The Time-Tested Strategy for Successful Investing
A Random Walk Down Wall StreetTopic Category
Stock market
STATUS:
The text is very rough.
The text is very rough.
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PART ONE - STOCKS AND THEIR VALUE
Investing as a Way of Life Today
Investing in Theory
The Firm-Foundation Theory
The Castle-in-the-Air Theory
How the Random Walk Is to Be Conducted
The South Sea Bubble
Wall Street Lays an Egg
An Afterword
3. Stock Valuation from the Sixties through the Nineties
The Sanity of Institutions
The Soaring Sixties
The New "New Era": The Growth-Stock/New-Issue Craze
Synergy Generates Energy: The Conglomerate Boom
Performance Comes to the Market: The Bubble in Concept Stocks
The Sour Seventies
the Nifty Fifty
The Roaring Eighties
The 1Humphant'Return of New Issues
Concepts Conquer Again: The Biotechnology Bubble
ZZZZ Best Bubble of All
What Does It All Mean?
The Nervy Nineties
The Japanese Yen for Land and Stocks
4. The Biggest Bubble of All: Surfing on the Internet
How Bubbles Arise
A Broad-Scale High-Tech Bubble
An Unprecedented New-Issue Craze
TheGlobe.com
Security Analysts Speak Up
New Valuation Metrics
The Writes of the Media
Fraud Slithers In and Strangles the Market
Should We Have Known the Dangers?
A Final Word
PART Two - How THE PROS PLAY THE BIGGEST GAME IN TOWN
5. Technical and Fundamental Analysis
Technical versus Fundamental Analysis
What Can Charts Tell You?
The Rationale for the Charting Method
Why Might Charting Fail to Work?
From Chartist to Technician
The Technique of Fundamental Analysis
Three Important Caveats
Why Might Fundamental Analysis Fail to Work?
Using Fundamental and Technical Analysis Together
6. Technical Analysis and the Random-Walk Theory
Holes in Their Shoes and Ambiguity in Their Forecasts
Is There Momentum in the Stock Market?
Just What Exactly Is a Random Walk?
Some More Elaborate Technical Systems
The Filter System
The Dow Theory
The Relative-Strength System
Price-Volume Systems
Reading Chart Patterns
Randomness Is Hard to Accept
A Gaggle of Other Technical Theories to Help You Lose Money
The Hemline Indicator
The Super Bowl Indicator
The Odd-Lot Theory
A Few More Systems
Technical Market Gurus
Why Are Technicians Still Hired?
Appraising the Counterattack
Implications for Investors
7. How Good Is Fundamental Analysis?
The Views from Wall Street and Academia
Are Security Analysts FUndamentally Clairvoyant?
Why the Crystal Ball Is Clouded
1. The Influence of Random Events
2. The Production of Dubious Reported Earnings through "Creative" Accounting Procedures
3. The Basic Incompetence of Many of the Analysts Themselves
4. The Loss of the Best Analysts to the Sales Desk, to Portfolio Management, or to Hedge Funds
5. The Conflicts of Interest between Research and Investment Banking Departments
Do Security Analysts Pick Winners?The Performance of the Mutual Funds
Can Any Fundamental System Pick Winners?
The Verdict on Market Timing
The Semi-strong and Strong Forms of the Efficient-Market Theory
The Middle of the Road: A Personal Viewpoint
PART THREE - THE NEW INVESTMENT TECHNOLOGY
Defining Risk: The Dispersion of Returns
illustration: Expected Return and Variance Measures of Reward and Risk
Documenting Risk: A Long-Run Study
Reducing Risk: Modern Portfolio Theory (MPT)
Diversification in Practice
9. Reaping Reward by Increasing Risk
Beta and Systematic Risk
The Capital-Asset Pricing Model (CAPM)
Let's Look at the Record
An Appraisal of the Evidence
The Quant Quest for Better Measures of Risk: Arbitrage Pricing Theory
A Summing Up
10.Behavioral Finance
The Irrational Behavior of Individual Investors
Overconfidence
Biased Judgments
Herding
Loss Aversion
The Limits to Arbitrage
What Are the Lessons for Investors from Behavioral
Finance?
1. Avoid Herd Behavior
2. Avoid Overtrading
3. If You Do 7rade: Sell Losers, Not Winners
4. Other Stupid Investor 7Hcks .
Does Behavioral Finance Teach Ways to Beat the Market?
