Essay about A Random Walk Down Wallstreet

3893 Words May 1st, 2005 16 Pages
"A Random Walk Down Wall Street"
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
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This was the set-up for disaster. How could prices be increasing when business in general was slowing down? It would catch up with them. Soon prices began to decline as company's earning and projections faltered. The declines in price had caused margin calls and customers were forced to sell there stock. As the prices dipped lower, more and more of the public sold shares. Finally, the volume of shares being sold dropped prices so low the market crashed. Malkiel states, "history teaches us that very sharp increases in stock prices are seldom followed by a gradual return to relative price stability", thus a sharp decline.
Chapter 3 expands more on stock valuation from the sixties through the nineties. Most people today including myself have put their money in the hands of professionals at institutions whose sole purpose is to manage money. The perception would be that the professionals would not be induced to act on the speculative crazes and schemes that the general public would naively dive into. However, past history shows this is not the case.
The soaring sixties was the time of the IPO. Also called the tronics boom. As long a company had the word tronics in its name it was considered a good buy. Some of these companies had nothing to do with the electronics industry. The IPO's would rise fast and fall even faster. There was market manipulation as well. Investment bankers would only issue small amounts of IPO into the market, thus making the stocks price

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