Market Theories
Investments Seminar
Table of Contents
Introduction 3
Castle in the Air Theory 3
Firm Foundation Theory 3
Effects of the Market 3
Market Theories 5
The Tulip-Bulb Craze 5
Today’s “Tulip-Bulb” Craze, the Dot-Com Crash 5
Conclusion 6
Introduction
Castle in the Air Theory
The Castle in the Air theory was introduced by John Maynard Keynes, an well known economist and successful investor of the 1930s. It was Keynes’ theory that the keys to investing came from supernatural or psychic means. He applied psychological rather than financial principles to the study of the stock market. He believed that it was not only too difficult but also quite time consuming to determine the intrinsic value that would yield a promising return on investments. He thought that it should not take all of that. He proposed that the best way to do so was estimating which investment situations that the public would focus on and then buying “before the crowd.” In other words, instead of picking out six out of a hundred stock based on how attractive they may have looked on the outside, it was better to select those stocks that the public were more likely to like the best. Or more so to predict what an average opinion of the best stocks are likely to be.
The Castle in the Air theory speculates that an investment is worth a certain price to a buyer because the buyer would expect to sell it to someone else at a higher price. And the new buyer anticipated the same thing. Keynes’ approach did pay off for him during the Great Depression. He became famous by playing the stock market from his bed for half and hour each morning and became quite successful. While other investors were struggling to find out the financial magic number of the best investment, he simply anticipated their next move and bought before anyone else. In the text, this theory was also named the greater fool theory because it proposed that there was a sucker born every minute. These “suckers” existed to buy an investment at a higher price than what was paid. The behaviors of the masses as well as the behavior of the economy could be observed and speculated in such a way that...
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...me out too soon too fast. Companies were not ready to go into this thing for the long term and they should have been thinking like so. The industry fell and fell hard after such a short time. Yet, overall taking a risk was perhaps one of the best things to have come out of this craze as well as all others.
Conclusion
In conclusion, I think that it is important for investors to understand both theories. The Castle in the Air theory sets an stage that is easier in my opinion to deal with. It has a way of encouraging an investor to look at and observe the behaviors of the market. The firm foundation theory, in my opinion is a worthwhile theory to research and develop. Knowing how to calculate different values and study the trends of such I believe are a good way to at least be able to make a more reasonable investment decision. Overall, I think that both methods are good because it can generate a better understanding of the market as a whole. Risk taking is a must and an investor is going to have to take risks in order to generate a return. That’s a given. However, it is by far a better thing to use these two theories in order to better equip investors for survival in the market.
...pulation because more people rushed into the industry to try to score a quick million.
...Walter Raleigh were instrumental in expanding English influence in the New World. Elizabeth's religious compromise laid many fears to rest. Fashion and education came to the fore because of Elizabeth's penchant for knowledge, courtly behavior and extravagant dress. Good Queen Bess, as she came to called, maintained a regal air until the day she died; a quote, from a letter by Paul Hentzen, reveals the aging queen's regal nature: "Next came the Queen in the sixty-fifth year of her age, as we were told, very majestic; her face oblong, fair, but wrinkled; her eyes small yet black and pleasant; her nose a little hooked; her lips narrow... she had in her ear two pearls, with very rich drops... her air was stately; her manner of speaking mild and obliging." This regal figure surley had her faults, but the last Tudor excelled at rising to challenges and emerging victorious.
She thoroughly prepared England for the colonization of the Americas. She also helped the arts in England by building several different buildings for the presentation of paintings and the theatre. One of the most well-known paintings of her was named Elizabeth I: The Armada Portrait. This piece of art was created in memory of the Great Sea Battle of 1588, a battle in which the English navy destroyed a Spanish fleet sent to overthrow the Virgin Queen. It depicts Elizabeth with perfect posture and her hand resting on a globe, which represents her power. Her black and white dress represents her high rank while her pearls represent
...e Crown. Queen Elizabeth Saw Mary as a dangerous threat to her position so had here on trial. Even though she was the queen of another country she was still trailed by and English court and condemned and later executed in 1587.
He is credited for being a pioneer in the visual effects realm of the filmmaking world. In his lifetime, he won three Oscars for his effect-based achievements.
McGuire, C. (2011, April). Workplace Safety 100 Years Ago. Safety Compliance Letter(2524), 1-6. Retrieved April 22, 2014, from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=60166397&site=ehost-live&scope=site
Elizabeth aslo began enforcing greater fines for not attending church each week from a few shillings to several pounds. Though no documents in Elizabeth’s handwriting survives to tell whether she truly believed in the Protestant faith as staunchly as projected by her governmental ministers and policies, one thing is certain, when King Phillip attempted to invade England with the Spanish Armada, Elizabeth was further turned from Catholicism.
