Scribd
Upload
26 views2 pages

Wall Street

In 'A Random Walk Down Wall Street', Malkiel argues that individual investors can compete with professionals by understanding the difference between investing and speculating. Investing is defined as purchasing assets for predictable long-term profit, while speculating lacks sufficient data. The document discusses two theories for asset valuation: the firm-foundation theory, which focuses on intrinsic value and dividend income, and the castle in the air theory.

Uploaded by

Stephen Chan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
26 views2 pages

Wall Street

In 'A Random Walk Down Wall Street', Malkiel argues that individual investors can compete with professionals by understanding the difference between investing and speculating. Investing is defined as purchasing assets for predictable long-term profit, while speculating lacks sufficient data. The document discusses two theories for asset valuation: the firm-foundation theory, which focuses on intrinsic value and dividend income, and the castle in the air theory.

Uploaded by

Stephen Chan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

There is a sense of complexity today that has led many to believe the

individual investor has little chance of competing with professional


brokers and investment firms. However, Malkiel states this is a major
misconception as he explains in his book “A Random Walk Down Wall
Street”. What does a random walk mean? The random walk means in
terms of the stock market that, “short term changes in stock prices
cannot be predicted”. So how does a rational investor determine which
stocks to purchase to maximize returns? Chapter 1 begins by defining
and determining the difference in investing and speculating. Investing
defined by Malkiel is the method of “purchasing assets to gain profit in
the form of reasonably predictable income or appreciation over the
long term”. Speculating in a sense is predicting, but without sufficient
data to support any kind of conclusion. What is investing? Investing in
its simplest form is the expectation to receive greater value in the
future than you have today by saving income rather than spending.
For example a savings account will earn a particular interest rate as
will a corporate bond. Investment returns therefore depend on the
allocation of funds and future events. Traditionally there have been
two approaches used by the investment community to determine asset
valuation: “the firm-foundation theory” and the “castle in the air
theory”. The firm foundation theory argues that each investment
instrument has something called intrinsic value, which can be
determined analyzing securities present conditions and future growth.
The basis of this theory is to buy securities when they are temporarily
undervalued and sell them when they are temporarily overvalued in
comparison to there intrinsic value One of the main variables used in
this theory is dividend income. A stocks intrinsic value is said to be
“equal to the present value of all its future dividends”. This is done
using a method called discounting. Another variable to consider is the
growth rate of the dividends. The greater the growth rate the more
valuable the stock. However it is difficult to determine how long
growth rates will last. Other factors are risk and interest rates, which
will be discussed later. Warren Buffet, the great investor of our time,
used this technique in making his fortune.

You might also like