Stock investment is a game of chance as the prices of stocks can be determined through consideration of various components of market. A major concern in stock investment is consideration of available information by investors. Value investing and random walk theory provides mechanism of determining performance of stock investment. Value investing has three main characteristics of financial markets as is described by Bruce C. N in his book. First, the price of stocks is subject to significant movements in financial markets (Greenwald Bruce C. N. , Judd Kahn, et. al. 2001).
There are certain impersonal forces that determine price of securities at any moment attracting value buyers to invest in stock markets. Second, despite gyrations in prices of financial securities, many investors have fundamental economic values relatively stable and measured with reasonable accuracy by diligent investors. This means there is a difference between intrinsic value of securities and current price at which a stock trades in the market. Although value and price of financial securities may be identical, there is a difference between the two.
Third, in the long -run, buying of financial securities when their market prices are lower than intrinsic value leads to higher returns. These three conditions are major considerations by investors in stock market especially during the period of economic hardships. In 2008, stocks markets were adversely affected by economic down turn whereby the prices of financial securities fell. The end of recession led to a strong surge of stock prices and this critical area affects decisions of value investors and random walkers.
Accounting for price surge and fall of stocks by value investors and random walkers is based on fundamental analysis described in the books of Bruton G. Malkiel and Bruce Greenwald. Investment approach I financial markets use existing economic information relating to financial statements of a company and any other relevant information about the affairs of the organization. The fall of security prices in 2008 can be linked with information provided in relation to affairs of stock markets.
A major analysis in the concept of financial markets is the concept of top down approach in which the prevailing microeconomic conditions determine price of financial securities. The stage of business cycle in the economy is very important for value investors as information relating to future expectations of price changes is determined. Stock selection model in this aspect of microeconomic conditions is made in a way that ensures stocks of a selected company outperform its peers in industries.
The objective of stock market investors is to make more money out of their investment portfolio. Economic down turn caught many investors unaware and price fall of shares was a major threat. The fall of stocks price is attributed to collapse of financial institutions and increased prices of commodities. Investing in financial securities is a mechanism of putting surplus money at disposal by an individual or corporate into investment portfolio such as stock markets in anticipation of higher returns.
Increased prices of other commodities leave individuals with less money for disposal. This means that the demand for financial securities decreases thus has an effect in price of stocks. Financial institutions play a very important role in financial markets as they finance value investors. Recession in 2008, made it hard for investors to access loan to invest in financial markets. The economic down turn thus made prices of stocks to fall making investors lose a lot of money. Strong surge of stocks price in 2009 was attributed to changes in economic performance.
Random walk down street written by Burton Malkiel is one of the best investment literature used by investors to make wise decisions. The critical concept raised in this article is the issue of price movements. Price of financial securities has no memory and thus investors cannot rely on past and present prices to predict future performance of stocks market. However, relying on information provided by financial analyst or experts is of essence in the aspect of stock investment.
Malkiel maintains that, buy and hold strategy is the best policy in the event of price surges as it outperforms attempts of timing markets in returns (Malkiel Burton, 2007). Consequently, in risk adjusted returns, the concept of buy and hold strategy is not credible. In this aspect buy and hold strategy is more of guesswork as it has little impact in compensating risk associated with continuous investment in stocks market. Efficiency of market is another concept used by investors in the event of stocks price fall like in 2008 and strong surge for stock price as was experienced in 2009.
Financial markets are to some extent predictable but this should not be considered as a symptom of inefficiency or irrationality. Predictability of stocks market is the concept behind capitalism as was argued by Andrew a professor in finance. Investors make high returns from efficient markets because information about stocks price is provided through research and constant innovation. The strong surge of stocks price is an element of investment in which many organizations strife to maintain competitive advantage.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 10 October 2016
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