Topic 1 – Are Stock Prices predictable?
Capital Ideas:
Chapter 1: Are Stock Prices Predictable? * It is doubtful * Paul Samuelson – economist and Nobel laureate (receiver): even smart people have a hard time getting rich by predicting stock prices. * While some people never try to outguess the market, in the face of admittedly high odds, y to predict stock prices to keep an entire industry humming (noisy). * The demand for the wisdom produced by armies of security analysts, portfolio managers, television pundits (expert), software peddlers (seller), and newspaper columnists shows no sign of waning (decreasing). * The wealthiest people on Wall Street are professionals whose bank accounts have been inflated by a constant flow of investment advisory fee. Index funds, which hold a diversified cross-section of the market and never sell one stock to buy another, account for less than 15 percent of all equity portfolios. * While no one goes as far to say that it is impossible to make good predictions or that all predictions are destined to be wrong, the abundant evidence and the robust (strong) character of the theories that explain the evidence confirm that the task of predicting stock prices is formidable by any measure. * 1900, Louis Bachelier: * Completed his dissertation titled “The Theory of Speculation.” This was the first effort to employ theory, including mathematical techniques, to explain why stock market behaves as it does. * Set the style for many later theorists who, like him, refrained from putting their money where their minds were. * Laid the groundwork on which later mathematicians constructed a full-fletched theory of probability. * Developed the now universally used concept of stochastic processes, the analysis of random movements among statistical variables. * Made the first theoretical attempt to value such financial instruments as options and futures. * He did all this in an effort to explain why prices in capital markets are impossible to predict! *