A Random Walk Down Wall Street

A Random Walk Down Wall Street - A Random Walk Down Wall...

Info icon This preview shows pages 1–3. Sign up to view the full content.

A Random Walk Down Wall Street A Random Walk Down Wall Street – Chapter 1-4, 6 Summaries I. Chapter 1: Firm Foundations and Castles In the Air A. What is a Random Walk? 1. One in which future steps or directions cannot be predicted on the bases of past actions B. Investments as a way of life today 1. Factors that differentiate investing from speculating a. Time period of investment return b. Predictability of returns 2. Our economy today a. Analysts predict relative price stability will continue—inflation fell to 2% in the early 2000s b. Becoming increasingly service-oriented productivity improvements harder to come by C. Investing in Theory: 2 Approaches to Asset Valuation 1. The Firm Foundation Theory a. Basic Argument: Each investment instrument has intrinsic value. When markets fall below/rise above this value, a buying/selling opportunity occurs b/c the fluctuation will eventually be corrected i. Intrinsic value = PV of future dividends b. Difference in growth rates important factor in stock valuation 2. Castle in the Air Theory c. Basic argument: Analyzing how crowd of investors are likely to behave in the future and how during periods of optimism they tend to build their hopes into “castles in the air” i. Tries to estimate which investments are most susceptible to public castle-building and then buy before the crowd d. Applied psychological principles rather than financial evaluation e. Optimal strategy: “To predict what average opinion is likely to be about what the average opinion will be.” f. “A thing is only worth what someone else will pay for it.” II. Chapter 2: The Madness of Crowds A. The Tulip Bulb Craze 1. Holland early 17 th century 2. Mosaic: Non-fatal virus that caused petals to develop stripes called “flames” a. Infected bulbs (“bizarres”) became valuable 3. Price skyrocketed and call options were popular as a way to leverage (increase potential rewards/risks) of investment. B. The South Sea Bubble 1
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

1. 17 th century England a. Stock was one of the few forms of property women could own 2. South Sea Company established to restore faith in government’s ability to meet its obligations. a. Took on a government IOU of £10 million in exchange for monopoly of South Sea trade. 3. The Mississippi Company – A French capital enterprise a. Started by John Law b. Goal to create more liquidity through a national paper currency backed by the state and controlled through a network of local agencies c. Increased English Jingoism for South Sea Company 4. Passed bill to offer to fund entire national debt a. Skyrocketed prices of SSC stock b. Backers of bill given option w/a twist: Granted stock w/o having to pay for it which was “sold” back to the company when the price increased and individual simply collected profit 5. Some people subscribed to the “Greater Fool Theory” – Prices will increase, buyers will be found, and money will be made 6. Bubble burst when people realized price of shares had no relationship to real prospects for the company a. Bubble Act:
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.
  • Fall '07

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern