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Random Walk Down Wallstreet Essay

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Book Report: A Random Walk Down Wall Street

A Random Walk Down Wall Street provides an excellent overview of the facts and fiction around the pricing of the stock market, as well as insight into the irrational investor behavior that causes stock market bubbles. The first chapter is devoted to an introduction to the book and the explanation of a “random walk”. The book starts off by defining two basic investment ideologies, the firm foundation theory and the “castle in the air” theory. The firm foundation theory basically says that you should invest based on the actual real value of what you’re investing in; for example, if you buy a stock of Coke, it should be based on what the value of the Coca-Cola Corporation is. The “castle in the air” theory basically says that you should invest in response to what the crowds are doing and that you can make more money by riding the waves of people who are either following trends or trying to invest based on a firm foundation. Which one is right? The truth is that they both are, but at different times. I really enjoyed one quote from the author that gives me some confidence in investing in the stock market.   The author wrote: “A successful investor is generally a well-rounded individual who puts a natural curiosity and an intellectual interest to work to earn more money.” In the second chapter the author dives into a historical look of how crowds of people have reacted to the prospect of making money no matter how unreasonable the investment is.   Examples of such events include: Tulip-Bulb Craze, the South Sea Bubble, and the few years before the Great Depression, where examples of financial disasters waiting to happen. In chapter three the author explains the extremely high price-earnings multiples that stocks were trading at with the expectations that someone else will come by and purchase the stock at a higher price.   The author goes on to explain the practices of underwriters for newly issued securities and how they...

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