Barclays made an announcement that it would no longer offer financial advice to customers. It is primarily due to the fine￡7.7m after Barclays’ advisers failed to explain the risks of shares to elderly clients, many of whom lost significant sums in that investment. As Kendal’s theory: Random walks (1953) supported that share price movement within a company is based on new information which is hard to predict. Hence, some people even hold the opinion that investors who earn money from stock market are totally by chance. However, if this is true, then why there are still investors like Warren Buffett can earn money during 15 years?
Undoubtedly, from my own perspective, the share markets do have some potential rules for those investors. Firstly, on the weak form market efficiency basis, the classic mistake for investors is to buying high and selling low. Equipped with historical information on share price movement, investors tends to overpay their investments if buying high, while suffers loses if selling low. A specific example related to this is nowadays hot topic on the partnership between Nokia and Microsoft. As we can see that, Nokia is no longer the dominant telephone brand, its share price decreased dramatically from EUR11.61 to 6.13 per share (London Stock Exchange). Hence, people may sell their shares as they think Nokia’s share price has reached its bottom. However, in my opinion, EMH still happen which can reveal the new information of Nokia; moreover, there will be a prosperous market for Nokia after the cooperation with Microsoft, as Stephen Elop (Nokia’s CEO) said this partnership will value the business as it is jointly by two giants. Secondly, it is easier for investors to be trapped into the “Herd Effect”, for people are likely influenced by their mate recommendation and behavior. As Turner (2009) said that individual behavior is not entirely rational. If everyone in a company is talking about a share because it has risen rapidly in value, people tend to buy that share even without any knowledge on it, but remember rule one: don’t buy high.
In conclusion, stock market is a place where people can gain benefits from it only if people know the potential rules behind the market. It can be forgiven for thinking that some people’s information are outdated or even distorted, like in the weak form and semi-strong form efficiency. But we can’t turn blind eyes to people who have good performance in stock market. Hence, maybe we should question on the notion “random walks” in share price.
I like that you point out there is no denying certain companies who have maintained a good performance contradict the 'random walk' belief.
ReplyDeleteI'd like to know what you think should be the criteria for a good investment? Especially within semi strong exchanges like the London Stock Exchange.
And do you agree with Mr. Elop that their collaboration will be increase the value of both companies?
Also what is EMH?
EMH is short for efficient market hypothesis, which shows that a firm's share price movement is equipped with the latest information. I think it's more like the strong-form efficiency.
ReplyDeleteIn terms of semi strong efficiency, in my opinion, a good investment can be related to the return gained by investors. Actually, I do believe Nokia is the biggest beneficiary in this collaboration, as its intention in this partership is to regain ground lost to the iPhone and Android-based devices (BBC news).However, as to Microsoft, I think, maybe he just want to take this opportunity to boost its accounting earnings.
I do agree besides the chance, there are also potential rules behind the stock market. I think that's why Warren Buffett can earn money during 15 years. You have give an example of the shares of Nokia. Its share price has been decreased dramatically due to its no longer the dominant telephone brand. And the share price may go up again according to your prediction.
ReplyDeleteAlso I think there are a group of people that can get the information very quickly and very earlier than the public and can make an quick decision to earn money, isn't it?
Well Buffet rejects EMH completely and is a proponent of value investing and behavioral finance. Buffet would argue that fundamentals and prospects, and importantly, a good management team an investor can believe in, are what makes for a good investment. His biography "The Snowball" makes for a good read.
ReplyDeleteI agree with you in the whole opinion, but the example of Nokia may not turn out true, I think the price of it going down actually proved EMH cuase investors react after they know about Nokia's losing market share and profits to its competitor like android of google and ios of apple.
ReplyDeleteI do agree with the concept on behavioral finance, in that the price of a share is not only depending on the value of itself, but also the investor’s psychological reaction and behavior. Hence, EMH seems like an unrealistic objective to achieving in the stock market, as it is impossible to reflect all information at any time of the share price. In terms of Nokia’s partnership with Microsoft, I think with the increase on investor’s expectation, the share price maybe slightly increased at the beginning, just as the notion of behavioral finance suggest.
ReplyDelete