A Random Walk Down Wall Street

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A Random Walk Down Wall Street

• Business 3059
• Investment Management

Chapter 3
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NOTICE

• This text is mandatory reading for this course.
  This slide set has been constructed to help you
  understand that there are important concepts in
  this resource for you to understand.
• This slide set IS NOT a substitute for your own
  independent reading of the text.

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Chapter 3 Stock Valuation from the Sixties to
the Nineties

• This is one of the longest chapters in the
  bookbut it does recount in a graphic way recent
  history of the markets.

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Chapter 3 Stock Valuation from the Sixties to
the Nineties

• Note the fact that 90 percent of trading volume
  on the NYSE is conducted by institutional
  investors (managed funds like mutual funds,
  pension funds, segregated funds, etc.) (why is
  this fact important?)
• Wellobviously, Malkiel then goes on to explain
  how even professional money managers can be taken
  in with a good story and fall prey to
  speculative bubbles.

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Chapter 3 Stock Valuation from the Sixties to
the Nineties

• The Soaring Sixties
• It was in this decade that the North American
  really began to pick up in the wake of the WWII
  erathe average person in the street began to
  reawaken to the stock market as an investmentthe
  first time since 1929
• Growth-stock/New-Issue Crazetronics infatuation
• The Conglomerate Boom be sure to follow his
  demonstration of the illusion of increased
  profitability and justifiably higher share values
  when combined two different companies in
  different industries with different P/E ratios
• The Bubble in Concept Stocks..the performance game

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Chapter 3 Stock Valuation from the Sixties to
the Nineties

• The Sour Seventies
• After the terrible results of the sixties
  fadsand now the growth of inflationand in the
  face of stagnant economic growth
• The Nifty Fifty is the term that Malkiel coined
  to describe Wall Streets denial of former fads
  and the new band wagon a focus on a handful of
  premier blue-chip stockslike IBM, Xerox,
  McDonalds,Hewlett-Packard, Disney, Sony,
  Polariod, etc.
• Of course, market leaders that grow large and
  lazy tend to be the focus of the next generation
  of innovative companiesin the seventiesIBM was
  Fortune magazines best company to work for over
  many years

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Chapter 3 Stock Valuation from the Sixties to
the Nineties

• The Roaring Eighties
• Interest rates and inflation were high at the
  start of the decadebut then fell steadilya
  terrible recession in the early 80saggressive
  monetary policyeconomic and corporate
  restructuring
• The triumphant return of New Issues
• The Biotechnology Bubble
• The Chinese Romance with the Lycoris Plant
• Alfin Fragrances
• ZZZ Best (like a giant Ponzi scheme)
• http//www.info-investisseurs.ca/common-frauds-pon
  zi.asp

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Chapter 3 Stock Valuation from the Sixties to
the Nineties

• The Nervy Nineties
• Finally the North American Economies of U.S. and
  Canada begin to see some positive results from
  supply-side economicsinflation droppingthe
  yield curve finally leveling out.but the
  economic health isnt a world-wide phenomenon
• The Japanese Yen for Land and Stocks
• The Internet Craze of the late 1990s.

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Chapter 3 Stock Valuation from the Sixties to
the Nineties

• Malkiels Conclusion
• Markets are NOT always rational in the
  short-runbut in each case the market did correct
  itself
• Anomalies can crop up, markets can get
  irrationally optimistic, and often they attract
  unwary investors. But eventually, true value is
  recognized by the market, and this is the main
  lesson investors must heed.