Summary Of A Random Walk Down Wall Street

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The firm-foundation theory from book “A Random Walk Down Wall Street” argues about each investment instrument including common stocks and pieces of real estate. These two instruments have a firm anchor of something called “intrinsic value,” which is determined by careful analysis of present conditions and future prospects. When the market prices fall below the firm-foundation of intrinsic value, a buying opportunity arises. This opportunity arises because the fluctuation will eventually be corrected. Thus investing becomes a full but straightforward matter of comparing something’s actual price with its firm foundation of value. The firm-foundation stresses that a stock’s value should be based on the stream of earnings a firm will be able to …show more content…

Malkiel argues that the biggest bubble of all: surfing on the Internet, was the result of a confluence of the same bubbles as before. This includes the IPO mania that fueled the early 1960s stock market, businesses of the South Sea Bubble, and the chasing of future efficiencies that happened in the 1850s with railroad stocks, which all happened with the dot-com businesses. These lead to the dot-com boom of the late 1990s and the bust in the early 2000s. Everything peaked, crashed and returned to roughly as they were before. It is true that markets are efficient however with time when inefficiencies occur, it does not take long for the market to clear them …show more content…

Markets can be efficient even if stock prices exhibit greater volatility than it can be explained by fundamentals such as earnings and dividends. Chapter 11: Potshots at the Efficient –Market Theory and Why They Miss, presents an argument of stock market fluctuations that stock prices show far too much variability to be explained by an efficient-market theory of pricing. It also talks about how one must look to behavioral considerations and to crowd psychology to explain the actual process of price determination in the stock market. I agree with Malkiel’s proclaim about the demise of the efficient-market theory and how it reasons to show that market prices are indeed predictable. Such arguments are exaggerated and the extent to which the stock market is predictable is greatly overstated because market valuation rests on both logical and psychological

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