Docsity
Docsity

Prepare for your exams
Prepare for your exams

Study with the several resources on Docsity


Earn points to download
Earn points to download

Earn points by helping other students or get them with a premium plan


Guidelines and tips
Guidelines and tips

Stock Market Unpredictability: The Debate Between Technical and Fundamental Analysis - Pro, Papers of Corporate Finance

The unpredictability of stock market prices and the debate between technical and fundamental analysis. It explores the concept of intrinsic value, the impact of historical events on stock prices, and the limitations of past price behavior in predicting future movements. The text also touches upon the role of earnings and dividends in determining stock prices.

Typology: Papers

Pre 2010

Uploaded on 10/18/2008

we2ea
we2ea šŸ‡ŗšŸ‡ø

1 document

1 / 566

Toggle sidebar

This page cannot be seen from the preview

Don't miss anything!

bg1
Document
file:///E|/Unposted/Netlib/A%20Random%20Walk%20Down%...047814/nlReader.dll@BookID=32673&FileName=Cover.html [10/7/2007 12:41:52 AM]
pf3
pf4
pf5
pf8
pf9
pfa
pfd
pfe
pff
pf12
pf13
pf14
pf15
pf16
pf17
pf18
pf19
pf1a
pf1b
pf1c
pf1d
pf1e
pf1f
pf20
pf21
pf22
pf23
pf24
pf25
pf26
pf27
pf28
pf29
pf2a
pf2b
pf2c
pf2d
pf2e
pf2f
pf30
pf31
pf32
pf33
pf34
pf35
pf36
pf37
pf38
pf39
pf3a
pf3b
pf3c
pf3d
pf3e
pf3f
pf40
pf41
pf42
pf43
pf44
pf45
pf46
pf47
pf48
pf49
pf4a
pf4b
pf4c
pf4d
pf4e
pf4f
pf50
pf51
pf52
pf53
pf54
pf55
pf56
pf57
pf58
pf59
pf5a
pf5b
pf5c
pf5d
pf5e
pf5f
pf60
pf61
pf62
pf63
pf64

Partial preview of the text

Download Stock Market Unpredictability: The Debate Between Technical and Fundamental Analysis - Pro and more Papers Corporate Finance in PDF only on Docsity!

Page 3

A Random Walk Down Wall Street

Including A Life-Cycle Guide To Personal Investing

Burton G. Malkiel Chemical Bank Chairman's Professor of Economics At Princeton University

Page 5

To Nancy

Page 7

CONTENTS

Preface 13

Acknowledgments from Earlier Editions

Part One Stocks and Their Value

  1. Firm Foundations and Castles in the Air

What Is a Random Walk?

Investing as a Way of Life Today

Investing in Theory

The Firm-Foundation Theory

The Castle-in-the-Air Theory 31

How the Random Walk Is to Be Conducted

  1. The Madness of Crowds

The Tulip-Bulb Craze

The Triumphant Return of New Issues

Concepts Conquer Again: The Biotechnology Bubble

Page 8

The Chinese Romance with the Lycoris Plant 80

Some Other Bubbles of the 1980s

What Does It All Mean?

The Nervy Nineties

The Japanese Yen for Land and Stocks

The Internet Craze of the Late 1990s

A Final Word

  1. The Firm-Foundation Theory of Stock Prices

The "Fundamental" Determinants of Stock Prices

Two Important Caveats

Testing the Rules

One More Caveat

What's Left of the Firm Foundation?

Just What Exactly Is a Random Walk?

Some More Elaborate Technical Systems

The Filter System

The Dow Theory

The Relative-Strength System

Price-Volume Systems

Reading Chart Patterns

Randomness Is Hard to Accept

A Gaggle of Other Technical Theories to Help You Lose Money

Page 9

The Hemline Indicator 151

The Super Bowl Indicator 153

The Odd-Lot Theory 153

A Few More Systems 155

Technical Market Gurus 155

Why Are Technicians Still Hired? 159

Appraising the Counterattack 160

Implications for Investors 163

  1. How Good Is Fundamental Analysis? 165

The Views from Wall Street and Academia 166

Are Security Analysts Fundamentally Clairvoyant? 166

Why the Crystal Ball Is Clouded 170

  1. The Influence of Random Events 171
  2. The Creation of Dubious Reported Earnings through "Creative" Accounting Procedures
  1. The Basic Incompetence of Many of the Analysts Themselves 174
  2. The Loss of the Best Analysts to the Sales Desk or to Portfolio Management

