a random walk down wall street

the investment advice from the original edition

investors would be far better off holding a broad-based index fund rather than attempting to buy and sell individual securities or actively managed mutual funds

today there’s broad acceptance that ____ _____ is an optimal investment strategy

imdex investing

our markets reflect ____ ____ without delay and are ____ _____

new information

highly efficient

the efficient market hypothesis (EMH)

1. In an efficient market, public information gets reflected in stock prices without delay

2. In an efficient market, there are no possibilities for earning extraordinary gains without taking on extraordinary risks

EMH implies that

we can never be sure whether they prices are too high or too low

“random walk”

future steps or directions cannot be predicted on the basis of past history

when was the term “random walk” first used?

in 1905 to find the optimal search procedure to find a drunkard who had been left in the middle of a field

what does a “random walk” mean when it’s applied to the stock market?

short-term changes in stock prices are unpredictable

investing

a method of purchasing assets to gain profit in the form of reasonably predictable income and/or appreciation over the long-term

distinguish investing and speculating

• speculator buys hoping for a short-term gain

• investor buys to produce a dependable future stream of cash returns and capital gains in the long-term

approaches to asset valuation

• the firm-foundation theory

• castle-in-the-air theory

• they are mutually exclusive

the firm-foundation theory:

each investment instrument has an intrinsic value, which can be determined by analyzing present conditions and future prospects

castle-in-the-air theory:

discounting:

you look at the money expected in the future and see how much less it is worth currently

intrinsic value of a stock =

present value of all its future dividends