I
found this book in a second hand book shop and the title seemed quite interesting
to me. So, after a little bargain, I bought this book at a fair price. And,
today, I’ve finished reading this book. Burton G. Malkiel in this book has discussed
about the presence of efficiency in securities market and why it is more
logical to say that market prices of securities move in a random order than
predictable manner. My learning from this book is presented below.
1. There are two basic approaches to asset
valuation i.e. firm foundation theory which emphasizes on the intrinsic value
of a security determined by the analysis of present conditions and future
prospects; and castle-in-the-air theory focuses on determining the behavior of
investors towards a security.
2. Author presented the evidence of building
castle in the air by investors during the Tulip-bulb craze, South sea bubble, Florida
real estate craze, and Black Thursday. Discussions
were also made on the speculative movements pioneered by professional investors
like the growth-stock/new-issue craze, conglomerate boom, concept stocks
bubble, nifty-fifty bubble, biotechnology bubble and others.
3. Firm foundation theorists suggest 4 determinants
affecting the stock price i.e. growth rate, dividend payout, risk, and market
interest rate. The firm foundation value of a security will be higher if it has
larger growth rate, larger dividend payout, less risk and lower market interest
rate.
4. Fundamental analysis is based on the
firm-foundation view of stock pricing and technical analysis is on the
castle-in-the–air view. But, none of these are self-sufficient. So, 3 rules incorporating
the both are suggested for stock picking i.e.
a. An investor should only buy the securities
of the companies those have expected above-average earnings growth for five or
more years;
b. An investor should not pay for a security
more than its firm-foundation value;
c. An investor should seek the stock with
which crowd may build castle in the air.
5. Security analysts have difficulty in
predicting the future because of the influence of random events, creation of
dubious reported earnings, basic incompetence of analyst, and loss of best
analyst to sales desk or portfolio management.
6. The author has provided the evidences inconsistent
with the week form, semi-strong form, and strong form of efficient market
hypothesis. He also discussed about the weakness of several academic works.
7. Some warm-up exercises have been given for
the investors for reducing their risks and increasing their returns. Those
include covering oneself with protection, knowing investment objectives, being
competitive, diversifying investment steps etc.
8. In life-cycle guide to investing, the
author discussed about 4 principles in investing i.e. a. Risk and reward are related;
b. Actual risk in stock and bond depends on
holding period;
c. Dollar-cost averaging is useful in reducing
risk; and
d. One must distinguish between his/her attitude
towards and capacity for risk.
and provided
some suggestions regarding different investment choices based on the age of investor.
9. In final chapter, Malkiel discussed about 3
ways one can approach to securities market. Those are
a. No-brainer step – investing in the index
b. Deep thinker step – doing the stock picking
and selling own-self
c. Substitute player step – investing through professionals
Overall,
this is a good read for the people who have a stack with security market. Many nuances
of security market are discussed those will help in deeper understanding of the
practices and pitfalls of this market. My copy is the fifth edition of this
book and most of the advice are serviceable to-date. You can grab a copy of
this book from Amazon.
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