Page 10

The Capital-Asset Pricing Model (CAPM) 224

Let's Look at the Record

An Appraisal of the Evidence

The Quant Quest for Better Measures of Risk: Arbitrage Pricing Theory

A Summing Up

  1. The Assault on the Random-Walk Theory: Is the Market Predictable after All?

Predictable Patterns in the Behavior of Stock Prices

  1. Stocks Do Sometimes Get on One-Way Streets 243
  2. But Eventually Stock Prices Do Change Direction and Hence Stockholder Returns Tend to Reverse Themselves
  1. Stocks Are Subject to Seasonal Moodiness, Especially at the Beginning of the Year and the End of the Week

Predictable Relationships between Certain "Fundamental" Variables and Future Stock Prices

  1. Smaller Is Often Better 249
  2. Stocks with Low Price-Earnings Multiples Outperform Those with High Multiples
  1. Stocks that Sell at Low Multiples of Their Book Values Tend to Produce Higher Subsequent Returns
  1. Higher Initial Dividends and Lower Price-Earnings Multiples Have Meant Higher Subsequent Returns
  1. The "Dogs of the Dow" Strategy 258

And the Winner Is...

The Performance of Professional Investors

Concluding Comments

Appendix: The Market Crash of October 1987

Part Four A Practical Guide for Random Walkers and Other Investors

  1. A Fitness Manual for Random Walkers

Exercise 1: Cover Thyself with Protection

Exercise 2: Know Your Investment Objectives

Exercise 3: Dodge Uncle Sam Whenever You Can

Pension Plans and IRAs

Page 11

Tax-Deferred Annuities

Exercise 4: Be Competitive; Let the Yield on Your Cash Reserve Keep Pace with Inflation

Money-Market Mutual Funds 295

Money-Market Deposit Accounts 297

Bank Certificates 299

Tax-Exempt Money-Market Funds 300

Exercise 5: Investigate a Promenade through Bond Country 301

Zero-Coupon Bonds Can Generate Large Future Returns 302

No-Load Bond Funds Are Appropriate Vehicles for Individual Investors 303

Tax-Exempt Bonds Are Useful for High-Bracket Investors 305

Hot TIPS: Inflation Indexed Bonds 307

Should You Be a Bond-Market Junkie? 309

Exercise 6: Begin Your Walk at Your Own Home; Renting Leads to Flabby Investment Muscles

Exercise 7: Beef Up with Real Estate Investment Trusts 313

Exercise 8: Tiptoe through the Investment Fields of Gold and Collectibles 318

Exercise 9: Remember that Commission Costs Are Not Random Some Are Cheaper than Others

Exercise 10: Diversify Your Investment Steps 324

A Final Checkup 324

  1. Handicapping the Financial Race: A Primer in Understanding and Projecting Returns from Stocks and Bonds

What Determines the Returns from Stocks and Bonds? 326

Three Eras of Financial Market Returns 331

Era I: The Age of Comfort 333

Era II: The Age of Angst 334

Era III: The Age of Exuberance 340

The Age of the Millennium 342

Appendix: Projecting Returns for Individual Stocks 347

  1. A Life-Cycle Guide to Investing 351

Four Asset Allocation Principles 352

  1. Risk and Reward Are Related 352
  2. Your Actual Risk in Stock and Bond Investing Depends on the Length of Time You Hold Your Investment
  • The Substitute-Player Step: Hiring a Professional Wall-Street Walker
    • Risk Level
    • Unrealized Gains
    • Expense Ratios
  • The Morningstar Mutual-Fund Information Service
  • A Primer on Mutual-Fund Costs
    • Loading Fees
    • Expense Charges
    • Comparing Mutual-Fund Costs
  • The Malkiel Step
  • A Paradox
  • Some Last Reflections on Our Walk
  • A Random Walker's Address Book and Reference Guide to Mutual Funds
  • Bibliography
  • Index

Page 13

PREFACE

It has now been close to thirty years since I began writing the first edition of A Random Walk Down Wall Street. The message of the original edition was a very simple one: Investors would be far better off buying and holding an index fund than attempting to buy and sell individual securities or actively managed mutual funds. I boldly stated that buying and holding all the stocks in a broad, stock-market average as index funds do was likely to outperform professionally managed funds whose high expense charges and large trading costs detract substantially from investment returns.

Now, some thirty years later, I believe even more strongly in that original thesis, and there's more than a six-figure gain to prove it. The chart on the following page makes the case with great simplicity. It shows how an investor with $10,000 at the start of 1969 would have fared investing in a Standard & Poor's 500-Stock Index Fund. For comparison, the results are also plotted for a second investor who instead purchased shares in the average actively managed fund. The difference is dramatic. Through June 30, 1998, the index investor was ahead by almost $140,000, with her original $10,000 increasing thirty-one-fold to $311,000. And the index returns were calculated after deducting the typical expenses (2/10 of 1 percent) charged for running an index fund.