] This catastrophic event is caused by the accumulation of a large scale of speculation by not only investors but also banks and institutions in the stock market. Though the unemployment rate was climbing during the 1920s and economy was not looking good, people on Wall Street were not affected by the depressing news. The optimism spread from Wall Street to small investors and they were investing with the money they don’t have, which is investing on margin as high as 90%. When the speculative bubble burst, people lost everything including houses and pensions. The main reason ...
Elizabeth I will always be remembered as a ruler who always supported her people. She provided stability and consistency to her country. She helped her country through political and religious challenges, and the arts grew during this time with all of her support.
In early 1928 the Dow Jones Average went from a low of 191 early in the year, to a high of 300 in December of 1928 and peaked at 381 in September of 1929. (1929…) It was anticipated that the increases in earnings and dividends would continue. (1929…) The price to earnings ratings rose from 10 to 12 to 20 and higher for the market’s favorite stocks. (1929…) Observers believed that stock market prices in the first 6 months of 1929 were high, while others saw them to be cheap. (1929…) On October 3rd, the Dow Jones Average began to drop, declining through the week of October 14th. (1929…)
Queen Elizabeth I was the strongest monarch in English history. Throughout her reign she proved that she really did care about her country and the people in it. She successful in keeping the country together and safe, as many before her had failed to do. Even after four-hundred years, the people of England still love and remember her.
The stock market is an enigma to the average individual, as they cannot fathom or predict what the stock market will do. Due to this lack of knowledge, investors typically rely on a knowledgeable individual who inspires the confidence that they can turn their investments into a profit. This trust allowed Jordan Belfort to convince individuals to buy inferior stocks with the belief that they were going to make a fortune, all while he became wealthy instead. Jordan Belfort, the self-titled “Wolf of Wall Street”, at the helm of Stratton Oakmont was investigated and subsequently indicted with twenty-two counts of securities fraud, stock manipulation, money laundering and obstruction of justice. He went to prison at the age of 36 for defrauding an estimated 100 million dollars from investors through his company (Belfort, 2009). Analyzing his history of offences, how individual and environmental factors influenced his decision-making, and why he desisted from crime following his prison sentence can be explained through rational choice theory.
There is a sense of complexity today that has led many to believe the individual investor has little chance of competing with professional brokers and investment firms. However, Malkiel states this is a major misconception as he explains in his book “A Random Walk Down Wall Street”. What does a random walk mean? The random walk means in terms of the stock market that, “short term changes in stock prices cannot be predicted”. So how does a rational investor determine which stocks to purchase to maximize returns? Chapter 1 begins by defining and determining the difference in investing and speculating. Investing defined by Malkiel is the method of “purchasing assets to gain profit in the form of reasonably predictable income or appreciation over the long term”. Speculating in a sense is predicting, but without sufficient data to support any kind of conclusion. What is investing? Investing in its simplest form is the expectation to receive greater value in the future than you have today by saving income rather than spending. For example a savings account will earn a particular interest rate as will a corporate bond. Investment returns therefore depend on the allocation of funds and future events. Traditionally there have been two approaches used by the investment community to determine asset valuation: “the firm-foundation theory” and the “castle in the air theory”. The firm foundation theory argues that each investment instrument has something called intrinsic value, which can be determined analyzing securities present conditions and future growth. The basis of this theory is to buy securities when they are temporarily undervalued and sell them when they are temporarily overvalued in comparison to there intrinsic value One of the main variables used in this theory is dividend income. A stocks intrinsic value is said to be “equal to the present value of all its future dividends”. This is done using a method called discounting. Another variable to consider is the growth rate of the dividends. The greater the growth rate the more valuable the stock. However it is difficult to determine how long growth rates will last. Other factors are risk and interest rates, which will be discussed later. Warren Buffet, the great investor of our time, used this technique in making his fortune.
Once there was a time when “shares in business corporations were rarely bought and sold because few companies were considered promising financial profits” (Blume 21). That is hard to believe considering almost everybody has invested in some stock today. The stock market went through some distinct changes since its inception, and has evolved into a shaping force in the world today. There is one idea that sparked the fire which produced the stock market: capitalism. Everything the stock market is, and was, rooted in the basic idea of capitalism. Without that idea, stocks and bonds would never have come to be.
The stock market is an essential part of a free-market economy, such as America’s. This is because it provides companies the capital they need in exchange for giving away small parts of ownership in their company to investors. The stock market works by letting different companies sell stocks to gain capital, meaning they sell shares of their company through an exchange system in order to make more money. Stocks represent a small amount of ownership in a company. The more stocks a person owns, the more ownership they have of that company. Stocks also represent shares in a company, which are equal parts in which the company’s capital is divided, entitling a shareholder to a portion of the company’s profits. Lastly, all of the buying and selling of stocks happens at an exchange. An exchange is a system or market in which stocks can be bought and sold within or between countries. All of these aspects together create the stock market.