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Contents Preface 00 Acknowledgments from Earlier Editions 00 Part One Stocks and Their Value 1. Firm Foundations and Castles in the Air What Is a Random Walk? 00 Investing as a Way of Life Today 00 Investing in Theory 00 The Firm-Foundation Theory 00 The Castle-in-the-Air Theory 00 How the Random Walk Is to Be Conducted 00 2. The Madness of Crowds The Tulip-Bulb Craze 00 The South Sea Bubble 00 Wall Street Lays an Egg 00 An Afterword 00 3. Stock Valuation from the Sixties through the Nineties The Sanity of Institutions 00 The Soaring Sixties 00 The New "New Era": The Growth-Stock/New-Issue Craze 00 Synergy Generates Energy: The Conglomerate Boom 00 Performance Comes to the Market: The Bubble in Concept Stocks 00 The Sour Seventies 00 The Nifty Fifty 00 The Roaring Eighties 00 The Triumphant Return of New Issues 00 Concepts Conquer Again: The Biotechnology Bubble 00 ZZZZ Best Bubble of All 00 What Does It All Mean? The Nervy Nineties 00 The Japanese Yen for Land and Stocks 00 4. The Biggest Bubble of All: Surfing on the Internet How Bubbles Arise 00 A Broad-Scale High-Tech Bubble 00 An Unprecedented New-Issue Craze 00 TheGlobe.com 00 Security Analysts $peak Up 00 New Valuation Metrics 00 The Writes of the Media 00 Fraud Slithers In and Strangles the Market 00 Should We Have Known the Dangers? 00 A Final Word 00 Part Two How the Pros Play the Biggest Game in Town 5. Technical and Fundamental Analysis Technical versus Fundamental Analysis 00 What Can Charts Tell You? 00 The Rationale for the Charting Method 00 Why Might Charting Fail to Work? 00 From Chartist to Technician 00 The Technique of Fundamental Analysis 00 Three Important Caveats 00 Why Might Fundamental Analysis Fail to Work? 00 Using Fundamental and Technical Analysis Together 00 6. Technical Analysis and the Random-Walk Theory Holes in Their Shoes and Ambiguity in Their Forecasts 00 Is There Momentum in the Stock Market? 00 Just What Exactly Is a Random Walk? 00 Some More Elaborate Technical Systems 00 The Filter System 00 The Dow Theory 00 The Relative-Strength System 00 Price-Volume Systems 00 Reading Chart Patterns 00 Randomness Is Hard to Accept 00 A Gaggle of Other Technical Theories to Help You Lose Money 00 The Hemline Indicator 00 The Super Bowl Indicator 00 The Odd-Lot Theory 00 A Few More Systems 00 Technical Market Gurus 00 Why Are Technicians Still Hired? 00 Appraising the Counterattack 00 Implications for Investors 00 7. How Good Is Fundamental Analysis? The Views from Wall Street and Academia 00 Are Security Analysts Fundamentally Clairvoyant? 00 Why the Crystal Ball Is Clouded 00 1. The Influence of Random Events 00 2. The Production of Dubious Reported Earnings through "Creative" Accounting Procedures 00 3. The Basic Incompetence of Many of the Analysts Themselves 00 4. The Loss of the Best Analysts to the Sales Desk, to Portfolio Management, or to Hedge Funds 00 5. The Conflicts of Interest between Research and Investment Banking Departments 00 Do Security Analysts Pick Winners?-The Performance of the Mutual Funds 00 Can Any Fundamental System Pick Winners? 00 The Verdict on Market Timing 00 The Semi-strong and Strong Forms of the Efficient-Market Theory 00 The Middle of the Road: A Personal Viewpoint 00 Part Three The New Investment Technology 8. A New Walking Shoe: Modern Portfolio Theory The Role of Risk 00 Defining Risk: The Dispersion of Returns 00 Illustration: Expected Return and Variance Measures of Reward and Risk 00 Documenting Risk: A Long-Run Study Reducing Risk: Modern Portfolio Theory (MPT) Diversification in Practice 9. Reaping Reward by Increasing Risk Beta and Systematic Risk The Capital-Asset Pricing Model (CAPM) 00 Let's Look at the Record 00 An Appraisal of the Evidence 00 The Quant Quest for Better Measures of Risk: Arbitrage Pricing Theory 00 A Summing Up 00 10. Behavioral Finance The Irrational Behavior of Individual Investors 00 Overconfidence 00 Biased Judgments 00 Herding 00 Loss Aversion 00 The Limits to Arbitrage 00 What Are the Lessons for Investors from Behavioral Finance? 00 Does Behavioral Finance Teach Ways to Beat the Market? 00 11. Potshots at the Efficient-Market Theory and Why They Miss What Do We Mean by Saying Markets Are Efficient? 