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A Random Walk Down Wall Street Keypoints Chapters 1 2 A Random walk is a movement in which future steps or directions cannot be predicted Applying random walk theory to stock market simply means short run gainsloses in stock prices cannot be predicted Hence advisory services earnings predictions and forecast analysis are obsolete not to mention costly Eliminate the middlemen B Malkiel promotes The Get Rich Slowly but Surely method that advises investors to stay even meaning investments must secure a rate of return equal to inflation Ideally most investors would want holdings that have rate of return higher than inflation Rate of Return Inflation C Firm-Foundation Theory states that assets rely on their present conditions and future prospects in order to establish an intrinsic value The prospective dividends are then factored into the stocks market price hence its intrinsic value risesfalls D Castle-in-the-Air Theory is one that focuses on the dreams and wants of masses For example the Tulip Bulb Craze was a classic example of a self-fulfilling prophecy The prices of the bulbs skyrocketed because the buyers made them by way of DEMAND There were not enough bulbs to go around and those individuals lucky enough to have them doubled their equity in tulip bulb holdings However the bubble burst when the price of bulbs got to high holders wanted to sell but to their dismay there were no buyersbulb prices then plummeted Res tantum valet quantum vendi postestA thing is worth only what somelse will pay for it Similar lessons are depicted in The South Sea Bubble and The Florida Real Estate Craze Chapters 3 4 A Determining the value of a stock is not easy Companies can manipulate the value of shares outstanding with misleading announcements For instance General Electrics 1955 venture into diamond production resulted in a 400 million dollar gain Air castles were being built and investors wanted in on the deal They did
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