0
A Random Walk Down Wall Street
Author: Burton G. Malkiel
Part III Presenter: Tim Wilson
Book Pages 251-267, Chapter 11 exc...
Attempts to Disprove the:
Efficient-Market Theory and
Why They Miss
Close but Still Miss the Target  
• “Ever mindful that they need theories or strategies to
nail down tenure or bonuses, ...
-Attempts to: nail down the markets direction
The Trend Is Your Friend (Otherwise Known as Short-Term Momentum)
There is ...
-Attempts to: nail down the markets direction
The Dividend Jackpot Approach
High dividend yields do not
predict high retur...
-Attempts to: purport to find longer +market returns
The Initial P/E Predictor (P/E = Price to Earnings Ratio) Predictor
...
-Attempts to: purport to find longer +market returns
The “Back We Go Again” Strategy
(Otherwise Known as Long-Run Return R...
-Attempts to: single out the most profitable stocks
The “Smaller is Better” Effect –one of the strongest patterns
That is...
-Attempts to: single out the most profitable stocks
The “Value Will Win” Record -Warren Buffett’s favorite theory
“Two fi...
Why Even Close Shots Miss
The Market while not always perfectly efficient, also corrects its self
“Anyone who pays
transa...
Upcoming SlideShare
Loading in...5
×

Investment ppt3 final -tim wilson

146

Published on

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
146
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
1
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Transcript of "Investment ppt3 final -tim wilson"

  1. 1. A Random Walk Down Wall Street Author: Burton G. Malkiel Part III Presenter: Tim Wilson Book Pages 251-267, Chapter 11 excerpt:
  2. 2. Attempts to Disprove the: Efficient-Market Theory and Why They Miss
  3. 3. Close but Still Miss the Target   • “Ever mindful that they need theories or strategies to nail down tenure or bonuses, both academics and analysts have come up with slightly more accurate shots aimed at destroying the essential unpredictability of the stock market.” –Burton G. Malkiel • Three Groupings of Published ‘Potshot’ types 1. -Attempts to: nail down the markets direction 2. -Attempts to: purport to find longer +market returns 3. -Attempts to: single out the most profitable stocks
  4. 4. -Attempts to: nail down the markets direction The Trend Is Your Friend (Otherwise Known as Short-Term Momentum) There is some evidence that stock price gains are more likely to be followed by price gains in the same stock in the following period according to Lo and MacKinlay Additional studies by Terrance Odean concluded that momentum investors (e.g. The Trend Is Your Friend Investors) realized even lower gains than buy-and-hold investors “Anyone who pays transaction costs is unlikely to find a trading strategy based on momentum that will beat a buy-and-hold strategy” –Burton G. Malkiel (Malkiel, 252) “While the stock market may not be a perfect random walk, it is important to distinguish statistical significance from economic significance.” –Burton G. Malkiel (Malkiel, 252)
  5. 5. -Attempts to: nail down the markets direction The Dividend Jackpot Approach High dividend yields do not predict high returns because:  1. When dividend yields are high 2. Then Interest Rates tend to be high and usually 3. the market (usually ) supplies an additional adequate market premium because of market efficiency not because you choose a high yield stock (Malkiel, 253-254)  If interest rates are low, then stock dividends tend to be low (Malkiel, 255) “Alternatively, perhaps practitioners (investors) learn quickly about any true predictable pattern and exploit it to such an extent that it becomes no longer profitable.” –Burton G. Malkiel (Malkiel, 252) Continued:
  6. 6. -Attempts to: purport to find longer +market returns The Initial P/E Predictor (P/E = Price to Earnings Ratio) Predictor There is some degree of evidence that stocks with a low Price to Dividend Earnings Ratio  when compared to the Market Average Price to Dividend Earnings Ratio may give you higher rates of return (Malkiel, 255-256) According to Chambell and Shiller over 40% of inconsistencies in long term returns can be predicted by the initial market P/E Predictor (Malkiel, 255) . But also consider that: There have been times when following The Initial P/E Predictor has lead to substantial lower returns (Malkiel, 255-256)
  7. 7. -Attempts to: purport to find longer +market returns The “Back We Go Again” Strategy (Otherwise Known as Long-Run Return Reversals) The “Back We Go Again” Strategy proposes that stocks which have preformed badly in the last three years have the highest chance of gains in the next three years. This cycle of up and down prices is usually associated more with interest rates than with an opportunity to profit from the stocks increasing in substantial value. (Malkiel, 256-259) ”We found that those stocks did enjoy improved returns in the next period of time, but they recovered only to the average stock-market performance.” –Burton G. Malkiel ” …one should be very wary of expecting sure success from any simple contrarian strategy (simple predictable formula).” –Burton G. Malkiel Continued:
  8. 8. -Attempts to: single out the most profitable stocks The “Smaller is Better” Effect –one of the strongest patterns That is since 1926 (noticeable pattern) “Probably one of the strongest patterns that investigators have found in stock returns is the tendency over long periods of time for small company stocks to generate larger returns than those of large company stocks.” -Burton G. Malkiel, 259 But ”The higher returns from smaller companies may simply be the requisite (required) reward owed investors for assuming a greater risk…” -Burton G. Malkiel, 260 Moreover “Today’s list of companies include only small firms that have survived….” -Burton G. Malkiel, 260
  9. 9. -Attempts to: single out the most profitable stocks The “Value Will Win” Record -Warren Buffett’s favorite theory “Two find value, investors should look for stocks with low price-earning ratios and low prices relative to their book values.” -Burton G. Malkiel, 261 A stocks P/E varies over time and  don’t forget usually low P/E’s are justifiable because they are usually riskier… ”We also must remember that the results of published studies –even those done over decades –may still be time-dependent and (one must) ask whether the return patterns of academic studies can actually be generated with real money.” -Burton G. Malkiel, 264 Continued:
  10. 10. Why Even Close Shots Miss The Market while not always perfectly efficient, also corrects its self “Anyone who pays transaction costs is unlikely to find a trading strategy based on momentum that will beat a buy-and-hold strategy” –Burton G. Malkiel “Nothing is ever as clear in prospect (while it is happening) as it is in retrospect.” –Burton G. Malkiel 
  1. A particular slide catching your eye?

    Clipping is a handy way to collect important slides you want to go back to later.

×