11. P tshots at the Efficient-Market Theory and Why They Miss
What Do We Mean by Saying Markets Are Efficient?
Potshots That Completely Miss the Target
DogsoftheDow
January Effect
"Thank God It's Monday Afternoon" Pattern
Hot News Response
. Why the Aim Is So Bad
Potshots That Get Close but Still Miss the Target
The Trend Is Your lTiend (Otherwise Known as Short-Term Momentum)
The Dividend Jackpot Approach
The Initial PIE Predictor
The llBack We Go Again"
The New Investment Technology
Part 38. New Walking Shoe: Modem Portfolio Theory
Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their henzy from some academic scribbler of a few years back.
—J. M. Keynes, The General Theory of Employment, Interest and Money
—J. M. Keynes, The General Theory of Employment, Interest and Money
Throughout this book, I have attempted to explain the theories used by professionals-simplified as the firm-foundation and the castle-in-the-air theories-to predict the valuation of stockso As we have seen, many academics have earned their reputations by attacking these theorieso Although not denying that these theories tell us a good deal about how stocks are valued, the academics maintain that they cannot be relied on to yield extraordinary profits.
As graduate schools continued to grind out bright young economists and statisticians, the attacking academics became so numerous that it seemed obvious-even to them-that a new strategy was needed; ergo, the academic community busily went about erecting its own theories of stock-market valuationo That's what this part of the book is all about: the rarefied world of the "new investment technology" created within the towers of academyo One insight-modern portfolio theory (MPT)-is so basic that it is now widely followed on the Street.
The others remain controversial enough to continue to generate thesis material for students and hefty lecture fees for their advisers.
In this chapter, I describe the origins and applications of modern portfolio theory. Using these insights, you'll be able to reduce risk while possibly earning a higher returno In chapter 9,
I describe how some academics have gained press coverage by saying that investors can increase their returns by assuming a certain kind of risko Then, in chapters 10 and 11, I cover the arguments of some academics and practitioners who conclude that psychology, not rationality, rules the market, and that there is no such thing as a random walko They argue that markets are not efficient and that a number of investment strategies can be followed to "beat the market." Moreover, they suggest that, to a considerable extent, market prices are predictableo Then I conclude by showing how wrong they areo I do this, in part, by using the best example of the efficient-market application-a commonstock index fund-and show that, despite all the journal publications and learned conferences, it remains the undisputed champion in taking the most profitable stroll through the market.
The Role of Risk
Efficient-market theory explains why the random walk is possibleo It holds that the stock market is so good at adjusting to new information that no one can predict its future course in a superior mannero Because of the actions of the pros, the prices of individual stocks quickly reflect all the news that is availableo Thus, the odds of selecting superior stocks or anticipating the general direction of the market are eveno Your guess is as good as that of the ape, your stockbroker, or even mine.
Hmmmo "I smell a rat," as Samuel Butler wrote long ago.
Money is being made in the market; some stocks do outperform otherso Common sense attests that some people can and do beat the market. It's not all chanceo Many academics agree; but the method of beating the market, they say, is not to exercise superior clairvoyance but rather to assume greater risko Risk, and risk alone, determines the degree to which returns will be above or below average, and thus decides the valuation of any stock relative to the market.
A New Walking Shoe: Modern Portfolio Theory
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Defining Risk: T e Dispersion of Returns
Risk is a most slippery and elusive concepto It's hard for investors-let alone economists-to agree on a precise definitiono The American Heritage Dictionary defines risk as "the possibility of suffering harm or losso" If I buy one-year Treasury bills to yield 5 percent and hold them until they mature,
I am virtually certain of earning a 5 percent monetary return, before income taxeso The possibility of loss is so small as to be considered nonexistent. If I hold common stock in my local power and light company for one year on the basis of an anticipated 6 percent dividend return, the possibility of loss is greatero The dividend of the company may be cut and, more important, the market price at the end of the year may be much lower, causing me to suffer a serious net losso Investment risk, then, is the chance that expected security returns will not materialize and, in particular, that the securities you hold will fall in price 0
Once academics accepted the idea that risk for investors is related to the chance of disappointment in achieving expected security returns, a natural measure suggested
