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Welcome to the Investing Section of Options Realm |
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Over the past few weeks I have been reading A Random Walk Down Wall Street by Burton G. Malkiel. In the first few chapters of the book Malkiel talks a lot about the different types of investing and he breaks it down into two different categories. The first category is what he refers to as The Castle In The Sky theory. This way of investing is the belief that the actual value of a stock is not important but rather the most important fact is what other people are willing to offer for the stock. In this theory if the investor knows that a stock is only worth 25 dollars a share and the stock is trading at 30 dollars a share the investor will still buy the stock if the investor believes someone else will pay 35 dollars a share. In summary, with this method value does not matter but future prospects are all that matter. The second method that Malkiel describes is The Firm-Foundation Theory. Malkiel explains that this theory is rooted in the fact that all investments have an “intrinsic value” and the investments is based off of this value. This “intrinsic value” can be found by discounting future earnings in a way that earnings for next year are only worth 95% of the total because they are future earnings. Malkiel states that this method also has downfalls in the fact that future earnings are hard to predict and often are predicted to grow at rates much higher then reality. While this system does have drawback’s Malkiel admits that many investors have earned large sums of money from following it. In the end Malkiel is somewhat skeptical of both theories. He admits that both can be profitable but he warns that most people will not beat the market averages. |
