Random_Walk_Report_Essay

Random_Walk_Report_Essay - A Random Walk Down Wall Street...

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“A Random Walk Down Wall Street” Book Report BFIN 546 - Investments 02/22/2007
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A Random Walk Down Wall Street is the “Average Joe’s” introduction to investing. The author does an excellent job of mixing humor, personal feelings, and historical examples of how people succumb to the “Castles in the Air” mentality. The first chapter is devoted to an introduction to the book and the explanation of a “random walk”. The “Random Walk” as Malkiel explains is the unpredictability of future steps or directions based on past actions. He further integrates this term into the unpredictability of the world of investing specifically the stock market. In chapter one he introduces the two techniques used by market professionals to determine what stocks to invest in and when to purchase them. These techniques are fundamental analysis and technical analysis. The first chapter goes on to introduce other concepts in investing such as the effect of inflation, the theory of investing, the Firm-Foundation theory, and what I believe to be the author’s favorite term, the Castle-in-the-Air Theory. I really enjoyed one quote from the author that gives me some confidence in investing in the stock market. The author wrote: “A successful investor is generally a well-rounded individual who puts a natural curiosity and an intellectual interest to work to earn more money.” This quote says to me that with the right motivation and using my own intellect I could be successful in investing also. In the second chapter the author dives into a historical look of how crowds of people have reacted to the prospect of making money no matter how unreasonable the investment is. Examples of such events include: Tulip-Bulb Craze, the South Sea Bubble, and the few years before the Great Depression, where examples of financial disasters waiting to happen. The Tulip-Bulb Craze in Holland proved to be an example of people wanting to get in on an investment no matter how risky or unique it appeared. This craze
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created a new method for investors to get the most action for their money and is still popular today in the stock market. The “Call Option” allows an investor to pay 15-20% of the current market price of an investment to sell it later at a profit if the investment increased. Personally, I was introduced into this when I worked as a bank teller for Bank of America in 1996-1998. As an employee, every 6 months we were given 50 stock option shares at the current market price minus a discount. I really didn’t know much about it at the time and all I was told was that if the price of the stock increased we could exercise our options and make a profit. In other words to me at the time, I would make free money. So as I continued to work for about 2 years I accumulated more stock options and Bank of America even issued a stock split and I ended up with more shares. Then they announced that they were planning to merge with Nations Bank and the price of the stock increased. I
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Random_Walk_Report_Essay - A Random Walk Down Wall Street...

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