00 Potshots That Completely Miss the Target 00 Dogs of the Dow 00 January Effect 00 "Thank God It's Monday Afternoon" Pattern 00 Hot News Response 00 Why the Aim Is So Bad 00 Potshots That Get Close but Still Miss the Target 00 The Trend Is Your Friend (Otherwise Known as Short-Term Momentum) 00 The Dividend Jackpot Approach 00 The Initial P/E Predictor 00 The "Back We Go Again" Strategy (Otherwise Known as Long-Run Return Reversals) 00 The Smaller Is Better Effect 00 The "Value Will Win" Record 00 Stocks with Low Price-Earnings Multiples Outperform Those with High Multiples 00 Stocks That Sell at Low Multiples of Their Book Values Tend to Produce Higher Subsequent Returns 00 But Does "Value" Really Trump Growth on a Consistent Basis? 00 Why Even Close Shots Miss 00 And the Winner Is . . . 00 The Performance of Professional Investors 00 A Summing Up 00 Part Four A Practical Guide for Random Walkers and Other Investors 12. A Fitness Manual for Random Walkers Exercise 1: Gather the Necessary Supplies 00 Exercise 2: Don't Be Caught Empty-Handed: Cover Yourself with Cash Resources and Insurance 00 Cash Reserves 00 Insurance 00 Deferred Variable Annuities 00 Exercise 3: Be Competitive-Let the Yield on Your Cash Reserve Keep Pace with Inflation 00 Money-Market Mutual Funds 00 Bank Certificates of Deposit (CDs) 00 Internet Banks 00 Treasury Bills 00 Tax-Exempt Money-Market Funds 00 Exercise 4: Learn How to Dodge the Tax Collector Individual Retirement Accounts 00 Roth IRAs 00 Pension Plans 00 Saving for College: As Easy as 529 00 Exercise 5: Make Sure the Shoe Fits: Understand Your Investment Objectives 00 Exercise 6: Begin Your Walk at Your Own Home-Renting Leads to Flabby Investment Muscles 00 Exercise 7: Investigate a Promenade through Bond Country 00 Zero-Coupon Bonds Can Generate Large Future Returns 00 No-Load Bond Funds Are Appropriate Vehicles for Individual Investors 00 Tax-Exempt Bonds Are Useful for High-Bracket Investors 00 Hot TIPS: Inflation-Indexed Bonds 00 Should You Be a Bond-Market Junkie? 00 Exercise 8: Tiptoe through the Fields of Gold, Collectibles, and Other Investments 00 Exercise 9: Remember That Commission Costs Are Not Random; Some Are Cheaper than Others 00 Exercise 10: Avoid Sinkholes and Stumbling Blocks: Diversify Your Investment Steps 00 A Final Checkup 00 13. Handicapping the Financial Race: A Primer in Understanding and Projecting Returns from Stocks and Bonds What Determines the Returns from Stocks and Bonds? 00 Three Eras of Financial Market Returns 00 Era I: The Age of Comfort 00 Era II: The Age of Angst 00 Era III: The Age of Exuberance 00 The Age of the Millennium 00 14. A Life-Cycle Guide to Investing Five Asset-Allocation Principles 00 1. Risk and Reward Are Related 00 2. Your Actual Risk in Stock and Bond Investing Depends on the Length of Time You Hold Your Investment 00 3. Dollar-Cost Averaging Can Reduce the Risks of Investing in Stocks and Bonds 00 4. Rebalancing Can Reduce Investment Risk and Possibly Increase Returns 00 5. Distinguishing between Your Attitude toward and Your Capacity for Risk 00 Three Guidelines to Tailoring a Life-Cycle Investment Plan 00 1. Specific Needs Require Dedicated Specific Assets 00 2. Recognize Your Tolerance for Risk 00 3. Persistent Saving in Regular Amounts, No Matter How Small, Pays Off 00 The Life-Cycle Investment Guide 00 Life-Cycle Funds 00 Investment Management Once You Have Retired 00 Inadequate Preparation for Retirement 00 Investing a Retirement Nest Egg 00 Annuities 00 The Do-It-Yourself Method 00 15. Three Giant Steps Down Wall Street The No-Brainer Step: Investing in Index Funds 00 The Index-Fund Solution: A Summary A Broader Definition of Indexing A Specific Index-Fund Portfolio ETFs and the Tax-Managed Index Fund The Do-It-Yourself Step: Potentially Useful Stock-Picking Rules 00 Rule 1: Confine stock purchases to companies that appear able to sustain above- average earnings growth for at least five years 00 Rule 2: Never pay more for a stock than can reasonably be justified by a firm foundation of value 00 Rule 3: It helps to buy stocks with the kinds of stories of anticipated growth on which investors can build castles in the air 00 Rule 4: Trade as little as possible 00 The Substitute-Player Step: Hiring a Professional Wall Street Walker 00 The Morningstar Mutual-Fund Information Service 00 A Primer on Mutual-Fund Costs 00 Loading Fees 00 Expense Charges 00 Turnover Costs 00 The 50-50 Rule 00 The Malkiel Step 00 A Paradox 00 Some Last Reflections on Our Walk 00 A Random Walker's Address Book and Reference Guide to Mutual Funds 00 Index 00
Library of Congress Subject Headings for this publication:
Random walks (Mathematics).