Monday, August 25, 2014

Stock Market Strategy: Random Stock Prices

Years ago, when I was Vice President of Trading for a Wall Street investment bank, I got a resume from a promising young man who wanted to work as a trader.

And what a great resume it was! Ivy league finance MBA, top of class, interned at the best Wall Street investment bank, etc.

I told this young man that I was always interested in the latest financial theories from the universities and asked him what the latest and greatest was.

He told me that the best thing was the Random Walk Theory: all stock prices are random and you cannot predict stock prices.

Therefore, I asked him how he was going to make money trading stocks if he could not predict prices.

He had a very good answer, "Ahhh....uhhh..........I... ahhh....., um.........."

That pretty much ended the interview.

I have now come to find out that there are actually several versions of the random walk school of thought.

The most severe of these geniuses believe that even if you have inside information, you cannot predict stock prices. This leaves me speechless.

However, this school of thought is very useful to portfolio managers who do not know what they are doing and those who want to take advantage of them.

The inept portfolio manager can always claim that he cannot predict prices and so it is not his fault you lost money.

However, if you want to make money, I suggest you stay tuned to this blog.

We do believe we can predict which stocks are likely to appreciate.