A Random Walk Down Wall Street Today there is a sense of complexity that has led many to believe that the individual investor has little chance of competing with professional brokers and investment firms. investment. However, Malkiel says this is a serious misunderstanding, as he explains in his book “A Random Walk Down Wall Street.” What does a casual walk mean? The random walk means, in stock market terms, that “short-term changes in stock prices cannot be predicted.” So how does a rational investor determine which stocks to buy to maximize returns? Chapter 1 begins by defining and determining the difference between investing and speculating. Malkiel defined investing as the method of “purchasing assets to obtain profits in the form of reasonably foreseeable long-term income or appreciation.” Speculating in a sense means making predictions, but without enough data to support any kind of conclusion. What does investing mean? Investing in its simplest form is the expectation of receiving greater value in the future than you have today by saving on income rather than expenses. For example, a savings account will earn a particular interest rate as will a corporate bond. Investment returns therefore depend on the allocation of funds and future events. Traditionally, there have been two approaches used by the investment community to determine the valuation of assets: the "foundation theory" and the "castle in the air theory". The solid foundation theory holds that every investment instrument has something called intrinsic value, which can be determined by analyzing the securities' current condition and future growth. The basis of this theory is to buy stocks when they are temporarily undervalued and sell them when they are temporarily overvalued relative to their intrinsic value. One of the main variables used in this theory is dividend income. The intrinsic value of a stock is said to be “equal to the present value of all its future dividends.” This is done using a method called discounting. Another variable to consider is the dividend growth rate. The higher the growth rate, the more valuable the stock. However, it is difficult to determine how long growth rates will last. Other factors are risk and interest rates, which we'll talk about later. Warren Buffet, the great investor of our time, used this technique to make his fortune. The second theory is known as the “castle in the ai…… middle of the paper…… while using the beta approach as a guide. Returns may also depend on general market movements, changes in interest rates and inflation, changes in national income and other economic factors. Chapter 11 closes our discussion with several insights into efficient market theory. There have been many attempts to discredit the random walk theory, but none of the theories hold up against empirical evidence. Any patterns noticed by investors will disappear when investors try to exploit them, and growth rate valuation methods are too difficult to predict. As we said before, the random walk concludes that there are no patterns in the market, prices are accurate, and all available information is already incorporated into the stock price. Therefore the market is efficient. Even if pricing errors occur in the short term, they will correct themselves in the long run. The random walk suggests that short-term prices cannot be predicted and that it makes sense to buy stocks for the long term. Malkiel.