar gain. Air castles were being built and investors wanted in on the deal.


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