A Random Walk Down Wall Street
A Random Walk Down Wall Street
#investing
http://www-cs-students.stanford.edu/~maisan/booknotes/randomwalk/chapter2.html
http://site.iugaza.edu.ps/wdaya/files/2013/03/A-Random-Walk-Down-Wall-Street.pdf
Part I. Stocks and their value
Chapter 1. Firm Foundations and Castles in the Air
Asset Valuation
The firm-foundation theory
Each investment instrument has "intrinsic value". Fluctuations around this value create buying and selling opportunities, because the fluctuations will eventually be corrected.
In The Theory of Investment Values, John B. Williams argues that the intrinsic value of a stock is equal to the present or discounted value of all its future dividends. But forecasting the extent and duration of future growth is tricky.
Warren Buffet allegedly followed the firm-foundation theory approach.
https://finance.fandom.com/wiki/Firm_Foundation_Theory
The Firm Foundation Theory postulates that any financial asset like a stock or real estates like a piece of property has an intrinsic value. The condition in the market either keeps the price below the intrinsic value or above the intrinsic value - it rarely remains at or around the intrinsic value. This position offers the investor a choice - in case, he is able to buy the stock or the real estate below its intrinsic value, he shall make profits when the price goes above the intrinsic value.
The castle-in-the-air theory
This theory focuses on the psychology of the market crowd. Profits are made by foreseeing changes a short time ahead of the general public.
In this kind of world, there is a sucker born every minute and he exists to buy your investments at a higher price than you paid for them.
John Maynard Keynes
https://finance.fandom.com/wiki/Castle-in-the-Air_Theory
The Castle-in-the-Air Theory tries to unravel and understand the psychic values and behavior of the group of investors. The investors try to build a sort of castles in the air and think of the probable price rise in the future than estimating the intrinsic values of stocks. Once the investor has estimated this, he/she tries to beat the crowd by building positions in the preferred stocks before the crowds (read other investors) start buying those stocks and the price surges ahead.
Chapter 2. The Madness of Crowds
More about bubbles.
Dutch Tulip Bulb Market Bubble
The Dutch tulip bulb market bubble, also known as 'tulipmania' was one of the most famous market bubbles and crashes of all time. It occurred in Holland during the early to mid 1600s when speculation drove the value of tulip bulbs to extremes. At the height of the market, the rarest tulip bulbs traded for as much as six times the average person's annual salary.
South Sea Bubble
The South Sea Company was formed in 1711 and was promised a monopoly by the British government on all trade with the Spanish colonies of South America. Expecting a repeat of the success of the East India Company, which provided England a flourishing trade with India, investors snapped up shares of the South Sea Company.
As its directors circulated tall tales of unimaginable riches in the South Seas, shares of the company surged more than eightfold in 1720, from £128 in January to £1050 in June, before collapsing in subsequent months and causing a severe economic crisis.