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April 1 - July 8, 2024
Buyers of these issues didn’t really care what the companies made—so long as it sounded electronic, with a suggestion of the esoteric.
As long as a company has prepared (and distributed to investors) an adequate prospectus, the SEC can do nothing to save buyers from themselves.
Very few pointed out that it is always easy to look back and say when prices were too high or too low. Fewer still said that no one seems to know the proper price for a stock at any given time.
Part of the genius of the financial market is that if a product is demanded, it is produced. The product that all investors desired was expected growth in earnings per share. If growth couldn’t be found in a name, it was a good bet that someone would find another way to produce it.
Synergism is the quality of having 2 plus 2 equal 5.
In fact, the major impetus for the conglomerate wave of the 1960s was that the acquisition process itself could be made to produce growth in earnings per share.
The trick that makes the game work is the ability of the electronics company to swap its high-multiple stock for the stock of another company with a lower multiple.
An interesting footnote to this episode is that during the first two decades of the 2000s deconglomeration came into fashion. Spin-offs of company subsidiaries into separate companies were as a rule rewarded with rising stock prices.
They were “big capitalization” stocks, which meant that an institution could buy a good-sized position without disturbing the market.
Institutional managers blithely ignored the fact that no sizable company could ever grow fast enough to justify an earnings multiple of 80 or 90. They once again proved the maxim that stupidity well packaged can sound like wisdom.
Styles and fashions in investors’ evaluations of securities can and often do play a critical role in the pricing of securities. The stock market at times conforms well to the castle-in-the-air theory.
Most initial public offerings underperform the stock market as a whole. And if you buy the new issue after it begins trading, usually at a higher price, you are even more certain to lose.
By 1990, the total value of all Japanese property was estimated at nearly $20 trillion—equal to more than 20 percent of the entire world’s wealth and about double the total value of the world’s stock markets.
When the Internet bubble popped in the early 2000s, over $8 trillion of market value evaporated. It was as if a year’s output of the economies of Germany, France, England, Italy, Spain, the Netherlands, and Russia had completely disappeared.
The promise of the Internet spawned the largest creation and largest destruction of stock market wealth of all time.
But the whole mechanism is a kind of Ponzi scheme where more and more credulous investors must be found to buy the stock from the earlier investors. Eventually, one runs out of greater fools.
Companies that changed their names enjoyed an increase in price during the next ten-day period that was 125 percent greater than that of their peers, even when the company’s core business had nothing whatsoever to do with the Net.
Digiscents offered a computer peripheral that would make websites and computer games smell.
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.
“originate and hold”
“originate and distribute”
It was called “financial engineering.” Even if the underlying mortgage loans were of low quality, the bond-rating agencies were happy to bestow an AAA rating on the bond tranches with the first claims on the payments from the underlying mortgages.
Second-order derivatives were sold on the derivative mortgage-backed bonds.
Indeed, almost two-thirds of the bad mortgages in the financial system as of the start of 2010 were bought by government agencies. It was not simply “predatory lenders” but the government itself that caused many mortgage loans to be made to people who did not have the wherewithal to service them.
Credit boom bubbles are the ones that pose the greatest danger to real economic activity.
Rather, the clear conclusion is that, in every case, the market did correct itself. The market eventually corrects any irrationality—albeit in its own slow, inexorable fashion.
Eventually, every stock can only be worth the present value of its cash flow.
Markets are not always or even usually correct. But NO ONE PERSON OR INSTITUTION CONSISTENTLY KNOWS MORE THAN THE MARKET.
the incentives were perverse, regulation was lax, and some government policies were ill considered.
A meme stock is one whose price is entirely determined by social sentiment as opposed to the company’s financial condition.
A short sale is the sale of stock you don’t own in the hopes of profiting by buying it back at a cheaper price
The irony of this bizarre story is that the two companies were, at least temporarily, saved from failure by the behavior of an irrational mob.
For an economist, money is what money does. Money performs three functions in the economy. First, it is a medium of exchange.
Second, money is a unit of account, the yardstick that is needed to post prices and record debts now and in the future.
Third, money is a store of value.
Creating a single token requires as much electricity as the typical American household consumes in two years.
It is not hard, really, to make money in the market. As we shall see later, an investor who simply buys and holds a broad-based portfolio of stocks can make reasonably generous long-run returns.
Investments in transforming technologies, especially those that are wildly popular, have usually proved unrewarding for investors.
Part Two of this book concentrates on the methods used by professional portfolio managers.
the efficient-market hypothesis (EMH) and its practical implication: Stock investors can do no better than simply buying and holding an index fund that owns a portfolio consisting of all the stocks in the market.
technical or fundamental analysis.
Technical analysis is the method of predicting the appropriate time to buy or sell a stock used by those believing in the castle-in-the-air view of stock pricing.
Fundamental analysis is the technique of applying the tenets of the firm-foundation theory to the selection of individual stocks.
Many chartists believe that the market is only 10 percent logical and 90 percent psychological. They generally subscribe to the castle-in-the-air school and view the investment game as one of anticipating how the other players will behave.
Fundamental analysts take the opposite tack, believing that the market is 90 percent logical and only 10 percent psychological. Caring little about the particular pattern of past price movements, fundamentalists seek to determine a stock’s proper value. Value in this case is related to a company’s assets, its expected growth rate of earnings and dividends, interest rates, and risk. By studying these factors, the fundamentalist arrives at an estimate of a security’s intrinsic value or firm foundation of value. If this is above the market price, then the investor is advised to buy.
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The first principle of technical analysis is that all information about earnings, dividends, and the future performance of a company is automatically reflected in the company’s past market prices.
The second principle is that prices tend to move in trends: A stock that is rising tends to keep on rising, whereas a stock at rest tends to remain at rest.
One of the first things the chartist looks for is a trend.
compare with the Gambler's Fallacy
As Magee wrote in the bible of charting, Technical Analysis of Stock Trends, “Prices move in trends, and trends tend to continue until something happens to change the supply-demand balance.”
Suppose, however, that at about 24, the stock finally runs into trouble and is unable to gain any further ground. This is called a resistance level. The stock may wiggle around a bit and then turn downward. One pattern, which chartists claim reveals a clear signal that the market has topped out, is a head-and-shoulders formation
