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random walk is one in which future steps or directions cannot be predicted on the basis of past history. When the term is applied to the stock market, it means that short-run changes in stock prices are unpredictable.
investing as a method of purchasing assets to gain profit in the form of reasonably predictable income (dividends, interest, or rentals) and/or appreciation over the long term.
if we are to cope with even a mild inflation, we must undertake investment strategies that maintain our real purchasing power;
successful investor is generally a well-rounded individual who puts a natural curiosity and an intellectual interest to work.
investment returns—whether from common stocks or exceptional diamonds—are dependent, to varying degrees, on future events.
The firm-foundation theory argues that each investment instrument, be it a common stock or a piece of real estate, has a firm anchor of something called intrinsic value, which can be determined by careful analysis of present conditions and future prospects.
intrinsic value of a stock was equal to the present (or discounted) value of all its future dividends.
thus, differences in growth rates are a major factor in stock valuation.
firm-foundation theory relies on some tricky forecasts of the extent and duration of future growth.
castle-in-the-air theory of investing concentrates on psychic values.
analyzing how the crowd of investors is likely to behave in the future
successful investor tries to beat the gun by estimating what investment situations are most susceptible to public castle-building and then buying before the crowd.
no one knows for sure what will influence future earnings prospects and dividend payments.
foreseeing changes in the conventional basis of valuation a short time ahead of the general public.”
the optimal strategy is not to pick those faces the player thinks are prettiest, or those the other players are likely to fancy, but rather to predict what the average opinion is likely to be about what the average opinion will be,
new buyer in turn anticipates that future buyers will assign a still higher value.
Any price will do as long as others may be willing to pay more.
Res tantum valet quantum vendi potest. (A thing is worth only what someone else will pay for it.)
market participants ignore firm foundations of value for the dubious but thrilling assumption that they can make a killing by building castles in the air.
outguessing the reactions of a fickle crowd is a most dangerous game.
Options provide one way to leverage one’s investment to increase the potential rewards as well as the risks.
The crash itself, in his view, was precipitated by the Federal Reserve Board’s policy of raising interest rates to punish speculators.
very sharp increases in stock prices are seldom followed by a gradual return to relative price stability.
It is not hard to make money in the market. What is hard to avoid is the alluring temptation to throw your money away on short, get-rich-quick speculative binges.
Part of the genius of the financial market is that if a product is demanded, it is produced.
have a case where the conglomerate has literally manufactured growth. None of the three companies was growing at all; yet simply by virtue of their merger,
ability of the electronics company to swap its high-multiple stock for the stock of another company with a lower multiple.
But when these earnings are averaged with those of the electronics company, the total earnings (including those from selling chocolate bars) could be sold at a multiple of 20. And the more acquisitions Synergon could make, the faster earnings per share would grow and thus the more attractive the stock would look to justify its high multiple.
conglomerates could not always control their far-flung empires. Indeed, investors became disenchanted with the conglomerate’s new math; 2 plus 2 certainly did not equal 5, and some investors wondered whether it even equaled 4.
the acquiring company has to have an earnings multiple larger than the acquired company if the ploy is to work at all.
deconglomeration came into fashion. Spin-offs of company subsidiaries into separate companies were as a rule rewarded with rising stock prices.
be very wary of purchasing today’s hot “new issue.”
you can keep your head when all about you Are losing theirs . . . Yours is the Earth and everything that’s in it . .
bubbles have been associated with some new technology (as in the tronics and biotech booms) or with some new business opportunity
“positive feedback loops.” A bubble starts
to increase their attractiveness; the same happened during the Internet mania. Dozens of companies, even those that had little or nothing to do with the Net, changed their names
justify ever higher prices for Internet-related companies, security analysts began to use a variety of “new metrics”
The Internet had democratized the investment process, and it played an important enabling role in perpetuating the bubble.
investments in transforming technologies have often proved unrewarding for investors.
The key to investing is not how much an industry will affect society or even how much it will grow, but rather its ability to make and sustain profits.
the old system, which might be called the “originate and hold” system, banks would make mortgage loans (as well as loans to businesses and consumers) and hold those loans as assets until they were repaid. In such an environment, bankers were very careful about the loans they made.
the “originate and distribute” model of banking. Mortgage loans were still made by banks (as well as by big specialized mortgage companies). But the loans were held by the originating institution for only a few days, until they could be sold to an investment banker. The investment banker would then assemble packages of these mortgages and issue mortgage-backed securities—derivative bonds “securitized” by the underlying mortgages. These collateralized securities relied on the payments of interest and principal from the underlying mortgages to service the interest payment on the new
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Second-order derivatives were sold on the derivative mortgage-backed bonds. Credit-default swaps were issued as insurance policies on the mortgage-backed bonds.
had inadequate reserves to pay the claims if trouble occurred. And anyone from any country could buy the insurance, even without owning the underlying bonds. Eventually, the credit-default swaps trading in the market grew to as much as ten times the value of the underlying bonds,
financiers created structured investment vehicles, or SIVs, that kept derivative securities off their books,
If the only risk a lender took was the risk that a mortgage loan would go bad in the few days before it could be sold to the investment banker, the lender did not need to be as careful about the creditworthiness of the borrower. And so the standards for making mortgage loans deteriorated sharply.
increase in the demand for houses. Fueled by easy credit, house prices began to rise rapidly.
the amount of their mortgage far exceeded the value of their home.
drop in house prices destroyed the value of the mortgage-backed securities as well as the leveraged financial institutions
bursting of bubbles has invariably been followed by severe disruptions in real economic activity.
