The smart investor should try and buy before the optimism sets in so that he buys at a lower price than the general market. Relations to the course The article relates to the course in the sections on fundamental and technical analysis. Fundamental analysis is similar to the firm foundations theory. The firm foundation theory essentially makes the same claim. The article on Castles in the air is similar to technical analysis in the book.
Technical analysts do give a degree of attention to the value of future prospects, but they believe it is secondary in nature. Their true purpose is to analyze the trend of stock price movement. So for an investor to earn capital gains and dividends it is necessary to look at items that show positive earnings. This is one of the most essential ideas of fundamental analysis. Another reason the author prefers the fundamental analysis is that the technical analysis only focuses on the stock price, while the fundamental analysis focuses on the worth of the stock.
Despite the support for the theory, the author finds it weak as well. The author provides situations where fundamental analysis can have flaws. The author also asserts that financial experts are no better than investors. He states that they only have an edge because they can access more information from companies.
Although I had some knowledge of the two techniques of stock valuation, I had not deeply analyzed them to an extent of identifying their weaknesses. I enjoyed humorous examples offered because it was a light way of learning about the techniques.
The part of the book also offers a lot of lessons when it comes to stock trading. The first lesson is that one should purchase stocks if their expected growth of earnings is above the market average. Moreover, prospected growth should entail a period of more than five years. The second lesson is that it is too risky to purchase multiple stocks whose prospected future growth has been discounted.
The last and the most significant lesson is that an investor should consider whether an asset possesses the likelihood of attracting masses to invest in them. The last lesson means that logic is the key when considering a stock purchase. Another interesting conclusion from the understanding is that I have come to question the roles of financial advisors in aiding investors making investment decisions. The author cites that the only difference between them and investors is that they have more information.
Prior to reading the book, I viewed experts as a haven and the best avenue for investors to make right investment decisions. After reading this part of the book, I realized that experts might not be significantly different from investors. I find great sense in the claim because some of the historical bubbles came up since investors had more trust in experts than in the authorities.
The section concentrates on the modern portfolio theory that entails combining assets with different risk levels to create a positive returns diversified portfolio. Harry Markowitz came up with the theory in the s, making him win the Nobel Prize. Chapter eight introduces the modern portfolio theory by asserting that it is essential for investors to diverse their investments and at the same time minimize their risks to obtain positive returns.
According to the author, the risk of an asset is a significant determinant of the nature of returns. It is worth noting that the standard deviation of the stock is usually the measure of risks. The author cites that risks are inevitable irrespective of the nature of diversification. The argument of the author portrays that he partly agrees with the theory. Chapter nine expounds on the theory by explaining ideas highlighted in chapter eight. On the basis of the model, the author argues that investors should avoid diversifiable risks because they do not have premiums.
The author also argues that an investor should attain more returns by investing in high-risk assets. However, the risk should be systematic. The premium aspect leads to the introduction of the beta factor.
The author explains that the beta factor explains how a stock behaves in the stock market. Specifically, it measures volatility of an asset as compared to the whole market. On the one hand, theoretical application indicates that the price of a stock with a higher beta value will rise at a higher rate than other stocks in case of a bull period.
On the other hand, its price will decrease at a higher rate in case of a bear market. However, after introducing the beta concept, the author takes an unprecedented stand by claiming that beta is not a sufficient measure of the relationship between the risk and returns. The concept entails application of human cognitive and emotional concepts in making investment decisions. After explaining the concept, the author concludes that most choices based on personal biases do not reap intended rewards in the long run.
Malkiel argues that the common sense aspect of personal biases has a chance of providing a logical judgment on investments that may prove fruitful. Some of the common sense ideas include inner motivation of investors to resist investing in pricey assets in the long run and the desire to avoid overtrading. Another possible aspect of common sense is that an investor should only get rid of stocks that portray a trend of losing value. Chapter eleven entails the author providing a summary of his opinions given in previous chapters.
Some of the assertions include that the market is fairly efficient and in most instances corrects discrepancies when they occur. He asserts that in the long run the trends of growth and value stocks do not run parallel to market trends. After reading the part, I gained more information on the importance of beta. However, after the author providing a lot of information about its importance in determining the risk of an investment, it was surprising for the author to disagree with the beta factor.
The author argues that particular differences in the stocks make beta more ineffective. Despite the surprise, I appreciated his insight because it provided a platform for me to read more about the relationship between beta and risk and returns.
The inner thought that there is an opportunity to make money can urge an individual to make rash decisions. Moreover, the thought of a possible loss can influence similar decisions.
The significance of personal biases in investing has led to the creation of various notions in the modern investment world. Some investors have the tendency to disregard the efficient market hypothesis and endorse unproven beliefs.
