AEM 324 Malkiel Ch5 Notes - A Random Walk Down Wall Street...

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A Random Walk Down Wall Street – 2007 Edition Part II: How the Pros Play the Biggest Game in Town Chapter 5: Technical and Fundamental Analysis 1. Trillions of dollars of transactions take place each day 2. If the stakes are high, so are the rewards. 3. Technical versus Fundamental Analysis a. The attempt to predict accurately the future course of stock prices and thus the appropriate time to buy or sell a stock must rank as one of investors’ most persistent endeavors. b. Technical analysis is the method of predicting the appropriate time to buy or sell a stock used by those believing in the castle-in-the-air view of stock pricing. i. Technical analysis is essentially the making and interpreting of charts. ii. Most chartists believe that the market is only 10% logical and 90% psychological. c. Fundamental analysis is the technique of applying the tenets of the firm-foundation theory to the selection of individual stocks. i. Fundamental analysts believe that the market is 90% logical and only 10% psychological. ii. Fundamentalists seek to determine an issue’s proper value. iii. Fundamentalists believe that eventually the market will reflect accurately the security’s real worth. 4. What Can Charts Tell You? a. The first principle of technical analysis is that all information about earnings, dividends, and the future performance of a company is automatically reflected in the company’s past market prices. b. The second principle is that prices tend to move in trends c. A stock that is rising tends to keep rising whereas a stock as rest tends to remain at rest. d. John Magee = one of the original chartists. e. One of the first things chartists look for is a trend. f. Chartists presume that the momentum in the market will continue to perpetuate itself, however sometimes the market surprises the chartist. g. Bear Trap – the exception that tests the rule. h. The chartist flirts with stocks just as people flirt with the opposite sex – he is a trader, not a long term investor and he buys when it looks favorable and sells on bad omens. i. For the chartist, timing is essential. 5. The Rational for the Charting Method a. Why is charting supposed to work? i. History just has a habit of repeating itself. 1. Trends might tend to perpetuate themselves for one of two reasons: a. Crowd instinct – the price rise itself helps fuel the enthusiasm in a self-fulfilling prophecy. b. There may be unequal access to fundamental information about a company. 1
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i. This process is supposed to result in a rather gradual increase in the price of the stock when the news is good, and a decrease when the news is bad. ii.
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AEM 324 Malkiel Ch5 Notes - A Random Walk Down Wall Street...

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