Summary: Malkiel: A Random Walk Down Wallstreet

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• 1 1. FIRM FOUNDATIONS AND CASTLES IN THE AIR

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• A random walk referring to the stock market:

  Short – run changes in stock prices are unpredictable. 

• Two approaches of the “investing theory” regarding asset valuation:

  · The firm -  foundation theory
  · The castle – in – the – air theory. 

• The firm – foundations stress the following:

  A stock’s value should be based on the stream of earnings a firm will be able to distribute in the future in the form of:
  · Dividends
  · Stock buybacks. 

• The castle – in – the – air theory of price determination:

  An investment is worth a certain price to a buyer because he expects to sell it to someone else at a higher price.

• 2 2. THE MADNESS OF CROWDS

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• The Tulip – Bulb Craze:

  A botany professor from Vienna brought a collection of unusual plants – tulips, which originated from Turkey – to Leiden, The Netherlands. However, he unsuccessfully tried to sell these tulips at a high price to the Dutch people, in order to gain high profits. Unfortunately, a thief broke into his house, stole the tulips and sold them for a lower price, yet greater profit.

• The tulip – spree lasted from:

  
  1634 to early 1637. People truly believed tulips were a great investment and make them become wealthy. 

• The South Sea bubble: 

  Is about the South Sea Company which led to believe investors that great profits would be received if they invested in the stocks of this company. 

• “Wall Street Lays an Egg”: 

  The stock market, share values dropped heavily and the Great Depression followed.

• 3 3. SPECULATIVE BUBBLES FROM THE SIXTIES INTO THE NINETIES

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• The Soaring Sixties: The “New Era” and craziness of new issues:

  The introduction of electronic goods, caused stock prices to rise rapidly.

• The Roaring Eighties, the return of new issues:

  In 1983, when there was a rapid rise of new electronic goods on the market. However, there was enormous debt accumulated in 1993.