An example is the January effect when people tended to think that stocks perform well in January. Despite their unproven status, beliefs may make an investor invest heavily during the month. In effect, such an investor may end up experiencing losses.
The part also offers advice to investors by affording them strategies that they can use to choose their investment portfolio. Chapter twelve offers investors advice on how to start an investment venture. The author encourages stock investors to ensure that they have emergency funds available in case their investment decisions lead to losses. He argues that ordinary shares and real estate investments provide a viable option for investment. He concludes with the assertion that prior research is vital for investors in coming up with the best portfolio.
The author argues that an investor should not entirely rely on the past performance of a stock to predict its future performance. However, he states that the past performance partially influences its future value. The author believes that investing in stock in the long run offers more returns than in bonds due to the elimination of risks.
Moreover, he asserts that investing in stocks in the long run may provide the needed safety to fight inflation. However, Malkiel insists that the period cannot be shorter than a decade.
He states that a shorter period than a decade is too random and investors do not have a choice but to invest in risky stocks. The assertion means that investors who intend to venture into the short-term investments have to choose between risks and adopt the one that they feel comfortable to carry.
Our Samples The best way to know how to write good essays is by getting a sample of an essay from competent experts online. We can give you the essay examples you need for future learning. Free Essay Examples are here. Chapter fourteen entails the author insisting that investors willing to commit their resources for more than a decade should commit themselves to stocks. He also insists that it would be better for short-term investors to concentrate on a diversified portfolio that include bonds.
The author also advises short-term investors to consider retaining some of their resources as cash to cover any case of emergency. The chapter offers guidance on how investors can approach the market.
Despite offering the above options, Malkiel encourages investors to venture into long-term investments. He advises investors to consider venturing into long-term stocks as a way of saving a retirement fund.
Chapter fifteen is the last one in the section and the entire book. Apart from providing a summary of the book, it goes into the specifics of investing. The author argues that an investor does not have to perform an extremely detailed analysis to make an investment analysis. Instead, the author encourages investors to venture into an index fund. He encourages investors intending to purchase individual stocks to venture for the long term instead of trading them.
Moreover, he asserts that investors should concentrate on stocks that have a record of good performance. Concerning managed funds, the author has reservations about them. He asserts that they may not be an advisable option because they may have misleading information. The also advises investors to purchase stocks that create positive stories about their potential to improve their value.
After reading the last part of the book, I came to get the picture of intentions of the author. The first intention is to prove that the market efficiency hypothesis offers a realistic guidance in the stock market. The second aim was to reconcile market efficiency and perceptions of the market towards economic bubbles. The last aim of the author was to identify various ways of analyzing the stock market, highlight their weaknesses, and apply lessons from their weaknesses in offering investment advice to investors.
The fourth part culminates his aims by combining strengths of different investments theories and techniques and avoiding their weaknesses to come up with a hybrid investment decision-making guideline.And, again, it peaked and crashed and everything returned to roughly as they were before. Malkiel, a Princeton economist and professional investor, backs it all up with statistics, charts and studies, and gives an entertaining review of the sorry history of market bubbles, panics and delusions of omniscience, from the Dutch tulip craze to the Beardstown Ladies. I have also learned that having long-term investments is a preferable way of saving in the long run.
He asserts that in the long run the trends of growth and value stocks do not run parallel to market trends. Chapter seven concentrates on the fundamental analysis concept. By offering real examples and enlightening historical occurrences, the author remains authoritative and ensures that the reader grasps the real impacts of the masses in making investment decisions. This is one of the most essential ideas of fundamental analysis. The premium aspect leads to the introduction of the beta factor. The fundamental analysis, is more random than any other
If you look closely at some of the things our government does today, you can see that our government is slowly moving towards the way people were treated in Bud Fox is a young stockbroker who comes from an honest working-class family but on the other hand, Gordon Gekko is a millionaire who Bud admires and wants to be associated with The scenario confirms the assertion of the author in the second chapter that such situations continue to recur.
In fact, only brokers benefited. I really enjoyed one quote from the author that gives me some confidence in investing in the stock market. Loading Disqus Comments
Malkiel has at least some respect for fundamental analysis because it is based on foundational logic and is open to accepting wide varieties of data. He asserts that they may not be an advisable option because they may have misleading information. The main character, Elena, lives in a cramped ghetto-like building that is looked down upon by the public eye. All through the s to the late s, economic bubbles would always recur. The author also asserts that financial experts are no better than investors. However, after the author providing a lot of information about its importance in determining the risk of an investment, it was surprising for the author to disagree with the beta factor.